Europe voted last week. And, as is so often the case, this ballot can have serious consequences. We will discuss these consequences in a diptych, with today the consequences of the elections on the European member states.
On the wings of the good score on Sunday, May 26, you can Lega North to drop the government in Italy and call new elections. This in the hope of strengthening its position compared to the coalition partner 'the Five Star Movement'. This would allow Lega Nord to put its own stamp on policy more clearly. However, the elections and coalition formation would also bring new ones political uncertainty in Italy (and tensions with Brussels).
In Greece, the ruling 'Syriza' suffered a crushing defeat, after which the party's chairman and Greek Prime Minister Alexis Tsipras announced early elections. Those elections appear to be won by the centre-right. This is something that would benefit expectations regarding Greece (and fiscal policy there).
Brexit
Unexpectedly, the British also had to go to the polls on May 26. Nigel Farage's 'Brexit party' emerged as the winner, with almost 32% of the votes. Also left British Prime Minister Theresa May will resign on Friday, June 7. Boris Johnson seems to have the best credentials to succeed May: under his rule there is a good chance that London will take a much tougher attitude towards Brussels, something that could increase the chance of a hard Brexit.
In the meantime, there may be increasing rumblings within the United Kingdom. In Scotland, the Scottish National Party achieved a resounding victory. In fact, Scotland rejected Brexit for the second time in less than 3 years. If the United Kingdom takes a tougher stance towards the European Union under a new prime minister, calls for a new independence referendum in Scotland may increase.
Instability in Germany
And finally, there is a small chance of political instability in Germany. The German government is a coalition between CDU/CSU and the SPD. Many of the SPD members were not in favor of continuing with the CDU/CSU after the defeat in the national elections. In the elections within the states, the SPD also suffered one serious defeat after another. The call to pull the plug on the coalition became increasingly louder. The SPD ensured peace at home by agreeing to hold a review of participation in the ruling coalition at the end of 2019.
That moment is now slowly approaching. Since the SPD has again performed poorly in the European Parliament elections, the call to leave the coalition (to limit the damage) may become louder. That is why the state elections in some former GDR areas (in September) could become very important.
Consequences for financial markets
These uncertainties make it impossible to say anything meaningful about the consequences on the financial markets. Still, that's no reason not to try. First, if tensions between Italy and the European Commission rise again, an increase in the spread between Italian and German interest rates can be expected. This is partly due to an increase in Italian and/or downward pressure on German interest rates. With political instability in Germany, upward pressure on German interest rates would not be surprising. If it takes longer for the important positions in the European Union to be filled, the downward pressure on German interest rates may continue.
The prospect of further steps in integration within the eurozone could put upward pressure on German interest rates in the long term. This is because Germany would guarantee weaker euro countries sooner and with more money in such a new eurozone. It should be noted that this upward effect will be more than neutralized in the short term if economic growth in 2020 is lower than expected and/or inflation remains low.