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Varying national conditions decisive in super election year

Last week’s Dutch election provided new perspectives on how the 2016 political upheavals in the United States and United Kingdom will affect Europe. The question now is to what extent the French presidential election (April 23 and May 7) and Germany’s September parliamentary election will redraw the political map, writes Håkan Frisén, SEB's head of Economic Forecasting.

Some ideological currents behind the victories of Brexit and Trump will certainly continue gaining ground on the Continent too: a shift in views on refugee resettlement has already occurred, for example. But when the entire political field is in motion, it is far from clear that the balance of power will change much. The Trump administration’s provocative behaviour may also trigger counter-reactions in the European elections.

Election systems key to cooperative climate

When we compare the most important countries in Western Europe, it is obvious that constitutional ground rules are highly important to the climate of cooperation. The UK’s first-past-the-post elections normally lead to strong governments; parties rarely need to cooperate in order to create parliamentary majorities. France’s strong president system also decreases the need for broad political coalitions. Although the president, as in the US, may be forced to deal with a parliament dominated by another political complexion, its members are elected in majority constituencies. This further reduces opportunities for extreme parties: for example, the National Front has only two representatives.

The price of the decisiveness offered by majority parliamentary (and to some extent presidential) elections is that they may also trigger sudden shifts in policy when small movements in the electorate may lead to major changes in parliament. After British election losses, with Downing Street a seemingly distant prospects, there are numerous examples of both Labour and Tories entering introverted periods with rather extreme agendas. For example, in 2002 the current prime minister, Theresa May, warned Tory compatriots against becoming an eccentric “Nasty Party”. Today’s Labour Party under Jeremy Corbyn is often described in similar terms; the Tory government must therefore largely deal with the Brexit process on its own. As in the Nordic countries, Germany’s proportional representation system creates a need for more or less broad political coalitions. Since the country also has a tradition of creating majority governments, this means most parties in the federal parliament are often well-positioned to join a ruling coalition. This may also help even small parties “mature” faster into potential government participants. The evolution of the Greens in Germany compared to many other countries is one example of this.

Heads of government since the Second World War
Percentage of the period Right Left
Germany  70 30 
France*  69 31 
United Kingdom  59 41 
Sweden  24 76 
Denmark  45 55 
Norway  33 67 
*Presidents (heads of state) during Fifth Republic since 1958 

Right has dominated Germany and France

In modern times both France and Germany, to a greater extent than the UK or the Nordics, have had right-of-centre politicians as heads of government (or presidents in the case of France). German Christian Democrats (CDU/CSU) and French Gaullists/Republicans have largely backed their national economic models, which seems to have softened the economic conflict dimension in politics. This is especially clear in Germany, where two periods of Social Democratic (SPD)-led coalitions − with the Liberals and Greens, respectively – represented no major economic policy experiments. The main impact of the Willy Brandt/Helmut Schmidt period in 1969-1982 was perhaps a cautious rapprochement between the West and East German nations of that era. Under Gerhard Schröder’s SPD-led governments in 1998-2005, the labour market changed due to the Hartz reforms, which were highly instrumental in pushing German unemployment far below French and EU averages. This major difference signifies that the current need for economic reforms is substantially greater in France than in Germany.

France goes against rest of Western Europe

Looking at the historical pattern of post-war heads of government/state, France has a clear tendency towards moving in the opposite direction from other countries. The most striking example is Socialist President François Mitterrand’s election victory in 1981, following the election of Margaret Thatcher in the UK and Ronald Reagan in the US in 1979 and 1980. Mitterrand’s radical economic policies, including large increases in public spending and far-reaching nationalisation of businesses, rather quickly had to shift in a more traditional direction in response to market turbulence and soaring deficits. It is quite possible that we will see a counter-reaction to trends in the major English-speaking countries, especially if US President Donald Trump continues his provocative behaviour. This might, for example, lead to a heightened commitment to the EU in French politics, thereby increasing the headwinds for right-wing populist Marine Le Pen’s “Frexit” policy.

