This week, elections season is dominating the markets. Following the weekend elections in Australia, and the recently concluded general elections in India, focus now shifts to the EU.
The EU elections are unlikely to impact the markets and the euro as much as the regional elections in Germany, France or the Netherlands did a year ago.
Still, as the second largest exercise of democracy, the world’s attention turns to the European Union.
Held once every five years, the EU elections give the average European citizen a voice in voting for their candidate to get a seat in the European powerhouse in Brussels. Policies set by the EU Parliament reverberate across the 28 member nations that make up the Union.
The EU elections are unique as they allow EU citizens to vote a candidate into the trans-national parliament. Thus, they represent the interest of the voters at the highest level.
The European parliament appoints the President of the EU commission among other key positions and holds them accountable. Laws passed by the EU tend to have an impact not just on the member states but globally as well.
In the financial markets, some of the biggest laws passed by the EU include the MiFID II (Markets in Financial directive) and EMIR (European Markets Infrastructure Regulation) among others.
The official law-making body of the EU has also taken to task some of the biggest multi-national companies such as Google, Microsoft, and Facebook. As such, the decisions of the EU Parliament tend to have a big impact globally.
How Does the EU Hold its Elections?
The EU parliament is the official government authority which makes laws and approves budgets. It is therefore crucial to maintaining the proper functioning of the group of countries that form the EU.
As mentioned, EU parliamentary elections are held once every five years. Each EU country is eligible for a specific number of seats in the parliament depending on the size of its population.
As an example, the EU country of Malta has the smallest representation of just six seats, while Germany, the largest country in the EU, has a representation of 96 seats. 28 member states of the EU hold 751 seats in the parliament. Candidates elected to the EU parliament are known as MEPs or Members of the European Parliament.
All EU citizens, above the age of 18 are eligible to cast their votes. It takes a few days for voting to be completed across the 28 member states.
Every member state is made up of various political parties who compete for a seat in Brussels where the European Parliament is located. EU voters can vote for these parties locally. This means that a German citizen can only vote for one of the political parties from Germany. They cannot vote for a political party from the Netherlands for example.
The UK will also be participating in the EU elections this May due to the delay in Brexit until October this year.
What are the Main Political Parties?
There are many political parties vying for a seat in Brussels. But the EU elections are dominated by some big names.
- European People’s party or EPP
The EPP is the largest political party made up of Germany’s CDU/CSU. It is a center-right pro-European party and holds the majority party since 1999. The EPP is widely tipped to win again in the 2019 elections.
- Socialists & Democrats
The S&D is center-left and is the second largest party dominated by Germany and Italy. The S&D is also pro-European and it is quite likely that the EU parliament will once again see the majority seats shared between the EPP and the S&D.
- Eurosceptic parties
Then there are a number of far-right and eurosceptic parties that have been gaining steady ground in the past few years. Some of the well-known eurosceptic parties include the Europe of Nations and Freedom.Such parties are more inclined to nationalistic and populist policies.
- The Greens
The Green Party is the name given to political parties that are environmentalists. Some big names include the European Greens, European Free Alliance.
In recent times, given the downturn in the EU economy, many fringe political parties have come up.
These parties are in opposition to the EU’s policies by and large and prefer a more nationalistic view. At a regional level, such parties have managed to increase their share of representation. This trend is quite likely to show up at the highest level in the EU as well. But, it is unlikely that eurosceptic parties will be able to make a big impact.
Will the Elections Impact the Euro?
For traders, the biggest concern will be the level of impact the EU elections will have on the single currency. After all, the outcome of the elections will impact the policies governing trade and international relations.
History shows that the EU elections do not have a big impact on the euro. This is in stark contrast to the euro’s volatility during the German and the French elections.
The chart below shows the EURUSD’s weekly time frame since the 2014 EU elections to put things into perspective.
EURUSD Price Chart from 2014 EU Elections
There is no doubt that the euro is significantly weaker to the dollar. In recent times, the EURUSD has pushed back into the longer-term range of 1.1455 and 1.0450 levels. We do not expect to see this change anytime soon.
Regardless of the outcome of this week’s EU elections, focus will remain on how the EU parliament will address the immediate concerns such as:
- Potential tariffs on exports to the US
- Sanctions on Iran and the threat of Iran going back to its nuclear program
- Jobs and economic growth
From a policy perspective, given the fact that latest polls suggest the status quo will remain, it is unlikely to see volatility rise.