A Year of Change at Europe’s Key Institutions
Alan McQuaid
Alan McQuaid

It’s an important year for compositional changes at the European Central Bank, with the three top posts up for grabs. ECB President Mario Draghi’s term expires at the end of October, and either side of that, the other two most important ECB roles in the form of the Chief Economist (Peter Praet’s term expires in May) and Head of Markets (Benoit Coeure’s term ends in December) will see new people in place. Recently the Eurogroup (Eurozone finance ministers) kicked off the process for appointing a successor to Praet, by nominating our own Philip Lane for the job (Philip is Governor of the Central Bank of Ireland). Assuming Lane is ratified by the European Council at its March summit, which appears a formality at this stage, then he will take over his new role at the beginning of June.

The trio of Draghi, Praet and Coeure were instrumental in paving the way for Quantitative Easing (QE) as well as shaping market expectations as to the timing and pace of QE taper and ultimate end. It is debatable whether another ECB board member, especially from a northern Eurozone country, would have been as willing to embrace and extend QE to the same extent as that of Draghi. The successors to the trio at the top will thus shape the speed at which policy normalisation happens, and if the economic environment deteriorates, whether there is a re-embracing of QE. Policy normalisation, if it can be achieved, would mean an end to negative/zero interest rates, which would be a positive for Eurozone banks and their share prices. It would also in time mean higher rates of return on consumer/household deposits at banks.

Complicating the ECB compositional picture is that these roles are a part of a broader horse-trading that will be conducted in Europe as other posts need filling this year including European Parliament President (July), European Commission President (October) and European Council President (November). Something to look out for is the potential that Coeure could use a legal loophole that would allow him to become the next ECB President. This loophole allows an Executive Board member to first resign from his/her post which would then open up the door for a fresh eight-year term to be served as ECB President. As someone the market already knows and with whom the market is comfortable, the appointment of Coeure would be positive and suggest continuity at a time when the central bank is likely to be at an important phase in policy normalisation. The practice of the head of the Central Bank coming from its most inner circle is new to what is still an infant ECB. However, it’s a practice that has seen the three most recent US Federal Reserve Chairs, Jerome Powell, Janet Yellen and Ben Bernanke come from the Board of Governors. If adopted by the ECB, then this model could help alleviate and contain uncertainty and volatility for financial markets.

Meanwhile, the EU Parliament elections are probably the most significant contest facing Europe. The parliament is responsible for electing the President of the European Commission and has the authority to approve or reject the appointment of the Commission (which proposes legislation, implements decisions, upholds treaties and manages the day-to-day business of the EU). The parliament also has the authority to force the Commission as a body to resign by adopting a motion of censure.

The elections run from 23rd to 26th May. A total of 705 seats are being contested, representing around 500 million people from 27 member states. In the past, EU parliamentary elections were not considered significant, except in that they were often used as a means to protest against standing national governments. In the 2014 elections, voter turnout was 42.54%. Generally speaking, the EU Parliament has been supportive of the European integration process, voted overwhelmingly in favour of pro-integration measures and provided some space for Eurosceptic political leaders to protest and air their views without much consequence.

However, the upcoming elections offer the potential to be something very different as significant gains are expected for Eurosceptic parties. Participation is expected to be higher. The number of seats a country receives is based on population size, with the largest blocs being Germany with 96, France with 79, Italy 76, Spain 59 and Poland 52. This breakdown gives considerable importance to the electoral contests in the larger countries. While Germany and Spain are expected to return a pro-EU bloc of seats to the EU parliament, there is potential for Eurosceptic parties to gain significant representation in a number of countries. These are namely Italy, which has a left-right populist Eurosceptic coalition government (5 Star Movement/League); Poland which has a strongly nationalist government in Warsaw; and France, where the Macron government is struggling against widespread popular discontent. Although the pro-EU parties, led by the European People’s Party (EPP), Progressive Alliance of Socialists and Democrats (S&D), and the Alliance of Liberals and Democrats for Europe (ALDE), are expected to remain a clear-cut majority, Eurosceptic parties are set to make gains, possibly topping a fifth of all seats.

The more Eurosceptics there are in the European Parliament, the greater the likelihood of disruption as regards implementing policy. This would likely be seen as a negative by financial markets, pushing European stock prices lower as a result. Still, it is possible that the shift in the Parliament’s make-up could see a relaxation of fiscal policy across the bloc, leading to increased stimulus for European economies, which would be good news for equities. Looser fiscal policy would though be a negative for government bonds, pushing yields higher, particularly in the likes of Italy and Greece.

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