BoJo and the general elections

This is a spectacular moment. BoJo has lost tonight and the final decision will be taken tomorrow as the Parliament will vote  for the possibility for it to take the lead in the negotiation in order to avoid a no deal Brexit. 
Then BoJo will convene general elections. 
Then we may have what everybody asks since the first referendum: a confirmation of the Brexit or not. 
That’s may be the best move to clarify the political situation as the vote at the general election will again be remain vs brexit. No one will no longer be able to say “we didn’t know”. 
The result is still random even if polls bend on Johnson’s side. 
The general elections results will definitely give the answer. Will the UK remain in the EU or will they exit. An exit vote would probably mean a no deal brexit. 
Therefore the pound will improve in coming hours but will follow polls’ results after BoJo convenes general elections. A poll in favor of Brexit will probably weaken the pound and conversely a stronger pound when polls are in favor of the remain side. The equity market will follow the same momentum. The point is that everyone will know that these elections will definitely close the referendum file. The huge uncertainty will be on the side the coin will fall. We can expect huge uncertainty and volatility if polls have the same volatility than before the referendum. Because investors know that this is the second chance. 
 This can be a source of a kind of sudden stop on the economic activity as no one will take strong bets on the future. 

Italian Elections and US Protectionism: my Monday Column

This weekend’s Italian elections failed to provide an answer to address the risk of political instability that has characterized the country since the Second World War.
The vote saw a surge in populism that the pre-election polls had not fully taken on board. The Five Star Movement looks set to win 34% of votes and the League (formerly known as the Northern League) is poised to carry off 16%, while Silvio Berlusconi’s party should gain only 14% and Matteo Renzi’s Democratic party just 18%. This marks a huge decline for the traditional governing parties as compared to 2013.

Based on the outcome expected as counting continued today, a hung parliament looks likely. There is a small amount of proportional representation, so a 40% score would be enough to secure a majority.

This potential outcome raises a number of questions: Continue reading

German risks for Europe

After the failure to form a coalition the first thing to notice is that Merkel is no longer at the center of the game. She has been replaced by the German president, Frank-Walter Steinmeier, who will decide what will be the next steps.

These steps can be threefold
1 – A coalition between the CDU-CSU and the social democrats of the SPD but the SPD is reluctant to participate.
2 – A minority government but with the risk of doing nothing while important issues have to be managed (the current negotiation failed on the refugees’ question, on carbon emissions, on taxes and on education) These are important issues that cannot be postponed.
3 – New elections at the beginning of next year

I favor the third possibility but my guess is that in this type of situation domestic questions are at the center of the discussion or of the campaign.
European questions were not at the center in recents days but with Merkel’s recent point of view was a kind of guarantee that Europe would not be forgotten.
It could be the case in a foreseeable future if Merkel is no longer the leader. Europe could then be erased from discussions

The recent improvement in the perception of Europe is twofold.
1- GDP growth is stronger and employment is improving rapidly
2- The commitment between Merkel and Macron to improve the way institutions are working at the European level

If Merkel is weaker and focused on internal issues then European reforms will no longer be on the agenda
This would create an uncertainty that could reduce the economic horizon then limiting investment and the possibility to improve the potential growth. Therefore it can have a negative impact on growth and could  be damaging.

Another point on reforms is that with stronger growth it limits the risk of populism. If, because Merkel is no longer at the center of the picture, reforms are not done then we will see the convergence to a lower growth trend rate and more that the come back of populism with the risk of weaker institutions. Some nationalists want to exit from the EU.
The political process in Germany is at risk not only for the Germans but also for Europeans as the current momentum would become more fragile opening the door to populism

The impact on Brexit negotiators will depend on the result of the current political process. A bias positive to populism would a piece of cake for the UK government as populists do not like Europe. It would be the worst situation for a European citizen.

France: General elections – Second round – Employment and Europe in line of sight

The President-elect has won an overall majority after the general elections. His party will have 306 seats and 348 when the Modem, a close political party, is included (on 577 seats). Nevertheless, the new majority will not depend on ally (Modem).
It’s far from the tsunami that was expected after the first round. The new President majority will represent 60% of the seats (versus almost 80% expected after the first round) it is close to the average seen since 1981.
France-legislatives2emeround-2017-en
Continue reading

France: General elections – First round

The French general elections will give an overall majority to Emmanuel Macron the President-elect. After the first round, yesterday, La Republique En Marche (LREM) his political party can expect between 400 and 455 seats on a total of 577.

Different remarks
1 – French people are legitimist; they have given a large majority to the new President enabling him to pass the reforms he announced during his campaign. This mustn’t be a surprise. The new President has always had a majority notably since 2002 as general elections follow the presidential election by a month. Nevertheless the LREM victory is large but not the largest as it can be seen on the graph below. Continue reading