Europe dodges a bullet

There were huge sighs of relief today within the European Union’s establishment. Fewer Dutch people than expected voted yesterday for the nationalist, anti-Islam Freedom Party. But anti-EU sentiment isn’t going anywhere. This is just a pause in a bigger trend. As the EU dodges a bullet it should still expect plenty of incoming fire.

The Freedom Party in the Netherlands is headed by a man called Geert Wilders. He’d like the country to leave the EU. He’d also like to close all mosques and ban the koran.

Polls predicted his party would win the largest number of seats in the Dutch parliament. But instead of 30 predicted seats, out of 150, the party got just 20 (although it was still in second place). The polls got it wrong again, but this time – for a change – it was the establishment that came up smiling.

Voter turnout was the highest in 30 years, at 80.2%. Clearly the Dutch felt there was much at stake. Overall there was a shift to the right – the left leaning Labour Party was decimated – just not to the far right.

Dutch politics is highly fragmented. This means voters get a lot more choice than “red team” or “blue team” (for example in the US, and in the UK until recently). But it also means governments have to be formed from complex coalitions of multiple parties.

2016 Dutch election result: seats

As it is, existing prime minister Mark Rutte’s VVD party – of the centre right persuasion – got the most seats and will attempt to form a new coalition. Rutte and his fellow EU leaders praised the result.

“A good day for democracy” said Angela Merkel of Germany. “A clear victory against extremism” exclaimed Francois Hollande of France. The Dutch showed “responsibility” according to Mariano Rajoy from Spain.

But is that the end of nationalism in Europe? Is the integrity of the EU now guaranteed? I very much doubt it.

Rocks erode slowly. So do multi-decade political institutions – at least most of the time. The EU’s history goes back 65 years to when the “European Coal and Steel Community” was formed in 1952.

So the EU “rock” is still more or less intact, but it continues to wear away. Obviously a big chip is about to fall off, in the shape of the United Kingdom.

In fact it’s expected that today Queen Elizabeth, the British monarch and head of state, will formally sign the legislation that allows the British government to trigger the “Brexit” process. That will be followed by at least two years of horrendous political intrigue and negotiation, at least judging by the last nine months of shenanigans.

Brexit will mean big changes. There will be winners and losers. Winners will include businesses that want more trade outside of the EU, or that benefit from the now weaker currency (exporters). Losers potentially include businesses that rely on trade with the EU, or need to be inside it to do business there.

One area which could lose is financial services, especially some of the things done in “The City”, as London’s financial district is known. Estimates of potential job losses range from the one extreme to another. Consultancy firm Oliver Wyman suggested just 4,000 jobs are at risk – which frankly is a rounding error in a sector employing over 700,000 people. At the other extreme, the CEO of the London Stock Exchange – a Frenchman called Xavier Rolet – came up with 232,000, which sounds way over the top.

My guess – which is not scientific – is that it will run be somewhere between 20,000 and 30,000 jobs that get moved. Obviously that’s a big deal for anyone affected – although a lot will just be non-British Europeans moving back to the continent, or involve British citizens moving abroad. In any case, thirty thousand jobs are less than 0.1% of the total British workforce, albeit mostly in well paid roles.

In the meantime Britain has its own nationalists still to deal with – the Scottish Nationalist Party, led by Nicola Sturgeon (no relation to the fish of that name). She’d like to leave the UK and rejoin the EU – which is oddly contradictory for a supposedly “nationalist” party.

After all, the UK was created in 1707 by the Act of Union. Whereas the EU’s political union only began to formally develop in 1993 with the Maastricht Treaty. Hasn’t Sturgeon heard the phrase “better the devil you know”? Apparently not.

In any case it’s far from clear that the EU would even allow Scotland to join. Not least since Spain is likely to play hard ball. The government in Madrid doesn’t want a precedent to be set for Spain’s own, longstanding breakaway movement in the region of Catalonia.

And then there’s France. The presidential elections will be held in two rounds on 23rd April and 7th May. The two leading candidates (of many) in the first round will then face each other in the second, which is winner takes all.

Everything currently indicates that the second round will be between Emmanuel Macron (centre left, ex-Rothschild banker, internationalist, no party but a “movement” called “En Marche!”) and Marine Le Pen (leader of the Front National – nationalist, protectionist, anti-EU, anti-immigration, her dad used to run the party when it was overtly anti-semitic).

Polls suggest they’ll both get about 25% of the first round votes. But then Macron will win the second round with 60%. That would still leave Le Pen with 40%.

Four in ten French people would choose Le Pen? That’s hardly the end of French nationalism. She may not win this time, but looks set to remain a powerful force in French politics.

Perhaps she’ll get in next time? I don’t think it would take much more than another global recession…a few more terrorist attacks…a few more hundreds of thousands of immigrants from Africa and the Middle East. In the meantime she’ll continue to be a prominent thorn in the EU’s side.

Even Germany’s Federal Election in September could, perhaps counterintuitively, create problems for the EU. It’s going to be between the centre-right Christian Democrats, headed by Angela Merkel, and the centre left Social Democrats, with Martin Schultz at the helm.

By November, Merkel will have been the Chancellor of Germany – their top political bod – for 12 years. But she’d like a fourth four year term (there are no term limits in Germany). Martin Schultz was President of the European Parliament until January, and as such is an arch eurocrat.

When Schultz announced he was in the race his party’s polls shot up about 10 points. As things stand Merkel and Schultz are neck and neck, with 31% each. It could go either way.

Schultz is an EU hardliner. The project, the principles, the puffery…all or nothing. If he ends up as leader of the most powerful country in the EU then it could be another boost for anti-EU movements.

He’s part of the EU establishment… the inner core of the idealistic bureaucracy. Those are the people most detested by Europe’s massing ranks of nationalists and populists.

The EU can breathe a sigh of relief as it dodges a nationalist bullet from the Netherlands. But I reckon this internal power struggle that pits nationalists against integrationists will continue for many years. There is no sign of a truce in the political battle for the future of Europe.

The result is likely to be many years of deeply embedded, long-run political uncertainty. In turn that ensures plenty of unpredictability in the world of investment.

This heightened risk is a big problem for professional investors, who are paid to make money without big price swings. But it could be good news for nimble private investors.

With price volatility there will also be opportunities to scoop up bargains from time to time. I’ll certainly be keeping an eye on things, and I recommend that you do too.

Stay tuned OfWealthers,

Rob Marstrand

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.