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by Brunello Rosa
20 September 2021
A couple of years ago, when the pandemic was not even on the horizon and populist parties were on the rise throughout Europe, we identified the September 2021 – June 2022 period as the moment of truth for European politics. Three key elections at the EU (and Eurozone) level will take place during this period. First, on Sunday 26thSeptember, the German general election will take place. Several months later, in February 2022, will be the Italian Presidential election (carried out by a special electoral college, including all MPs and regional representatives). Finally, in April there will be the French Presidential election, which in turn will be followed by France’s parliamentary elections in June. As we discussed in depth in a previous analysis, if any of those crucial events were to result in the victory of anti-system, anti-European candidates, the European integration process may stall indefinitely, and perhaps reverse further than it has already with Brexit.
As we discuss further in our forthcoming preview of the German election (after the in-depth analysis we published recently), the race has become more interesting than one could have expected. The choice of unsuitable candidates from the Greens (Annalena Baerbock) and the CDU/CSU (Armin Laschet) for the Chancellorship has given an unexpected boost to the SPD candidate Olaf Scholtz, who is now clearly leading the polls. Many combinations and permutations of coalitions will be attempted after the vote, but if the actual votes confirm the polls then it seems that a three-party coalition will be needed to form a government in Germany, for the first time since WWII. The so-called “traffic-light” SPD-Liberals-Greens coalition and the so-called “Jamaica” CDU-Liberal-Greens coalition appear to be the most likely to emerge. These coalitions are likely to be tenuous at best, and prone to collapse given cultural and political differences. The point is this: if Germany becomes politically unstable, that cannot be good either for Germany or – most importantly – for the EU and its integration process.
The Italian presidential election is also going to be a crucial moment. All eyes will be on Mario Draghi, and whether he will move from Palazzo Chigi to the Quirinale Palace. This could mark the beginning of renewed political instability in Italy, or the interruption of the reform project undertaken by Draghi’s government as a result of the Next Generation EU plan. The importance of the President in Italy is often underestimated, as is the crucial role Italian presidents have played in dampening the populist pushes within the country’s political system, or in preventing severe deviations from the Constitutional norm and spirit from taking place. Italy remains a cornerstone of the European project (one of the six founding members), and we have already seen how problematic EU policymaking becomes when Italy elects anti-system or populist leaders.
The French Presidential election is also crucial, especially if Germany become less of a bastion of stability in Europe. In theory, President Macron should have a relatively easy ride towards being re-elected, but in reality Marine Le Pen continues to be very close to President Macron in the polls for the second round of another election between them. Needless to say, if Le Pen were to become President, this would be yet another “French revolution”, which would likely mark the end of the EU integration process. President Macron still has time to recover, but he is going to face an uphill battle in this campaign.
In conclusion, the EU is about to enter its most delicate period of any time in the last few years, with the EU integration process at risk of derailment in coming months. A political derailment of this kind would have clear implications for the ECB’s policy stance and market dynamics.
by Brunello Rosa and Fawaz Sulaiman Al Mughrabi
23 September 2021
by Brunello Rosa
22 September 2021
by Brunello Rosa and Karmen Meneses
22 September 2021
by Brunello Rosa and Karmen Meneses
23 September 2021
by Brunello Rosa
9 September 2021
by Alessandro Magnoli Bocchi, Fawaz Sulaiman Al Mughrabi and Karmen Meneses
26 August 2021
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by John Hulsman
21 September 2021
Introduction: It Is The Math That Matters
In political risk terms, we already know the outcome of the pivotal German election, even before it takes place on September 26th. Germany will have an unwieldy three-party coalition and nothing will get done. That is because the math is the most important factor in assessing the outcome, not the horse race.
How can I be so sure of this political result, which will determine the medium-term policies of Europe’s most important country? My theory of the case is that we must sideline the horse race, instead looking at how the German Republic is actually governed, through coalition politics.
The personal horse race meets the political risk outcome only tangentially. It is true that the incredible acts of self-sabotage of the erstwhile front-running center-right Christian Democratic Union-Christian Social Union (CDU-CSU) chancellor candidate Armin Laschet and the center-left Green Party candidate Annalena Baerbock, have directly led to the cratering of both their parties in the polls--they have no one to blame but themselves.
It is the collapse of the poll numbers of both favorites that creates the need for Germany’s first three-way governing coalition in more than 60 years, as it is the only way any sort of governing majority can be formed, given that no single party has support that rises above the level of a quarter of the electorate.
For beyond even the coming usual ideological incoherence of German coalition-building, the real problem is the coalition math. I could not get three of my friends to agree on a favorite ice cream flavor, let alone important matters of state. The first three-party coalition in Germany in 60 years makes decisive leadership an impossibility in Europe’s most important state, dooming it to policy outputs that are either watered down or non-existent.
Even more than before, and outgoing Chancellor Angela Merkel’s long reign was no showcase of policy decisiveness, Germany will become a policy-free zone, which in turn dooms Europe to yet more drift and incoherence, as Germany simply cannot lead, despite the imperative that it must do so. Without Germany moving in a coherent policy direction, given its economic and political centrality to the continent, Europe cannot move in a coherent policy direction. Germany’s electoral math does nothing less than consign Europe to a medium-term of more drift and decline.
