The Storm Clouds Are Gathering

If you have any exposure to the major (or indeed minor) European bourses, prepare for turbulence. 2016 (with an epilogue in 2017) could turn out to be another 1848. That was the year that virtually every major European state succumbed to revolution, and the continent, as Karl Marx observed, passed into a new era. Storm clouds – political and economic – are gathering this August all over the Old World.

1848 and All That

The revolutionaries of 1848, let us recall, were bourgeois intellectuals and the new class of capitalist manufacturers of humble origin who wanted to prise control form the monarchs and dukes and other fatuous aristos who ruled the roost. They wanted democratic government (no votes for the working classes, of course), meritocracy and functioning modern states with civil services that could deliver railroads, sewerage and basic services. Virtually every government in Europe was deposed (except Britain – where such a revolution would have been unnecessary – and Russia – which remained entirely feudal for another fifteen years or so).

Karl Marx wrote a series of furious articles, chronicling events, in the Neue Zuricher Zeitung, before himself being exiled to London, where he spent the rest of his life – and where, famously, he spent many years writing Das Kapital in the old Reading Room of the British Museum.

1848 was the last year that the French sneezed and everyone else in Europe caught pneumonia. King Louis-Philippe of France was just the first of many crowned heads to topple. Future historians might reflect that 2016 was the first time the British expectorated and the rest of Europe got ‘flu. Whatever you think about the Brexit vote of 23 June it has articulated a mood of resentment against the ruling elites that is not unique to Britain. Elites which are attached to an ideology of unfettered globalisation, expanding differentials of salary between bosses and workers (the average FTSE-100 CEO is now paid 130 times more than the company average wage), and “open” borders. Along the southern flank of the Eurozone this resentment is intensified by socially damaging levels of unemployment, austerity and economic torpor. The divergence in fortune between Europe’s centre and its periphery has further stimulated intra-European migration.

On the immigration issue, there is clearly a widening gulf between the people who think immigration is good because they can hire cheap cleaners and nannies, and those (semi-skilled tradespeople amongst them) who have endured falling wages[i]. This is most apparent in the UK but is discernible in Germany and elsewhere.

The Rulers and the Ruled

Peggy Noonan, the veteran American commentator, wrote an interesting article in the Wall Street Journal recently[ii]. Noonan, observing Europe from the other side of the Atlantic, thinks that the coincidence of rising migration (the refugee crisis) with the advent of a new generation of Islamic terrorism has shaken the established social contract between rulers and ruled. Even the discourse has been perverted. While the rulers talk about compassion, any attempt by the ruled to dissent is branded xenophobia (or worse). For many at the bottom it seems that those at the top – to put it mildly – do not have their best interests at heart.

In America the middle classes doubt if Wall Street or Silicon Valley even thinks in terms of the national interest. This is part of what Donald Trump has tapped into. Much of the elite is supra-national – like the London private equity guru who told me recently that if Brexit undermined the City he will just relocate to America.

Anti-EU sentiment has been rising in Europe – and not just among those who were already affiliated to the right. Let’s just consider some of the elections coming up in Europe and how they could impact the markets.

The Voice of the People

Voters will go to the polls in Germany’s north-eastern Baltic Land of Mecklenburg-Vorpommern on 04 September. These elections will test support for Angela Merkel at a time when terrorist attacks in Germany have re-focused attention on her generous asylum policy. In March Alternative für Deutshland (AfD) – Germany’s equivalent to UKIP – took nearly a quarter of the poll in Sachsen-Anhalt. AfD will be seeking to exceed this result in Mecklenburg.

On 11 September voters will decide the composition of Croatia’s parliament. Croatia is an EU new boy, having finally acceded on 01 July 2013, and Croatians are still proud of their European status. The centre-left Social Democratic party is still the favourite but right-wing parties have gained support as the migrant crisis has impinged on Croatia’s borders.

Then, on 25 September there will be regional elections in Spain’s Basque Party. Basque separatists – the civilian corollary of the ETA terrorist group (just as Sinn Fein in Northern Ireland is intimately connected to the IRA) – are expected to sweep the board. Nominally, their aim is for a separate state but if they can’t get that we can expect them to extract additional resources from Madrid in the interim. Separatism – Basque, Catalan and Galician – continues to be a major headache for the Kingdom of Spain.

In early October, we have been promised a referendum in Italy on Prime Minister Matteo Renzi’s proposed amendments to the constitution. Mr Renzi has said that he will resign if the vote goes against him. There is no obvious candidate to replace him so an extended period of political uncertainty could result. Italy’s Five Star Party’s position on the referendum is equivocal. The chances are that Italians will cast their vote according to their support for Mr Renzi’s establishment line rather than on the merits of his proposals.

02 October will see the re-run of the disputed presidential election in Austria. Last-time, the contest between the right-wing Freedom Party candidate and the Social Democrat was on a knife-edge. Since April support for the Freedom Party has, if anything, risen. The election of a strongly anti-immigration head of state in Germany’s southern neighbour would be a huge blow to Angela Merkel. On the same fateful day the Hungarians will hold a referendum on the delicate subject of migration. It is a foregone conclusion that the Hungarians will reject migrant quotas imposed by Brussels.

In late October regional elections in the Czech Republic could unseat the left-leaning government of Bohuslav Sobotka. Parliamentary elections in Lithuania are also likely to yield gains for anti-Brussels parties. Similarly, parliamentary elections in Romania likely in late November bode ill for the ruling government of former EU Commissioner Dacian Ciolo.

Looking forward to 2017 the French presidential elections are likely to be some of the most dramatic since President de Gaulle inaugurated the elected presidency in 1962. The French do not know who will represent the Socialist Party, though the unpopular incumbent President Hollande will no doubt put his name forward. The centre right candidate (Sarkozy, Juppé?) is also still uncertain. What is certain – as anything can be in French politics – is that

Marine Le Pen of the Front National will win the first round.

Later in 2017 it will be Angela Merkel’s moment to receive the judgment of the people (if indeed she decides at last to continue in office). Nobody expects AfD to come to power. But the real point is that if a succession of election results across Europe count against her, then, by a process of attrition, her undoubted leadership of the EU will be put in question. That, in my view, is critical. The prospect is not so much that a succession of right-wing leaders will take power but that the legitimacy of the ruling elite will be further eroded as time goes by. Come the crunch, the political will needed to sustain the flawed Eurozone in its present form may be lacking.

The way in which the Brexit negotiations play out during 2017 will also affect the mood music in Europe. For reasons I’ll discuss elsewhere I’m now expecting a hard Brexit – more Fox than Johnson.

By January 2017 Mr Trump might already have assumed the presidency in the USA though, at the time of writing, Mr Trump’s poll ratings have been in free-fall. Indeed, since he was formally endorsed as the candidate of the Republican Party, he has been flailing around like a modern Don Quixote. But the very fact that he is running at all is a wake-up call to those who want to continue politics as usual.

So far this summer, the markets seem to have regarded this sustained increase in political risk with extraordinary sang-froid. That could change – and quickly.

[i] A report by the Resolution Foundation published on 15 August 2016 asserted that the wages of such as electricians, plumbers and bricklayers are an estimated £440 per year smaller as a direct result migration to the UK since 2003.

[ii] How Global Elites Forsake Their Countrymen, Peggy Noonan, WSJ 11 August 2016.