Tuesday 7th March '17
This blog is part of a series of blogs covering this year’s European geopolitical risks. Click here to view our 2017 European geopolitical risks infographic, highlighting this years’ key events to watch out for.
Why should investors pay attention to the Dutch upcoming elections on 15 March 2017, when:
+ the split electorate is likely to force a broad coalition with minimal change
+ the PVV (the Dutch far right party led by Geert Wilders and in favour of leaving the EU) is likely to end up as the largest party in opposition, and
+ the event poses—seemingly—no macro-economic and systemic risks for the European Union (EU)?
Building momentum for Front National
Firstly, what matters is the signal of confidence a PVV election win will send to the far-right and Eurosceptic movements in the EU. It will become timely to embolden and build momentum for the National Front in France just five weeks ahead of their elections. A win by Front National in turn could reinvigorate the AFD in Germany and the Five Star Movement in Italy.
Mainstream parties adopting tougher EU and nationalist rhetoric
More importantly, a Netherlands far right win will put pressure on mainstream centre-left and centre-right parties, both in the Netherlands as well as in wider Europe, to adopt increasingly hard-line policy proposals so as to not appear weak in front of their own electorate. Putting national interest ahead of the EU would be a logical response to blunt the populist rhetoric of the far right.
This in fact is already happening with Chancellor Merkel recently endorsing a ban on full face Muslim veils to appease the CDU/CSU. Prime Minister Rutte following the wishes of a small group of Dutch voters to put pressure on the EU to not offer aid guarantees and extend EU membership to the Ukraine. In Belgium, PM Charles Michel only ratified the CETA trade deal after extracting concessions related to its vulnerable industries in the south of the country.
Financial solidarity to become the bigger casualty and the larger long-term threat
The cherry picking of policy proposals may resonate with populist rhetoric at home and something the EU is willing to compromise on, but it sets a worrying precedent when looking beyond 2017. The continuing divergence of economic growth within the Eurozone is amplifying the discontent over the European project and threatening financial solidarity. Left-leaning mainstream parties in Italy, France, Greece and Portugal desire slower reforms, looser deficit targets and larger fiscal transfers to reinvigorate growth. Right-leaning mainstream parties in Germany, Netherlands and Austria want none of it, retorting the risks of rising borrowing costs, default and ending up paying the bailout costs.
The Netherlands emerged relatively unscathed from the financial crisis due to tough austerity and structural reform. At the same time, it contributed €23.3bn in rescue funds and state aid for Ireland, Portugal, Greece and Spain (see figure 1). The Netherlands too has been a long time net contributor to the EU budget. In pursuit of a populist agenda, the financial solidarity shown to seemingly intransigent EU members is becoming a powerful argument not just from fringe parties but increasingly from mainstream parties to attract votes.
The ECB itself has recently come under fire, with the Dutch Christian Democrats (CDA) commissioning a probe into the Euro following the detrimental effect the ECB’s low interest rate policy has had for Dutch savers and pension funds. Seen as a tactical election ploy to outflank the PVV by promoting national interest above the EU’s, it is indicative of the risks of fringe-party rhetoric becoming mainstream policy strategies.
Asset allocation: bearish Italian BTPs and Euro, bullish German Bunds and gold
For 2017 these legislative risks may still seem remote if the far right movement fail to build sufficient support. Sophisticated investors also appreciate the checks and balances that are inherent in the Dutch, French, German and Italian electoral processes, where governance is based on consensus building and legislative powers are divided between Upper and Lower Houses of Parliament.
But it is wrong to assume that far right and populist movements are too small to initiate change. Increasingly mainstream parties are slowly adapting and recalibrating their message and policy agendas to incorporate nationalist, anti-European views.
At stake is European financial solidarity which, while being side-lined by immigration issues in 2017, may become a central theme in 2018 and beyond by stronger EU members.
At risk too will be the Stability and Growth Pact which is constraining weaker EU members in their ability to recover sustainably. This polarised political stance is exacerbating the divergence in economic growth, and feeds onto itself in a vicious circle.
Eurozone government bonds with deteriorating creditworthiness, most notably issued by Italy, Portugal and Greece remain at risk. French government bonds, too, look vulnerable to speculative short term attacks.
We believe the safe havens are German Bunds and potentially gold as the Euro comes under renewed pressure.
Investors sharing this sentiment may consider the following ETPs:
+ Boost BTP 10Y 3x Short Daily ETP (3BTS)
+ Boost BTP 10Y 5x Short Daily ETP (5BTS)
+ Boost Bund 10Y 3x Leverage Daily ETP (3BUL)
+ Boost Long USD Short EUR 4x Daily ETP (4USE)
+ Boost Long USD Short EUR 5x Daily ETP (5USE)
+ Boost Gold 3x Leverage Daily ETP
You might also be interested in reading…
+ Brexit: How can you hedge Sterling currency risk?
+ Political risk at the gates: If 2017 is no threat to equities, it is for the Euro and peripheral bonds
+ WisdomTree’s toolbox for trading Trump and rising rates