There are two important takeaways from the recent Spanish election that we can apply to our analysis of the rest of Europe.
First, populism is morphing throughout Europe, with far-right populism rising and far-left populism declining. Second, the rise of new parties creates political fragmentation and results in governmental gridlock—with no major changes in the country's economic direction despite the electorate demands for radical policy changes.
Results of the Spanish Election
There are three principal results of the Spanish election.
First, the center-left Spanish Socialist Workers’ Party (Partido Socialista Obrero Español, or PSOE) won the election with 29% of the vote—a large margin. Partido Popular, a center-right party, received 17% of the vote, and Ciudadanos, a right-oriented party, received 16%.
Second, we're seeing a decline in the far-left populist party, Podemos. Podemos received 14% of the vote, down from 21% in the 2016 election.
Third, we're seeing a rise in far-right populism with the new Vox party. It started with 0% of the vote in 2016 and captured 10% of the vote in 2019.
So, what does that mean from an investment standpoint? There are two important takeaways.
Far-Right Populism Up, Far-Left Populism Down
Spain isn't the only place where we're seeing a rise in far-right populism and a decline in far-left populism. We've also seen this development in other European countries.
In Germany, we're seeing a rise of the Alternative for Germany (AfD), a right to far-right political party, but not much of a rise on the far left.
In Italy, we're seeing the far-right Lega Movement rise in popularity, while the far-left Five Star Movement loses ground.
The same thing is happening in Austria, and, of course, Eastern Europe. In France, far-right populism has been very strong for a long time.
From a pure investment standpoint, far-left populism tends to have policies that are not friendly to investors, such as bank levees and universal income funded by taxes or government deficits. Therefore, the decline in far-left populism is good news for investors. Far-right populism is disruptive as well, but it is more focused on social issues and immigration, and less focused on economic issues.
Political Gridlock Rather Than Radical Changes
The second point is that despite the rise of the far right, and most votes trending toward the right (since the two center right parties received more votes than the center left), the center-left PSOE is still the largest party in Spain and clearly won the elections. The reason for this paradox is that the center right is divided, and the center left is not.
That means the PSOE will most likely lead the next government with only 29% of the votes. But it is still well short of an absolute majority, so it will have to form a coalition very similar to the current coalition. And the most likely outcome of that situation is that Spain will remain gridlocked, with few decisions being made one way or another.
We have seen similar scenarios in many European countries. For example, in France, Emanuel Macron won the presidential elections with just over 20% support in the first round. In Germany, during the 2017 elections both main parties lost and had to form another uncomfortable grand coalition. In the United Kingdom, throughout the Brexit process we have seen a steady decline in support for the two main parties: Conservative and Labour.
The outcome is political gridlock. In countries with a tradition of proportional representation, increasingly heteroclite governing coalitions are unable to agree on much. In countries where the voting system still creates clear majorities—France and the United Kingdom—governments lack the political capital and popular support to implement reforms.
In Spain, government negotiation will take a while, but at the moment it doesn't look like we will see major changes in the economic direction of Spain.
So the country will likely continue the stable economic recovery that began after the significant banking and real estate crisis it experienced from 2008 until 2014.
Overall, then, the Spanish equity market remains attractively priced, so we expect to maintain a long position in Spain in our portfolios.
Looking at the wider European landscape, two important points are emerging.
First, the rise of populists in the European polls since 2014 has had few practical implications in terms of economic policies.
Second, the populist vote and the aspiration of voters for radical “change” remains strong. “Change” is still not precisely defined; however, far-right populism is rising and far-left populism is declining. This has less negative implications for Europe economic policies.
The investment picture from a wider European perspective is similar to that of Spain. European equity markets in general remain attractively priced, and downside risk created by populism is stabilizing and even declining in some countries such as Greece. Therefore, we remain long European equities.
Europe is not yet out of the proverbial tunnel, but we are starting to see some light amid the chaos created by its sovereign debt crisis.
Edouard Senechal, CFA
Senior Analyst Dynamic Allocation Strategies Team
William Blair Investment Management