Macro Vision March 28, 2017 Has Europopulism been stopped? Support for populist parties in Europe appears to have peaked and may well decline ahead as the economy continues to recover, migration flows dwindle, EU leaders understand the need to return power from Brussels back to member countries, and the examples of recent populist governments start to affect voter opinion. However, the aggregate picture can hide real danger at the country level. With a track record of feeble growth and strong immigration inflows, Italy appears to be a weaker link than France. There is a growing consensus worldwide that the short-term problem with Europe is not the economic performance, as GDP growth has been steady at a 0.3%-0.5% q/q pace since September 2014. It is the political situation that causes concern, particularly the rise of Eurosceptic and Populist parties that has been seen over the past few years. In many European Union (EU) countries, a general sentiment of revolt against mainstream politics, austerity, microeconomic reform and Brussels-based policy decisions has led many people to turn away from the European project. In this work, therefore, we define europopulism as a rejection of mainstream economic policies, like free trade and an independent central bank, support for increased political interference in economic life, including that of private sector corporates, and, in the European context, aversion to Brussels (including austerity measures, immigration policy and in some cases the common currency). Deterioration of the economic and social outlook following the euro crisis, along with growing concerns over immigration and terrorism, have led to calls for more independence and border control. This resulted in Brexit and the surge of Geert Wilders PVV in the Netherlands, increased support for Marine Le Pen s National Front in France, Beppe Grillo s 5SM in Italy and so on. However, not all is yet lost. We see evidence that support for populist parties may have reached its peak. We have constructed an aggregate index of Europopulist parties support as share of eligible European voters, and it reached a peak in june 2016 following the Brexit vote (see Chart 1) 1. We believe this overall support for populist parties across Europe might keep falling ahead, but country differences still matter, as we discuss below. 1 The index was created using data from national pollsters. Despite there being valid criticism regarding their efficiency after failure to predict Brexit (and Donald Trump s election in the US), the polls are still useful in identifying trends and tendencies. The index uses data from national polls from France (FN), Italy (5SM), Germany (AfD), Spain (Podemos), Greece (Syriza), Netherlands (PVV), Austria (FPO), Portugal (Socialists), United Kingdom (UKIP), Finland (Finns) and Denmark (DPP). Note that we include both left and right-wing parties in this sample, as per our definition of populism. Please refer to the last page of this report for important disclosures, analyst and additional information. Itaú Unibanco or its subsidiaries may do or seek to do business with companies covered in this research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the single factor in making their investment decision.
22% Chart 1: Populist forces appear to have peaked and started to decline 18% 16% Europopulists' share of voting intentions 14% Europopulism party-support might start to fall 12% Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 We see four main factors that could lead to drop in support for Europopulist parties. First, the economy is recovering and unemployment is falling. Eurozone unemployment has fallen from a 12.1% high in April 2013 to 9.6% as of January 2017 (see Chart 2). GDP has risen from -0.9% in 2012 to 1.7% in 2016, and it is set to continue increasing at a similar pace in 2017. Manufacturing PMIs, which serve as a leading indicator of industrial activity and thus job creation in the sectors where Eurosceptic nationalist speeches strike deepest, have been increasing across all major Eurozone economies and are currently far from the low levels of the Eurozone Crisis back in July 2012. The recovery in activity data is mostly a consequence of stimulus from the European Central Bank and structural reforms undertaken in many European countries, which takes some pressure off governments and limits the need for extreme austerity measures. This creates less room for eurosceptic politicians to play upon people s frustrations and turn them against mainstream governments. 13 12 Chart 2: Low unemployment expected to undercut Europopulist support % % 22 20 11 18 10 16 9 Europopulist' share of 14 voting intentions (rhs) Unemployment (-24) 8 12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19 Source: Haver, Itaú Second, immigration has been easing. Even mainstream governments are taking a harder line on immigration and border control, which helps to take away some of the fuel that drives nationalistic eurosceptic movements. The recent defeat of eurosceptic PVV in the Netherlands election could be seen as an example that this tougher approach on immigration is resonating well with the people. Additionally, the March 2016 EU-Turkey migrant crisis Page 2
