The European political scene is now changing every week. And we are not talking about Romania, where the people massively take to the streets in January and February against the government that voted enthusiastically in December, but about France, Germany and Italy, the three countries that united Europe, together with the Benelux, the they founded.
Restless and frustrated, public opinion fluctuates dramatically. In France Fillon first surprisingly emerged in December with a Thatcherite program that seems to be gaining great acclaim. Then Hamon emerges even more surprisingly among the socialists, who criticizes Hollande from the left and vaguely recalls the American Sanders. Two weeks go by and Fillon collapses, while the moderate centrist Macron emerges overbearingly, but the socialist party, of which he has always belonged, excommunicates not only him but anyone who wants to support him.
Marine Le Pen, meanwhile, provides the details of her proposal for an immediate exit from the euro. French devaluation limited to 20 percent if the euro dissolves, the franc free to go where he wants if the euro remains alive.
Banque de France brought back under political control, quantitative easing of 100 billion francs a year (40 for debt buy-back, 30 for welfare, 30 for industrial policy) and target rate for the ten-year OAT between 2 and 3 percent.
It should be remembered that the French elections do not end on May 8 with the presidential ballot but are repeated in June with the two equally important political rounds. Whoever wins the presidential elections will in fact have big problems in parliament. Macron does not have a party, Le Pen will win few seats, Fillon and Hamon should resort to a grand coalition, an absolute novelty for the Fifth Republic, born for governance.
In Italy, surprisingly, the polls are starting to show the three main political alignments substantially equal. In Germany, the country where the polls never seemed to be wrong and where the shifts in public opinion are as slow as the Phlegrean bradyseisms, the irruption of Martin Schulz into domestic politics upset all the balances in a few days. Schulz not only nimbly overtakes Merkel in the chancellery polls (50 per cent him, 34 per cent) but succeeds in the unthinkable miracle of resuscitating a SPD that for a decade has been wondering what it is doing on an overcrowded political scene that offers or strong personalities like Merkel or strong identities like those of Linke, the Greens and on the right, Alternative fur Deutschland.
The fascinating thing is that while the SPD has a program as vague and bland as tepid water, Schulz doesn't have that either. And not only does he not have it, but he has never had it in his political career. After having been a bookseller for twenty years in a small and sleepy Rhenish town (the bookseller in Germany is a very serious and highly esteemed job and in fact he soon became mayor of that town), Schulz made a very fast career based on the one hand brilliant and energetic speech and great organizational skills and, on the other hand, keeping well away from any controversial issue and gaining visibility through lively and memorable duels on politically correct issues (memorable and all on Youtube are his clashes with Berlusconi, Farage, Godfrey Bloom and even Cohn-Bendit). His site contains generic proposals on restful topics.
For markets, Schulz can weigh in two ways. The first is that any electoral overtaking would allow him to be able to choose between a renewed government alliance with a Cdu-Csu no longer led by Merkel at that point and a coalition (until now taboo) with the Linke and the Greens. In this second case, we would have the adoption of redistributive policies not only in Germany but throughout Europe. The second is that Schulz's Europeanism, less critical than Merkel's, would push for greater continental integration and a clearer closure towards the United Kingdom.
In 2012 Schulz came out in favor of Eurobonds. He probably did it because Merkel opposed them. Today Schauble increases his fire against the ECB because he knows that Schulz does not want to and therefore cannot attack Draghi. In the positions of politicians there is always a component of pure tactics on which the tare must be made, but there is no doubt that a success by Schulz, especially if spent in a coalition with the Greens and Linke, would reduce the spread between the periphery and the center or it would reduce the enlargement that is in the pipeline for the next two years.
It is evident that the shifts of opinion in Europe are no longer heading solely in the direction of populism, just as it is evident that European populisms are increasingly presenting themselves with distinct features (direct democracy and a light state in the north, statism in France, confused ideas in Italy and Spain). The continent has a great desire for novelty, but it also shows that it quickly tires of these novelties.
In this scenario, investors can adopt two types of attitude. The first, which applies to stock markets but not bonds, is deciding to ignore politics, polls and elections and focus on niches that are safe from them. The second is to be tactical and light before the pre-election phases (when everyone wants to be tactical and light) and buy call options (if you are light) or put (if you are strong) with expiry from May onwards. Let's mark our calendars for May 8, the day of the French ballot and the most delicate deadline of 2017.
It is popular to say, in this period, that the structural conditions, in particular the pro-growth monetary or fiscal policies that inspire almost all the governments of advanced countries, are stronger than the adverse events that could occur. It is a great truth, confirmed by the reaction of the markets to Brexit and to Trump. However, it is a truth that can admit exceptions if the adverse events themselves have a structural significance. A French exit from the euro (although still a decidedly lagging scenario) and the consequent probable end of the euro itself would not see the markets indifferent.
In this context it is very fortunate that America is so solid. The economy isn't doing very well (the fourth quarter was decidedly weaker than the third, especially if we factor in the build-up of inventories caused by the Trump effect on corporate purchasing departments) but the psychological resilience of the markets is excellent. The conviction that the most radical and pro-growth tax reform of the postwar period will emerge from the work of Congress is solid and is not affected by the skirmishes that the administration has to face with judges and in parliamentary committees on immigration and nominations. It is clear that the first concrete results are expected from Congress in order to start rising again. In the meantime, however, despite knowing that it may take months to see the effective launch of the reforms, no one seems to feel the need to go down from the already high levels yet. For their part, bonds and gold have rediscovered color without needing a trend reversal on the stock market. In the background, the stable dollar contributes decisively to the serenity of the markets.
