In the series A quick phone call to… we talk to an expert about a current topic in the field of economy, (responsible) investing, pension and income. In this edition, APG macro-economist and expert strategist Charles Kalshoven talks about the consequences of the swing to the right during the elections for the European Parliament on investments.
A swing to the right, but not as major as expected. That was the net result of the elections for the European Parliament that took place from June 6th to June 9th. The shift was mainly caused by the electoral victory of the French Rassemblement National (RN), the Fratelli d’Italia of Giorgia Meloni and Alternative für Deutschland (AfD). What does that shift mean to the investor?
Some nuance is required first to answer that question, says Kalshoven. “Can we really talk about an overall shift to the right? In Hungary, Viktor Orbán (prime minister and party leader of the radical right Fidesz, ed.) lost some seats. Admittedly to another right party, but still. In Poland, Donald Tusk (party leader of the center-right Platforma Obywatelska, ed.) did a really good job, while the radical right PiS lost five seats. In Belgium, the Vlaams Belang maintained its three seats, whereas growth was expected. Based on the elections for the European Parliament, not all Member States are dealing with a shift to the right.”
Fun things
But you may also wonder if, economically speaking, the electoral shift at the European elections is a movement to the right, according to Kalshoven. Economic policy is the most relevant factor for investments. Populist parties that are considered radical right, are culturally conservative and are often positioned entirely on the right side of the spectrum. However, in socio-economic terms these parties are usually not right at all.
“Classic-right – the liberal movement so to say – advocates, for example, as few rules as possible and low taxes. That goes hand in hand with a small government, trust in a free market and a lot of personal responsibility; matters that traditionally appeal to entrepreneurs. It also goes with open borders, not only to be able to export products but also to allow workers to come here. Right-populist parties clearly think differently about migration, arguing that labor migration keeps the wages low and reduces the availability of dwellings.
Socio-economically speaking, these parties often adhere to a classic-left program with a loose budgetary policy. Think about spending money to abolish the deductible in healthcare or to lower the fuel taxes. The funding for these matters is often sought in higher taxes on profit or capital, or a higher government deficit. You cannot call that truly right. It is redistribution. That is a perfectly legitimate political desire, but we used to call that left in the past.”
Less migration
If the victory for these parties in Europe indeed leads to less migration, it will have economic consequences. Kalshoven: “Europe is ageing, so we are in desperate need of hands to do the work. If those hands are not available, this will result in less economic growth and higher inflation. A tight labor market causes the wages to increase, or we have to get our products elsewhere. In extreme cases, this will lead to stagflation – a combination of stagnating economic growth and high inflation – which will have implications for investments. It is usually unfavorable for bonds, as the central banks will raise the interest in such a scenario. A lower economic growth is often also not favorable for shares, but these usually grow along with inflation somewhat. The impact on shares is therefore more limited.”
Parties on the entire right of the spectrum are often suspicious of global or supranational institutions. In the past, these parties also often wanted to leave the European Union. The same applied to the PVV. Kalshoven: “But that party now says that’s no longer the case. Instead, they say they want to ‘dismantle the EU from the inside’. There are more parties like that in Europe and if that were actually to be accomplished, it would mean a weakening of the European Union. The strength of the EU is that it concerns one major market in which the same rules apply to every country, with a common currency. That requires the budgets of the individual Member States to be somewhat in line with one another. When that principle is called into question, it has a detrimental effect on investments in Europe because that will probably also lead to higher inflation. Dismantling institutions, less immigrants, more trade barriers, a loose budgetary policy: all policies facilitating inflation and inhibiting economic growth. Those populist programs – that I would rather call left instead of right – are not every favorable for investments.”
‘Democracy is a streetcar’
To really see what the new electoral relationships in the EU mean for investments in Europe, we just have to wait and see to what extent populists in the European Parliament will and are able to realize their program items, such as less migration.
Kalshoven: “Erdoğan (president of Turkey, ed.) once said: ‘Democracy is like a streetcar. You get out as soon as you’ve reached your destination’. Whether politicians such as Meloni in Italy or later perhaps Le Pen in France feel the same way, we don’t know. Right now, we hear a moderate tone from Meloni when it comes to the EU, the NATO and support to Ukraine. But she is less moderate in her own country. For example when it involves constraining gay rights: for gay couples with children, the non-biological parent has to be removed from the birth certificate.”
Rule of law
The question is whether the attitude of these parties continues to be this moderate, says Kalshoven. “Economically speaking – which is not the same as morally – the exclusion of minorities does not seem very relevant at first. But it can become relevant through trust in the rule of law and of citizens in each other. An economy contains a lot of value in institutions, for example knowing that you can trust a court ruling. That trust has value for both companies and citizens. Because of that kind of institutions, a company knows: ‘When we build a factory here, we can be sure that it will not be expropriated in five years’ time’. This results in a country with a positive investment climate and economic prosperity. Those institutions also protect citizens in a similar way. When people know they cannot simply be evicted from their home or their passport cannot just be confiscated for no reason, they are more likely to invest also in themselves. Trust is the lubricant of economic traffic in all aspects. No credit without trust, no one willing to invest in a relationship without trust. When social trust crumbles, we also lose the very basis of our prosperity.”