deal has helped curb migration and alleviate pressure on this front. The number of monthly asylum applicants in the EU, which is a good proxy for migration data, has been falling dramatically since August 2016 (138,145 applicants), and the latest figure of January 2017 (26,040) is the lowest since June 2012 (24,875; see Chart 3). 180 160 140 120 100 80 60 Chart 3: Declining asylum applications reduce Europopulist support Thousands of People 24% 22% 18% 16% 40 EU Total Asylum Applicants 14% 20 Europopulists' share of voting intentions (rhs) 0 12% Jan-13 Nov-13 Sep-14 Jul-15 May-16 Mar-17 Source: Bloomberg, Itaú Third, Brussels leaders seem to have realized that some devolution of power to national governments may be warranted. EU leaders have begun to work together while admitting the need for power decentralization. On March 1 the EU Commission proposed five scenarios focused on building the Future of Europe. The highlight is that some of the scenarios favored greater decentralization of power from Brussels, with many EU leaders preferring the Those who want more, do more proposal at their informal summit held on March 8 and 9. Additionally, the shared agreement on measures to curb migration, finalize the banking union and take a tough stance on the forthcoming Brexit negotiations shows that the EU is focused on staying together by fostering integration with representation. Finally, recent europopulist victories are not living up to voter expectations. In Greece, the Syriza-led government s apparent failure to revive the Greek economy is leading to constant conflict with the IMF and debt creditors. In Italy, the confused 5SM government in the municipality of Rome is likely to start reducing party support among voters. Last but not least, the approaching triggering of Article 50 of the Lisbon Treaty and the ensuing start of (Hard) Brexit negotiations may have damaging results for the British economy, which would further undermine Eurosceptic support. Differences at the country level should be monitored Let us now take a closer look at country specific issues within the European Union. Looking at the factors driving europopulist support, we find that Germany has the largest immigration flows, whereas Greece has the deepest economic crisis. Germany in 2016 had about 745 thousand asylum applicants (Chart 5), almost 60% of the year s total and about 0.9% of the country s population (Chart 4). Greece doesn t face significant migration challenges, but it has one of the worst economic performances since joining the Eurozone, which combines with the block s highest unemployment rate at 23% (Chart 6) France also faces a significant challenge. The country has one of the highest unemployment rates in Europe (Chart 6) while also being home to a considerable number of asylum seekers (Chart 5). Page 3
UK faces intra-eu issues. Looking at the reduction in asylum applications in the 2014-2016 period (Charts 4 and 5), as well as the high growth and low unemployment (Chart 6), one might wonder how euroscepticism managed to grow and lead the British people to push for Brexit. In the UK, however, it is the high levels of intra-eu immigration, from Eastern Europe (especially Poland), that have fueled the desire to leave the EU, and that is not represented on this graph. Italy has the most worrisome combination of high migration flows, high unemployment and low growth, all of which fuel europopulism. Being a gateway to Europe, Italy has been one of the most affected by increasing migration flows (see Charts 4 and 5), whereas the structurally weak economy has struggled to compete with the other Eurozone members. Italy s CAGR since adopting the euro was a meager 0.3%, whereas the current unemployment rate stands at 11.9%, lower only than in Greece and Spain (see Chart 6). Risks of populism in other countries seem modest according to this analysis. Spain has, at the moment, high growth and little immigration influx. The unemployment rate, 18%, may still be very high, but it has fallen significantly from the 26% levels seen in 2013. Higher growth should continue ahead as the output gap closes, which will limit the rise of the europopulist party Podemos. Portugal has economic issues but barely any immigration influx. Finally, the Netherlands has some immigration issues but strong economic fundamentals. No wonder PM Mark Rutte managed to win the March 15 elections by making a few adjustments to his immigration stance. 1.2% 1.0% Chart 4: Asylum applicants as share of the respective country s population 250 200 Chart 5:Number of asylum seekers 745 477 Thousands of People 0.8% 0.6% 2014 2015 2016 150 2014 2015 2016 0.4% 100 0.2% 50 0.0% DE AT GR IT FR NL DK FI UK SP PT 0 DE IT FR GR AT UK NL SP DK FI PT Source: Bloomberg, Itaú Source: Bloomberg, Itaú 2.0% 1.5% 1.0% 0.5% 0.0% Chart 6: High discrepancies of growth and unemployment within the EU Average yearly GDP growth (1999-2016) Unemployment (rhs) 25% 15% 10% 5% 0% -0.5% GR IT PT DK DE FR NL FI AT SP UK Source: Eurostat, Itaú -5% Page 4
Looking at the major economies with upcoming elections, we believe the main risk is in Italy (instead of France), while Germany could deliver a positive surprise. Let us now take a closer look into the political situation of these three countries. France: Marine Le Pen s insurgency is not really new Given her familiar face in the French political spectrum, Marine Le Pen has managed to build herself a loyal base of supporters over the years. It is not a surprise, then, that her voter support has not moved much once all presidential candidates were in place (see Chart 7). In fact, Le Pen has never surpassed the 24%-27% polling threshold. By contrast, independent candidate Emmanuel Macron has managed to rise from 16% in polls from early December 2016 to 26% as of March 2017. This was due in part to Republican François Fillon s fall following nepotism allegations and also to an alliance with centrist François Bayrou in late February. On March 20, the live campaign debates kicked-off, and we are likely to see the other candidates gaining further support while Ms. Le Pen holds on to her established base of voters. 