Europe Could Face Economic Paralysis
Voters in 28 European Union member countries—yes, including the United Kingdom—will go to the polls between May 23 and May 26 to elect 750 members to the European Parliament for a five-year term. The political fragmentation of Europe suggests that their decisions could contribute to a near-paralysis of EU institutions. Barron's reports in its article Europe Could Face Economic Paralysis After Parliamentary Elections that turnout is expected to be low, but it has always been so, even after the Parliament was entrusted with significant new powers by the 2007 Lisbon treaty.
Political parties across Europe have nominated second-rate, underwhelming personalities for the job. Out-of-work politicians, retired celebrities, and the odd media personality usually help round out the slates that each political party puts forth for a vote. The European Parliament, which sits in Strasbourg, France, is the only directly elected European Union institution. It shares power over the EU budget and legislation with the Council of the European Union. If you like the current divided Europe, you will love the chaotic one that could emerge by the end of the year. We already know that voters will elect a significant slate of euroskeptic representatives; the only question is the size of this contingent. All polls indicate that the skeptics could account for about a third of the Parliament’s 750 deputies. That’s not just a symbolic threshold, but also the number above which a minority can block some major decisions.
What matters for markets is the ability of the European Union to continue functioning as a rational decision-making entity about economic matters. The main risk with the future Parliament isn’t the decisions it could make, but the ones it won’t. If a coalition of the far-right and far-left manages to hinder legislative work, many reforms under discussion won’t happen. Think of the efforts to build a serious capital-markets union in the EU, or to harmonize banking regulations in order to end the industry’s current fragmentation.
It’s not just the European Parliament that risks paralysis in the next five years. Populist or illiberal governments are already in power in Hungary, Poland, Romania, Italy, and the Czech Republic, to name a few. Each will get to send to Brussels one commissioner as part of the 28-strong EU executive body known as the European Commission. The crucial role of the commission in implementing rules and legislation throughout Europe is likely to be slowed or hindered by constant political grandstanding—hardly what the EU needs at the moment.
Finally, the election will have an indirect impact on the choice of a new president for the European Central Bank. Mario Draghi, the current president, retires at the end of October after his eight-year term. In choosing his successor, euro zone leaders will have to balance their choice for Commission president: If a German national goes to Brussels, a German can’t head the ECB in Frankfurt. This means that, depending on the outcome of next week’s election, the ECB could end up with a hawkish, dovish, or centrist banker at the helm. So much for the vaunted “forward guidance” on which central bankers like to base their actions. What investors are facing with the European Parliament election is the certainty of uncertainty.