These are troubling and unsettled times in the EU, a Union which remains structurally unsound and is becoming increasingly ill-at-ease with itself. A slew of recent elections and national government crises has seen an upsurge in populist political reaction, notably benefiting far-right momentum with tangible results.
Most obvious is Holland. Following the collapse of Mark Rutte’s centrist coalition in the summer thanks to irreconcilable differences on immigration policy, and against the polls and the pundits’ predictions, Geert Wilders’ Party for Freedom won much the greatest number of seats though in a large field too few seats to form a majority government. The party is overtly xenophobic (notably anti-Islamist), nationalistic and anti the EU. Wilders is now casting around for a political partner or partners who can get him over the line to form a workable administration; the condition is those partners must agree to a referendum for the Netherlands to leave the EU. Struggling to find willing co-conspirators, Wilders will most likely be forced to junk substantial parts of his manifesto to create a viable coalition (as Georgia Meloni did in Italy last year, toning down what many regarded as neo-fascist ideology to a less extreme stance: she now enjoys taking selfies with world leaders and swapping holiday snaps with Rishi Sunak), or a rainbow of alternative collation possibilities remains on the cards under either Franz Timmermans’ Green/Left or Rutte’s centre-right VVD parties. Whichever scenario emerges, however, that substantial minority who voted Party for Freedom cannot be ignored without the risk of a further political backlash. For the Dutch, this is politics dancing on the head of a pin.
In Poland the general election in the normal electoral cycle went to the wire in November. However, the result was inconclusive. Donald Tusk’s centre-left party narrowly won the most seats prompting him to declare victory despite not having a majority. He was premature. Despite having substantial personal conflicts of interest, the President invited the existing prime minister Mateusz Morawiecki of the right-wing PiS to form a new coalition government, a process which at the time of writing remains incomplete as Morawiecki entertains fractured talks with prospective partners. Tusk may yet have his wish.
And, as we have discussed in several of these recent columns, Olaf Scholz’s Traffic Light coalition in Germany is facing an existential threat thanks to its budget having been declared illegal by a constitutional court on the grounds of being significantly and wilfully in breach of the national debt brake regulations. Whether a cobbled-together solution can be found to present a legal and tenable budget before the year-end remains to be seen. None of the three parties in the coalition has any intent to be the instrument of its demise but at a time of economic stagnation and a growing sense of national insecurity, much political energy is being expended merely keeping the warring parties together rather than confronting the issues the electorate cares about.
At the mid-point in the cycle, the German electorate’s patience with the coalition is demonstrably care-worn. The evidence is plain: the far right AfD, adopting a hard line stance on immigration and being against the government’s climate change policies, has enduring momentum behind it consistently holding over 20% in nationwide polls; that places it second to the conservative Christian Democrats’ 30%, but substantially ahead of Scholz’s Social Democrats who have fallen as low as 15%. Informed pundits reckon in 2024 there is every chance of the AfD winning control for the first time in a state election with particular targets being Saxony, Brandenburg and Thuringia. It is worth noting that the AfD was only founded in 2013 and until five years ago was still regarded as a faddish, populist fringe movement; today it is firmly mainstream.
To the south, a couple of months ago Slovakia’s electorate returned a right-wing government coalition led by Robert Fico, a pro-Putin acolyte who, despite Slovakia being an EU and NATO member, without mincing any words branded all foreign NATO garrison troops stationed in Slovakia as Nazis
This political instability spanning an area of northern Europe ranging from the Belgian border to that with the Baltic States is extraordinary and unwelcome. The polarisation and populism of European politics is symptomatic of three key themes we have discussed on several occasions: disenfranchisement in the sense of the frustration verging on helplessness that whomever one votes for seldom makes a difference, that electorates are taken for granted as inconvenient but necessary evils or indulged as little more than useful idiots; the difficult and divisive but all-pervading topic of immigration; and deep divisions over climate change policy and how to achieve carbon net-zero.