Different leftist responses to Trump, Brexit

Since both the Brexit and Trump campaigns successfully mobilised groups that have traditionally supported left-wing parties, the positioning of social democratic and socialist parties may be important. Last week’s disastrous election losses by the Dutch Social Democrats further accentuate this. France’s Socialists are moving ahead with Benoît Hamon as their presidential candidate instead of Manuel Valls; this implies that they are following in the footsteps of the British Labour Party by ceding the political centre. Hamon’s radical programme, including a universal basic income and shorter working hours, is far to the left while Valls represented a more centrist alternative. This makes it easier for the National Front’s Le Pen to gain further ground among former leftist voters. But not even combined with alleged financial irregularities by Republican candidate François Fillon will this be enough to give Le Pen an especially good chance of winning the second round. According to betting firms, the odds of a Le Pen victory are currently 25 to 30 per cent. In light of earlier mobilisation to stop National Front candidates (see box), this probability seems high – even though Le Pen has broadened her party to reach new voter groups.

Although independent centrist candidate Emmanuel Macron, who has now emerged as the favourite, lacks both experience from political campaigns of his own and a party organisation, these are weaknesses that will only emerge at a later stage. His independence may instead become an asset in the campaign; we have recently seen various examples of how dissatisfaction with the established parties can also benefit new centrist candidates. As president, Macron might also initially encounter less resistance than an established right-of-centre politician when it comes to winning support for economically liberal reforms. If Le Pen, contrary to expectations, should make it all the way this would of course increase political uncertainty throughout Europe, but it is still unlikely that either a parliamentary majority or public opinion would accept French withdrawal from the EU (Frexit).

Many conceivable coalitions in Germany

With Martin Schulz has their new party leader, Germany’s Social Democrats (SPD) are resurgent. The party has improved its public opinion position without having to reveal so much about its intentions. So far, offering voters weary of Chancellor Angela Merkel a new alternative for stopping the EU-critical AfD (Alternative for Germany) has been enough. SPD is probably more inclined than Merkel’s CDU/CSU to adhere to international demands that Germany should pursue a more expansionary fiscal policy. Schulz has also indicated that he wants to move SPD a little to the left, with the slogan “time for more fairness” and the ambition of reversing some of the Schröder epoch’s labour market reforms. Yet it does not look as if this shift will be so great as to threaten the SPD’s chances of gaining new centrist votes.

With the SPD and CDU/CSU roughly equal in public opinion support, there are many conceivable governing constellations, without having to give the right-wing populist AfD any influence. Given the German tradition of majority governments, a continued “grand coalition” seems most likely. If the SPD should become the largest party and end up leading such a grand coalition for the first time, Merkel is likely to hand over the CDU leadership to someone who will be satisfied with the post of deputy chancellor. But no such big changes are required to enable the formation of other majority governments. The Liberals (FDP) lost their seats in the federal parliament for the first time in the 2013 election by polling just below the 5 per cent threshold. FDP now looks set to return, thus becoming a potential coalition partner for both a right-of-centre and left-of-centre government.

Common French-German EU plan needed

Although we are not facing political upheavals that will have a lasting effect on financial markets (read more here). French-German leadership in the European Union will face challenges ahead. The European Commission – frustrated at blockages and disunity among EU members – has presented a White Paper with five different scenarios until 2025. In itself, this shows great uncertainty about the future of the EU and puts pressure on member countries to examine future choices. A two-speed Europe, joint action in selected areas or deeper integration on a broad front are among alternatives to “carrying on” as usual. Merkel and Hollande seem to support the first-mentioned alternative, with Germany and France thus taking the lead in integration efforts. Because EU countries have such different views of how much national freedom there should be, this will certainly lead to tensions ahead. Without the UK, and with a more unpredictable US and a Russia that may exploit divergent interests among EU countries, relations with non-EU countries will also become more complex.

The two countries face different challenges. For France, economic reforms are important while it is also necessary to find ways of preventing escalating tensions in the wake of recent terrorist acts. For Germany, it will be vital to avoid an escalation of tensions in relations with the EU’s Eastern European members and eventually try to normalise relations with Russia. It will also be important to shape economic policies that ease tensions connected to the Germany trade surplus vis-à-vis other euro zone countries and the US. Establishing a trustful relationship between German and French leaders is vital, but this does not need to depend on political party affinities. Helmut Kohl and François Mitterrand had different political complexions, but this actually gave their agreements extra legitimacy when European integration efforts were in their most dynamic phase during the first half of the 1990s. In contrast, the frosty relationship between fellow right-of-centre leaders Angela Merkel and Nicolas Sarkozy was a source of difficulty during the acute financial and euro crises that began around a decade ago.