The centrifugal forces laid bare by the European vote, and the collapse of the moderate parties in France, will result in a more flexible interpretation of the Stability Pact. Instead, this does not seem to be the most favourable season in which to reconsider the Union’s governance…
For professional investors and advisers only
– The European elections of 25 May will have important consequences on the process of restoring the European economy to health. The low turnout and the success obtained in several countries by far-right and anti-European movements, confirm that centrifugal forces have increased with the crisis. And the prospect of a fragmented and split Parliament, as will result from the vote, certainly does not bode well for a reform of European governance capable of overcoming the prevailing approach seen in recent years, which has consistently led to poor compromises – all the less so now, that at least 20% of the Parliament would be in favour of taking more than a step back on integration. If a change in policy does come about, it will only be possible within the framework of the existing Treaties and rules, making the most of flexibility margins. Realistically, this does not seem to be the most favourable season in which to reconsider the Union’s governance once again.
– A few changes in the interpretation of the rules, however, are likely. The reason is that the elections could have had – and have had – an important fallout also at the national level within each country, capable of influencing the European picture much more than the changes in the composition of the European Parliament. The most worrying signals came from France, where both the socialists and the moderate right are rapidly losing ground to the extreme right Front National party. If this trend is not reversed between now and the next presidential elections due in 2017, the euro area will lose one of the pillars of its integration, and Germany will lose its main interlocutor. The other, more immediate problem, is the strategy the French socialists will adopt to win back votes. For the time being, the idea seems
to be to win a margin for a slacker fiscal policy, while carrying on the reforms already announced, and hoping in the healing effects of the economic recovery. It seems to be entirely in Germany’s interest to bear with the French government on this point, on condition of the framework of the Stability Pact being safeguarded.
– The impact on confidence reaped by the Italian result was totally the opposite, but goes in the same direction as the French disaster. By far the prevailing interpretation given by investors and analysts is that the strong gains achieved by the PD represent a mandate to press on with the reform programme announced at the end of February, while at the same time strengthening the position of the President of the Council also with regards to members of Parliament elected in the ranks of his own party. Nor, for the time being, does the other major risk at play seem to be materialising, i.e. a decision on the opposition’s part to stop supporting the electoral and constitutional reform process for fear of allowing the PD too much of an advantage. On Thursday, rating agency Fitch judged the outcome of the European elections to be positive for Italy’s sovereign rating, and the round of public debt placements was well received by the market (obviously also due to expectations for further monetary stimulus injections by the ECB). Therefore, expectations are high for the current momentum to translate into an acceleration of the reform process, slowed down in May by the run-up to the electoral test.
– However, the success of the government in office is also rooted in a fiscal policy strategy that has postponed achievement of medium term fiscal goals, and that will require flexible interpretations of the Stability Pact to be maintained. As the economic recovery in Italy is also one of the most fragile within the Union, it would be self-defeating for the European authorities to insist on respect of the original consolidation path – although there is no doubt that high public debt rules out the possibility of an expansive fiscal policy being pursued in Italy. As has already been the case for Spain, the way out could be a combination of methodological revisions (adjustment by cyclical effects could be the best option) and exploitation of the flexibility margins allowed by the Stability Pact. What’s more, the ECB’s increased activism could even be fuelled in part by the desire to rein in mounting opposition to European integration.
Appendix
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