At the establishment level in Brussels, recent comments from senior figures reveal their own anxieties and frustrations. Just in the past two weeks, consider these: first, from the current President of the European Commission Ursula von der Leyen, “we goofed Brexit”; hers was a tacit admission that in adopting an uncompromising line with David Cameron’s embassy to win concessions from Brussels before the 2016 referendum and giving him zero to go home with as a political lever, the EU’s stance had been self-defeating, compounded by the subsequent rancorous Brexit negotiations. Hers is an appeal that the UK should return to the fold to help “resolve some of Europe’s problems”, loosely translated as ‘we want Europe’s second biggest economy back, and we/I need a heavy counterweight to an overbearing centre of gravity dominated by France and Germany’.
This week it was announced by Brussels that it will defer by three years the new 10% tariff applicable from 1st January on all electric vehicles sold in the EU that fail to meet a minimum percentage threshold of components being produced in the EU; pragmatically, it was a bonkers regulation in the first place given the paucity of existing capacity to produce such equipment in volume. But it can also be no coincidence that with the UK being Germany’s biggest export market for cars, and the EU being a big market for our own vehicle exports, the imposition of such a punitive tariff which would potentially harm both UK consumers and car industry workers would hardly paint the EU as welcoming us back with open arms. “There’s a UK election, stupid!”: there is no doubt that politics as well as economics played a part here. Best not frighten the British horses any more than they have already been, especially when Keir Starmer is keen on realigning with the EU if Labour forms the next government.
Second, from former European Central Bank President and former Prime Minister of Italy, Mario Draghi, that the EU needs urgently to become a fully integrated mega-state. In these musings we have regularly rehearsed the arguments as to why the EU as currently configured just about functions with a great deal of effort day-to-day but remains dysfunctional strategically. It’s neither beast nor fowl. Semi-formed and half-baked, through over-expansion and yet a lack of effective leadership it has been locked in limbo for two decades, neither able to go back to being individual fully sovereign nations nor go forward towards full integration. Draghi’s is a statement of the obvious, the step to the logical endpoint: full monetary, fiscal and political union. But what a step! The question is how to get there. In many ways it’s a bit like the old joke of asking an Irishman the way to Dublin; to which the perverse but very logical answer is “well, you wouldn’t be starting from here, now”. But here is where it is. As to how to get to there, even the Irish don’t know the answer to that.
The EU’s ‘national’ anthem is Beethoven’s ‘Ode to Joy’. There’s not much joy to be had. Perhaps more in tune with Mario Draghi’s ambition to scrap the EU and begin over, a more appropriate anthem should be Winter & Lukather’s song (re-recorded by Mud), ‘Tobacco Road’ which includes the refrain: “Bring dynamite and a crane, blow it up start all over again”. Nothing else seems to have worked. Why not?
But as a perfect illustration of the difficulties which need to be overcome, even the EU’s most strident supporters and ambassadors are national politicians at heart needing to deal with domestic real politick as they find it.
Michel Barnier, the crushingly effective chief Brexit negotiator for the EU was suddenly overcome by a wave of French national self-expression when he stood against Macron in the most recent French Presidential election. Today in Poland, it is much the same with Donald Tusk, Barnier’s erstwhile paymaster when Tusk was President of the EU Council of Ministers and a staunch and utterly intransigent EU advocate. If he wants to be Polish PM and lead a stable government, Tusk cannot ignore the significant proportion of the electorate who are Eurosceptic; thus as von der Leyen tries to speed up the EU’s decision making by significantly increasing the number of areas which would be subject to qualified majority voting rather than the need for strict unanimity, Tusk has rejected that notion out of hand. If Brussels thought all its prayers regarding Poland (alongside Hungary the perennial habitues of the EU’s formal naughty step, almost permanently under threat of Article 7 and the suspension of their voting rights) might be answered with a former EU President at the helm in Warsaw, think again.