(This is an excerpt of Dr. Hulsman's latest article, which you can read here)
Dr. John C. Hulsman is the widely-read Senior Columnist for City AM, the newspaper of the city of London. Dr. Hulsman is also a Life Member of the US Council on Foreign Relations. His most recent work, the best-selling, To Dare More Boldly; The Audacious Story of Political Risk, was published by Princeton University Press in April 2018 and is available for order on Amazon. He can be reached for corporate speaking and private briefings at https://www.chartwellspeakers.com. His original writing work can all be found at johnhulsman.substack.com.
Week: 20 - 26 September 2021
The Week Ahead: PMIs Expected To Decline In Developed Markets
In DMs, manufacturing PMIs are expected to soften, as: i) US activity remains stable (c: 61.1; p: 61.1); ii) EZ activity slows (c: 60.5; p: 61.4); and iii)Japan’s indicators shows weaker activity (c: 51.5; p: 52.7). DM services PMIs are also likely to slow down (US: c: 54.9; p: 55.1; EZ: c: 58.7; p: 59.0; Japan: c: 43.0; p: 42.9).
Lingering Downside Risks Continue To Weigh On Economic Outlook; Central Banks Turn Hawkish
Geopolitical tensions to rise. US announces a new security alliance with UK and Australia, to counter China. US President Biden announced a new working group with UK and Australia “to share advanced technologies”, including the acquisition of nuclear-powered submarines - in a bid to counter China. The trio, now known by the acronym ‘AUKUS’, will share information in key technological areas such as: i) AI; ii)cyber; iii) quantum; iv) underwater systems; and v)long-range strike capabilities.
France recalls its ambassadors to the US and Australia. The French government recalled its ambassadors in “protest of the trilateral security deal that included nuclear-powered submarines for Australia”.
China enters Taiwan air defense zone. A day after Taiwan announced a USD 9bn boost to military spending “to counter the threat from China”, the island’s air force scrambled to warn away 10 Chinese aircraft that entered its air defense zone. Chinese-claimed Taiwan has complained of repeated missions by China’s air force near the democratically governed island, often in the southwestern part of its air defense zone - close to the Taiwan-controlled islands.
World Bank changed data to boost China ranking. The World Bank is cancelling a prominent report on business conditions around the world after investigators found staff members were pressured by the bank’s leaders to alter data about China, and some other governments. The bank said it would discontinue “Doing Business” following an investigation prompted by internal reports of “data irregularities” in its 2018, and 2020 editions and possible “ethical matters” involving bank staff.
Central Banks to determine “the right time” to begin normalizing monetary policy. A few CBs are ready to hike rates, some are in the process of tapering, and some have maintained their easing stance. At this week’s FOMC meeting, the markets will look for more hints of Fed tapering by the end of 2021, but it is unlikely to obtain: 1) specific dates; or 2) pace of the reduction.
Real Economy: Economic Growth Hindered By Lingering Risks, Inflation Pressures Transitory
In the US, August’s retails sales rose by 0.7% m-o-m (c: -0.8%; p: -1.8%). September’s consumer sentiment index fell to 71.0 (c: 72.2; p:70.3), as consumers – worried by the spread of the COVID-19 delta variant - expect “the least favorable prospects in more than a decade”.
In the EZ, July’s IP rose more-than-expected to 7.7%y-o-y (c: 6.0%; p: 10.1%).
In the Japan, July’s machinery orders fell to 11.1% y-o-y (c: 15.7%; p: 18.6%).
In the US, August’s inflation rate came in at 5.3% y-o-y (c: 5.3%; p: 5.4%), and ‘core inflation’ at 4.0% y-o-y (c: 4.2%; p: 4.3%).
Financial Markets: Global Stocks Weaken; Bond Remain Flat; A Stronger USD Weighs On Gold
Market drivers: investors remain cautious ahead of: i) a highly-anticipated FOMC meeting, in which the Fed is expected to provide more details on its tapering timeline; ii) upcoming economic data painting a mixed scenario, increasing their doubts on when the Fed will start cutting stimulus; and iii)a disappointing US consumer sentiment.
Global equities fell w-o-w (MSCI ACWI, -1.0%, to 730). In the US, the S&P 500 Index retreated to a one-month low (-0.6% w-o-w to 4,433), dragged down by materials and technology sectors. In the EZ, shares weakened (Eurostoxx 50, -0.9% to 4,131), as: i) concerns about the impact of the COVID-19 delta variant on the global economy outweighed expectations of continuing CB support. In EMs, equities fell (MSCI EMs, -2.3%, to 1,279), as Chinese stocks kept dropping (Shanghai Comp., -2.4%, to 3,614), dragged down by Beijing's regulatory crackdown after a series of overhaul on industries, and resurging – although sporadic - COVID-19 cases. Volatility fell slightly (VIX S&P 500, -0.2 points to 20.8, 52w avg.: 21.3; 10y avg.:17.3).
Fixed Income: w-o-w global bonds remained stable (BAML Global, -0.2% to 296.6) and UST yields rose slightly (+2 bps, to 1.36%), as investors await further details on when the Fed will start cutting stimulus.
FX: w-o-w, the US Dollar Index rose slightly (DXY, +0.7%, to 93.195; EUR/USD -0.8%, to 1.173), the second weekly gain. In EMs, currencies fell against the USD (MSCI EM Currency Index, -0.4% to 1,732).
Commodities: Oil prices rose (Brent, +3.3% to 75.3 USD/b), due to: i) supply disruptions; and ii) data from both the EIA and API showing a decline in crude stocks. Gold prices weakened (-1.9% to 1,754 USD/Oz), amid a USD surge ahead of the FOMC meeting this week.
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