30% Chart 7: France Elections: 1st round voting intentions 25% 15% 10% Hamon Macron 5% Fillon Le Pen Mélenchon 0% 3-Dec-16 3-Jan-17 3-Feb-17 3-Mar-17 Rejection of the French Far Right dates back to the 1970s (if not the 1940s). France s far-right nationalist leader, Marine Le Pen, has been driving the anti-establishment movement by reinforcing that Brexit, Trump and the Italian referendum last year were signs that the people require someone that can lead them forward and out of the old way of doing politics into a new type of government. Still, her party is not really new: the National Front (NF) has been around defending far-right populist measures since its inception in 1972, and it has opposed the EU since its creation. Ms. Le Pen herself has been a member of the party since 1986, and she took over the party leadership in 2011 from the founder of the NF, her father Jean-Marie Le Pen. The latter was defeated by Republican Jacques Chirac in the run-off of the 2002 presidential elections, 82%-18%. If the seemingly well entrenched aversion of French voters towards the extreme right holds, the French elections are highly unlikely to result in a victory for Euroscepticism. Examining the run-off polls, we can observe that both Macron and Fillon have very strong chances against Le Pen (see Chart 8). It is fair to conclude that the French two-round electoral system was designed exactly to block extreme candidates, and this system has not yet failed. Page 5
40% Chart 8: Voting intentions for a Runoff against Le Pen 35% 30% 25% 15% 10% 5% Fillon Margin over Le Pen Macron Margin over Le Pen 23% 11% Germany A win-win situation for Europe 0% 5-Dec-16 10-Jan-17 15-Feb-17 23-Mar-17 Germany s Eurosceptic AfD has been performing poorly in polls (Chart 9), which leaves the German Elections of September 24 with two possible Pro-european outcomes. If Angela Merkel s CDU wins the elections, we can expect Germany s position to stay as it is which is good for Europe in spite of the austerity stance. Her defeat however, might open the way for a less fiscally rigid Germany, as SPD s candidate, Martin Schulz, views Germany s 9% of GDP Current Account Surplus as way too high for its own sake and plans to increase fiscal spending in the Eurozone s largest economy, which would have positive demand-side spillover effects for the rest of the block. Having served as President of the European Parliament until November 2016, Mr. Schulz is a Pro-european politician who would work hard to foster integration within the EU. 50 45 40 35 30 25 20 15 10 5 % Chart 9: AfD far from being a problem in Germany CDU FDP SPD AfD Die Linke Others Grunen 0 Aug-13 Mar-14 Oct-14 May-15 Dec-15 Jul-16 Feb-17 Italy The real weak link Flying under the radar, given that no election is scheduled for this year, is Italy s political dilemma. After the failure of the political reform in the December 4 referendum and the subsequent fall of the Renzi administration, there was speculation that new elections would take place right away, bringing with it t.he chance of comedian-turned-politician Beppe Grillo s rise to power under the Eurosceptic banner of the 5SM. While we Page 6
have consistently defended the position that no anticipation of elections will take place, we are growing increasingly worried that former PM Renzi s push to unify his Democratic Party (PD) around a reformist banner will cost him not only the party leadership (voting scheduled for April 30, 2017) but also the May 2018 General Elections. In fact, a more left-oriented group of dissidents broke from the PD on February 25 to form the Democrats and Progressives (MDP) party, and there are risks of further splintering within the PD. Consequently, polls now indicate that 5SM has become the frontrunner in the approach to the elections, given the weakening of the PD (see Chart 10). While we agree with the consensus view that Italy needs microeconomic reforms, that would enable it to achieve the competitiveness gains needed to increase potential growth, the political implications, in the near term, may well be to increase the chances of a populist electoral win. 35 30 25 20 Chart 10: Renzi s bid to reunite the DP may cost the next election 30 26 15 13 10 M5S Others 5 PD MDP % FI LN 0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 5 11 Will investors be able to relax and disregard the threat of Europopulism? As we discussed above, the overall picture might improve. It all depends on the continuation of the current immigration slowdown, the recovery driven by domestic demand and European leaders maintaining their harder line on immigration while also pushing for the completion of the banking and fiscal union. The risk here is timing, as the political landscape will continue to shape Europe s near-term future. While the French elections should result in a clear victory for whoever faces off against Le Pen in the run-off, the Italian scenario is much more clouded, and the internal political struggle led by Mr. Renzi and the economic reformers may end up increasing the risk of delivering Eurozone s third largest economy into the hands of a populist party Vitor Fonseca Ferreira Macro Research Itaú Mario Mesquita Chief Economist Tel: +5511 3708-2696 Click here to visit our digital research library. Page 7
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