With the EU referendum and the election of president Trump, many Europeans assume UK and US voters have lost their minds.
Trump, whose initial flurry of executive orders triggered both outrage and constitutional chaos, appears determined in his early weeks to crystallise Europeans’ worst fears over the nature of his presidency. Brexit, while hardly comparable, is, nonetheless, similarly shrouded in confusion and division, and we may not know what a hard exit really means for another two years. Or will we?
The forthcoming elections in continental Europe loom large in more ways than one. Many Europeans only now seem to grasp the UK is, without doubt, leaving the EU; yet the elections in France, Holland and Germany could have a far more profound bearing on the future of the union than Brexit. The elections might also, should results change the direction of travel on the continent, fundamentally reframe the UK’s negotiating position and eventual deal with the EU 27.
Out of the three elections, the first in March is the least likely to shift Europe’s tectonic plates. Geert Wilders in Holland might be a highly inflammatory figure but, with the main political parties refusing to join a coalition with the PVV, he is highly unlikely to become prime minister. Indeed, the Dutch electoral system is most likely to create a multi-party coalition which, by its very nature, will be characterised by negotiation and compromise – not the ripest of conditions for extremism to flourish.
The French election, of course, is an entirely different matter. All indications suggest there will be a national protest vote of some significance, which will benefit National Front leader Marine Le Pen in particular. But the two-stage French electoral system, which unlike its equivalents in the UK and US offers voters another opportunity to express their view at the ballot box, is likely to derail her bid to become president. While Le Pen is a clear favourite to make it past the first round, inevitably there will be a degree of buyers’ remorse when the reality of her potential elevation sinks in and she is currently projected to lose the second round.
Germany, of course, holds the most significant election later in the year but, ironically, it is unlikely to unseat long-time chancellor Angela Merkel. One of the biggest threats to her re-election, however, is her controversial policy on immigration; and, intriguingly, that may yet have major ramifications for the terms of Brexit. If the German or wider European elections result in a change of attitude towards immigration on the continent – particularly if a populist leader comes to power – there could be a rapid European rethink towards UK immigration. That could profoundly alter the framework of Brexit negotiations. Indeed, there is every chance that, in five years’ time, the UK will still have freedom of movement of products, services, capital and people.
Whether or not a softer exit comes to fruition, the European elections and Brexit negotiations will, at a minimum, affect not only markets but how investors view risk. They will also strongly influence the strategies of a host of businesses based in the UK, some of which will have hard decisions to make amid the economic uncertainty and political turmoil.
For Kames, Brexit – in whatever form – will not affect our operational platform, strategy or the execution of our plans. It will only impact us in terms of the reaction of our customers and markets more broadly. Brexit may be inevitable, but European voters may yet have a big say over what it ultimately looks like.
Martin Davis is chief executive officer at Kames Capital