Pragmatic populists

Economic, fiscal and security risks push Europe right

Lost in all the handwringing over the success of populist parties in European Parliamentary elections and worry over early French elections was a clear shift in European voters’ broader preferences: a shift towards conservatism and pragmatism.  This distinction between perception and reality has important market implications.

While populist parties made the biggest gains, with the Conservatives & Reformists (ECR) gaining 14, Identity & Democracy (ID) party gaining nine seats, and non-aligned populist parties adding 28 seats, the center-right European People’s Party (EPP) not only returns to Parliament as the largest single party but managed to gain 13 seats (Figure 1).  Together, right-of-center parties now hold 420 of the European Parliament’s 720 seats (231 of which are populist right parties).  Who lost?  The liberal Renew (RE) party lost the most seats, 28, but the 20 seats lost by the Greens/EFA represented the largest proportional loss.  Even the radical Left’s two seat gain came at the expense of the three seats lost by the center-left Socialists & Democrats (S&D).  The net result was a substantive shift to the right by European voters.

But what does “right” mean?  Nearly a decade after it sprang into most people’s consciousness, the Politics of Rage remains widely misunderstood.  The commentariat and markets appear to believe that “right-wing populism” is synonymous with irresponsible economic and foreign policies.  Yet, both polling data – and the governance of populist parties in Europe – suggest that voters’ rightward shift instead reflects pragmatism and a clear realization that fiscal, trade and security risks are increasingly severe.

That doesn’t mean that markets’ concerns are unfounded.  European debt sustainability remains tenuous and the continent likely faces a massive defense expenditure shock.  The Politics of Rage is still young, skeptical of supranationalism, and of uncertain governance capacity.  All these wildcards merit a risk premium.  But markets’ fear, yet again, reflect an unhealthy dose of bias and misunderstanding of the actual risks European (and other regions’) assets face, offering attractive contrarian opportunities.