European politics is becoming more important

It’s not so long ago that the European elections were no big deal and for many politicians Brussels was a comfortable place to end their career (voluntarily or not). This has changed a lot. The European Parliament and the European Commission have become important elements not only of European, but also of national politics. In the meantime, many political impulses come from Brussels, and the further development of the EU is orchestrated there in cooperation with the heads of government. It will, therefore, be all the more important to strengthen democratic legitimacy and to keep the influence of national interests within proper bounds. Against this background, a right of initiative for the European Parliament would be an important development. But this will no doubt be some time coming.

In the last few elections we have seen an increasing divergence of political opinions. Parties at the extremes of the political spectrum are becoming stronger to the detriment of the political mainstream. A common factor here is probably the population’s increasing fear of the future. The rapid pace of change in society and at work combined with the ECB’s low interest rate policy and the discussion about migration and demography are a source of concern for many people and are making simple slogans appear respectable. But this also reflects the fact that the big parties in Europe are not addressing these concerns effectively enough.

This is also likely to be reflected in the upcoming European elections. Between 23 and 26 May EU citizens will be deciding the composition of the new European Parliament. The political mood suggests there will be a swing to the right. For the first time, conservative euro-sceptical and right-wing populist parties could attract around 25% of the vote. The populists are benefiting from tailwinds that have been conjured up not only by concerns about immigration and terrorism, but also by the considerable scepticism in some parts of the EU vis-à-vis the European institutions. The established parties will probably chalk up historically poor results. Christian and Social Democrats could, therefore, be dependent on a third partner, namely the Liberals. However, despite their losses the established parties will continue to dictate the decisions of the Parliament and the choice of the EU Commission President in the future. The situation is different for the EU Commissioners, who are nominated by the national governments.

However, in the financial markets the vital signal is likely to be: Fundamental change is not to be expected in the European Parliament nor in the EU Commission. Given the signs that political and institutional continuity will be assured, the increasing strength of the populists should not justify a higher risk premium. But old conflicts such as the budget dispute between Italy and the EU Commission may well flare up again.

The electoral gains that the euro-sceptics are expected to make will put the established parties and the national governments under pressure. This is likely to make it even more difficult for Germany and France to hammer out compromises as regards the question “where should Europe be headed?” So far Paris is championing greater solidarity in Europe so as a result – in the search of compromises – Berlin will not be able to avoid at least softening its hitherto strict opposition to setting up and expanding EU transfer systems. But things are different in Italy, which has erred from the reform path and whose debt continues to increase. Further political and fiscal integration would probably play right into the hands of the euro-sceptics and populists and fuel resistance to the EU’s institutions and the policies of the established parties and national governments.

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