“Imagine the Unimaginables” for 2017 is an annual attempt to identify what the capital markets are expecting in the months to come and therefore have efficiently discounted. It is an act of trying to identify consensus. This was originally published on December 1, 2016 and speculates what might happen in 2017 and is not yet discounted. Update: Imagine the Unimaginables 2017 (Link)
7. Populists on the retreat (lose European elections)
In December 2016 after the surprising Trump victory, populist parties across Europe got more confident as the possibility of a victory seemed credible. It also scared many. As the year developed, this unimaginable has gotten much less unimaginable:
- The Netherlands’ Party for Freedom and their leading candidate, Mr. Wilder, was a viable contender, but failed.
- Macron wins. Unprecedented as he headed a brand new party! Madame Marine Le Pen had to retreat.
- Merkel’s CDU gains together with the liberals FDP in the German state of Schleswig Holstein and NRW–this was a major CDU victory as NRW was always the SPD domain and it is the most populace in Germany. Still Merkel cannot afford to become complacent! The SPD’s chancellor candidate, Mr. Schulz is painting Merkel as being too friendly with Trump (not a popular person here) which many will say is a populist move on his part.
On Sept. 3, SPD’s Schulz and CDU’s Merkel had their debate. Merkel won as expected, but Schulz put in a better than expected performance. Still, as of September 8th, the SPD has lost points in the polls. Consensus now is convinced of a Grand Coalition (CDU-CSU-SPD) or the status quo after the debate performances were rather too congenial. The SPD party appears very vulnerable, much like Labour in the UK before the June election–due to a massive protest vote in Labour’s favor, they did well, much better than expected!
The major issue here in Germany will be the results outcome of the election on Sept. 24 of the other parties, namely, the Greens, the FDP (liberals), the AfD (right wing, populists), and Die Linke (left, former Communists). The surprise factor would be the FDP gaining more than expected (currently ~9-10pct) and the AfD populists failing. This may result in a possible CDU-FDP coalition and would be quite favorable for markets. Bloomberg also has a story on a possible “Jamaica” coalition of CDU, Greens, and FDP which seems to be working in the small Federal State of Schleswig-Holstein. This would be a greater surprise as the Greens are not either FDP or CDU friendly to put it mildly! Otherwise, the status quo of a Grand Coalition of CDU+SPD would prevail.
Berlin chose a Red-Red-Green coalition a year ago, which would be a disaster for the market if that outcome prevailed at the federal level.
Source: Credit Suisse, WSJ THe Daily Shot 29/June 2017
So we must learn to expect the unexpected. How will the protest vote play out in Germany? The danger could be that people don’t vote, because it appears to be a sure thing–some will say this is a form of protest. This is when the peripheral parties and esp. the populists, AfD can do very well or surprise, surprise, the FDP. The interesting battle may be that one, the AfD vs. the FDP. First Germany on September 24th, then let’s see what happens in Italy with their 5 Star Movement (also in retreat).