European Elections: Big Changes, or Business as Usual?

Many observers are predicting that European elections later this month will usher a wave of populist representatives into the European Parliament. David Zahn, Head of European Fixed Income, Franklin Templeton Fixed Income Group, believes there may be a shift in political balance, but suggests the ability of extremists at either end of the political spectrum to dramatically alter the direction of the European Union is likely to be limited.

As investor attention in Europe focuses on European parliamentary elections later this month, there has been a lot of talk about a possible surge in populism and the likely impact on financial markets.

Our view is that there’ll be little change for markets, whatever the outcome.

For fixed income investors, the major themes in Europe over the past decade have been politics and monetary policy.

Nothing in the political field strikes us as likely to change enough to prompt the European Central Bank (ECB) to change its accommodative stance. We’d expect the ECB to remain in an accommodative mood for the foreseeable future. Our current estimate doesn’t see eurozone interest-rate hikes before 2022.

European Parliament Makeup

The European Parliament is already quite diverse in terms of the spread of political views represented. We don’t expect that to change dramatically after the elections, although there may be some shift in the balance.

We also don’t expect this election to alter the political paralysis in Europe. In fact, it could exacerbate it.

We’ll likely see more representation from populist and extremist parties than currently. As a result, European politics will probably get a lot noisier and we’d expect more volatility in discussions taking place in the European Parliament. That could prompt more uncertainty about European Union (EU) policy which could mean Europe continuing to stagnate if it can’t make the changes it wants.