Moving Europe’s goalposts

James Walsh, Policy Lead: EU & International, NAPF

The election results have quite different impacts depending on whether we are talking about the broader political situation or pensions policy in particular. At the political level, the success of euro-sceptic parties in several member states will increase the pressure for reforms that result in the EU doing less, regulating less and handing power back to national parliaments. The elections have less impact on pensions policy specifically, largely because the sceptic parties tend not to get involved in the European Parliament’s committees where decisions and compromises on legislation are thrashed out.

The parties of the centre-right (EPP, ECR and ALDE), who regularly commanded majorities in the last parliament, no longer have the numbers to do so. We can expect more votes to be won by a ‘grand coalition’ of the EPP and socialist S&D groups. This means that Parliament has shifted from centre-right towards the centre-left.

Significant as the parliament is, it is still the European Commission that initiates legislation, so a great deal depends on who ends up sitting in the key positions of Commission President and Internal Market Commissioner.

Martin Harvey, Fixed Income Manager, Threadneedle Investments

As widely expected, the European elections have shown a shift in public opinion towards protest parties. However, this should not prevent the more traditional parties from forming a majority, given that those gaining share will not necessarily form alliances at the European level due to their diverse ideologies.

The European bond markets had been relatively sanguine in the approach to the elections, aside from some weakness in Italian bonds which has been swiftly erased by the better result for Matteo Renzi. It is certainly true that the next few months will involve an element of political impasse while key jobs are assigned for the coming years, so any resurrection of the crisis may be met with something of a power vacuum. However, national governments are a more important part of the crisis-fighting process, so we would not expect major problems.

From a bigger picture perspective, many of the building blocks for a more integrated union have already been put in place over recent years, most recently banking union legislation, and these are unlikely to be derailed by a change in the parliamentary make-up. In fact, in certain circumstances where EU parliamentary approval may have proved tricky, national governments have managed to circumvent the process via intergovernmental treaties. Over the long-run, it is surely concerning that the population feels increasingly uneasy with the direction of travel in European politics, especially given that much of the crisis-fighting ideology involves greater integration. It should therefore be food for thought for European policymakers eager to maintain democratic legitimacy.

David Henry Doyle, Head of Financial Services, Hume Brophy

The European elections will have a direct impact on the pension industry as there are a number of relevant legislative initiatives currently on the table which the next parliament will negotiate. These deal with the pension sector both directly and obliquely. The revision of the Institutions for Occupational Retirement Provision (IORP II) will likely spark a wider debate on pensions in the next parliament. Already there are questions being raised about whether pensions are receiving special regulatory treatment not afforded to other institutional investors. In this context there are calls to “level the playing field” between life insurance and pensions for regulatory capital.

There are also several initiatives under way to incentivise pensions (and other institutional investors) to become more active in capital markets and long term financing of the real economy. The new shareholder rights directive, the European long term investment fund regulation, securitisation, the framework on crisis management for non-banks and the next steps in the commission’s long term financing are all files for the sector to watch closely in the coming year. Calls to introduce a financial transaction tax are also likely to increase in the next Parliament. Although MEPs are not able to legislate on taxation they can certainly apply political pressure to speed up negotiations.

Séverine Neervoort, Account Director, MHP Communications

The three biggest political groups together (EPP, S&D and ALDE) still hold over 450 seats and will be able to set the tone in the next legislature. However, the numbers also mean that a form of grand coalition between EPP and S&D will be necessary to push legislation through parliament. Centre-right (EPP, ECR and ALDE) and centre-left (S&D, ALDE, GUE/NGL and Greens/EFA) coalitions that could have existed on specific pieces of legislation fall short of the necessary majority. More than ever, when engaging with the European parliament, industry representatives will need to seek the support of MEPs from moderate parties across the political spectrum.

The message for UK financial services is that if you don’t have European allies in the parliament, building those relationships should be your number one priority in 2014.

The victory of the Front National is likely to diminish the actual influence of France in the next Parliament. Twenty-three out of the total of 74 French MEPs are expected to come from the FN, making it the single largest French delegation in parliament. This also means that the French presence in the three leading political groups will be less pronounced, potentially falling behind some of the other big countries such as Spain, Poland, and Italy (let alone Germany). With the rise of UKIP, the UK delegation will also lose the little influence it had left in the European Parliament. Meanwhile, Germany will be in pole position to dominate policy making for the next five years.

Yannick Naud, Portfolio Manager, Sturgeon Capital

The sharp rise of the ‘populist’ vote in the European Union’s parliamentary election has certainly put under pressure traditional parties in many countries. Politically the main question would be to know if they will be able to create a coherent group and therefore if there is a risk for them to block parliament.

Every analyst will agree that decision-making in EU is often too slow and too complicated, but so far there has always been a consensus between stakeholders to compromise in order to find an acceptable solution to any given problem. A ‘European Tea Party’ stand of no compromise in order to push a narrow agenda would be very harmful for the EU, the euro and of course for investors.

Given historical track record both domestically and at EU level, I think we should probably be able to avoid this outcome. In fact for investors the direct consequence of voters dis-affection with the European Union, surprisingly enough, could very well be positive for risk assets in the medium term, and especially equities in continental Europe as it could trigger faster than expected economic reforms and also put back ‘growth’ (instead of ‘fiscal consolidation’) into each country as well as on the EU Commission’s agenda in order to help lower unemployment.

Vincent Juvyns and Maria Paola Toschi, Global Market Strategists, J.P.Morgan Asset Management

The outcome of the European elections will have little impact on the economic land-scape in the near term and this is reflected in the reaction of both equity and bond markets. Voters are calling for a different Europe to the one we have now, but nothing occurred to significantly undermine stability in the region.

In the short term, markets may get some support from the European Central Bank (ECB). Mario Draghi, the ECB president, somewhat uncharacteristically commented after the elections that people are calling for answers, but not more austerity. This points towards further action from the ECB to loosen monetary policy.

The longer-term outlook is less clear. The stronger political base of the eurosceptic and populist parties means they now have the ability to slow very necessary economic reforms and hinder further EU integration measures. The cost could be substantial. The European Parliamentary Research Service estimates that greater levels of integration could add up to €800 billion per year to the European economy or roughly 6 per cent of the region’s GDP.

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