In the meantime, determined to be seen to be making progress, the EU muddles and meddles along. To borrow what a commentator described in another context this week, it is the application of the political logic of the drowning man: “we must do something; this is something; therefore we must do it”. It wants to expand from 27 members to 29, taking in Ukraine and Moldova; the last time the EU wanted to bring Ukraine into the fold, that didn’t turn out so well. EU governance is chronically sclerotic as it is but the strategic thinking is as unsophisticated as “two more can’t make it any worse”. And with Ukraine (if it ever gets that far), there comes a huge financial bill literally to pay for the rebuilding of a nation.
In earlier columns we have described how in matters of defence arising out of the Ukrainian conflict, Presidents Macron and von der Leyen have been pushing for the pan-EU integration of defence procurement. This is a programme in which process is of greater importance than output. The result has been significant disruption (indeed prolonged suspension) to the flow of military aid to Ukraine, the country Brussels would like to be an EU member. Today, compounding the problem is the German budget deadlock: Chancellor Scholz has told the EU that as part of plugging the hole in his domestic budget thanks to the court ruling, he will reduce Germany’s contribution to the EU’s central military aid fund (he not unfairly points out that Germany has now passed the UK as the second biggest direct donor to Ukraine, why pay twice?). These are the politics of ever-decreasing circles.
If all these seem distant tribulations of an EU in perpetual conflict with itself, what relevance is it to investors? Does it matter?
It is about context. In the past month, eurozone government bond yields have been behaving like their US counterparts: heading rapidly downhill (with prices powering in the opposite direction) as markets try to provoke the central banks into relaxing monetary policy. The German 10-Year Bund yield today is 2.21% having peaked at very nearly 3% at the end of September; Italy’s equivalent has fallen more than a point from 5% to 3.97%. The myopic focus is on inflation and interest rates. But the context is the risk premium: governments determine fiscal policy and in the EU, political instability is demonstrably on the rise. There is a view that while governments are in paralysis, their ability to do anything is limited and therefore little near-term harm can be done. But over the medium and longer-term it becomes more difficult to predict the outcome which logically argues for a greater appreciation of the possible risks. In their drive to recoup two years of losses, markets are heads-down and eyes-down; occasionally a heads-up and a scan of the horizon for a reality check is no bad thing.
The Jupiter Merlin Portfolios are long-term investments; they are certainly not immune from market volatility, but they are expected to be less volatile over time, commensurate with the risk tolerance of each. With liquidity uppermost in our mind, we seek to invest in funds run by experienced managers with a blend of styles but who share our core philosophy of trying to capture good performance in buoyant markets while minimising as far as possible the risk of losses in more challenging conditions.
Authors
Jupiter Merlin Portfolios
Multi-manager portfolios constructed to deliver a range of specific outcomes.
The value of active minds – independent thinking
A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.
Fund specific risks
Important information
This document is for informational purposes only and is not investment advice. We recommend you discuss any investment decisions with a financial adviser, particularly if you are unsure whether an investment is suitable. Jupiter is unable to provide investment advice. Past performance is no guide to the future. Market and exchange rate movements can cause the value of an investment to fall as well as rise, and you may get back less than originally invested. The views expressed are those of the authors at the time of writing are not necessarily those of Jupiter as a whole and may be subject to change. This is particularly true during periods of rapidly changing market circumstances. For definitions please see the glossary at jupiteram.com. Every effort is made to ensure the accuracy of any information provided but no assurances or warranties are given. Company examples are for illustrative purposes only and not a recommendation to buy or sell. Jupiter Unit Trust Managers Limited (JUTM) and Jupiter Asset Management Limited (JAM), registered address: The Zig Zag Building, 70 Victoria Street, London, SW1E 6SQ are authorised and regulated by the Financial Conduct Authority. No part of this document may be reproduced in any manner without the prior permission of JUTM or JAM.