The EU: Singing from 28 Hymn Sheets

What’s the investment lesson in Europe’s recent parliamentary elections? Our Fixed Income CIO Sonal Desai says it’s differentiation. Read more of what’s on her mind about this topic.

These latest European Parliamentary elections can best be described as inconclusive—as is often the case with European Union (EU) affairs. There is something for everyone. Populist parties did a lot better than in previous rounds, but not as well as they had hoped and others had feared.

In the United Kingdom, Nigel Farage’s Brexit Party won 31.6% of the vote and secured 29 seats (improving on UKIP’s 2014 performance of 27.5% of votes and 24 seats), but some commentators say the vote represented a victory for the remain camp.1 (If the remain camp did win, I suspect “better late than never” may not apply in this case). In Italy, the right-wing populist Lega boosted its support to about one third of the vote, but its populist coalition partner Five Star lost ground. In France, Marine Le Pen’s far-right party did very well, but so did Macron’s centrist movement.

The bottom line is that these elections leave the European Parliament more fragmented, and confirm that the decades-long European integration process has stalled. Determination to maintain political sovereignty at the national level has gotten stronger; the adoption of the euro has failed to foster the envisioned economic convergence across member countries. This leaves the euro area more exposed to the risk of financial shocks. And it leaves the European Central Bank (ECB) hamstrung, its monetary policy hostage to fiscal dominance.

Widening Gaps in Debt Levels

To say that economic convergence has failed to materialize is putting it mildly. In some important dimensions, euro-area countries have diverged further. Government debt ratios have moved farther apart even as debt levels increased across the board: in 2000, only five member countries exceeded the 60% of gross domestic product (GDP) Maastricht ceiling2; today 11 do. Italy, Belgium and Greece entered the euro area with debt ratios just above 100% of GDP. They have now been joined by Portugal and Cyprus; and while Belgium’s debt ratio declined marginally, Italy’s has surged to more than 130%.