I recently returned from my annual tour of our offices in the Asia-Pacific region. Two weeks, eight cities, 54 hours in flight and one suitcase. When I got home, my clothes burst out of the bag and marched into the washing machine on their own.
The schedule sounds grueling, but the quality of the conversations kept my energy at a very high level throughout. Its always good to get a close-up of key markets to complement the wide-angle view one gets from a distance. Following are some impressions and themes that emerged from the dozens of meetings that took place during the journey.
Budget night in Australia is a major event, which prompts many subsequent days and nights of televised debate. (Imagine Americans tearing themselves away from reality shows to debate the nations finances
not going to happen.) Wrapped in the discussion of revenue and expense are issues related to education, infrastructure, health, the environment and retirement.
The last item was the subject of the most angst: Australia faces mounting bills for its aging population, and it needs to address them now while they are still manageable. Encouraging people to work longer, indexing benefits to need, and promoting saving were among the planks in the platform. Kudos to Treasurer Joe Hockey for daring to tackle this challenge publicly; we could use some of that kind of initiative here in the United States.
The compensation for all of the travel time was some really good food. Barramundi with a view of the Sydney opera house; seafood stew looking out over Hong Kong harbor; lamb with cumin in Beijing; whole fish with red curry in Kuala Lumpur; and Christines salad with oranges, walnuts and pomegranate seeds in Balnarring were among the many highlights. I send thanks to my gracious hosts for sharing their ideas, their company and their cuisine.
My body clock is still centered somewhere between China and Chicago, so Ive been a little slow at times this week. My partners say that they hardly notice the difference from my normal level of engagement. Im not sure whether theyre being supportive or snide, but I am looking forward to a little rest this weekend.
EU Elections: Ripple or Sea Change?
Last weekends European Parliament (EP) election generated reams of headlines about a political earthquake, yet virtually no market reaction. Its possible that investors noted that the more-moderate blocs will continue to dominate the legislature. But its probable that, like most of the voters, they still dont see the EP as having much real power. Although little may seem to change in the near term, the surge in support for right-wing populist parties will have an impact on various national political scenes and negative longer term economic and policy consequences at the EU level.
Another grand coalition of moderate center-left and center-right parties will dominate the next parliament. However, the final tally across all 28 countries saw aggregate support for euro-sceptic parties roughly double to about 20%, giving these parties 141 of the 751 seats. The combination of low turnout (43%) and a proportional representation voting system helped boost support for the extremists. Voters are also much more inclined to support fringe parties in an election that they see as less important to their daily lives.
It was in countries such as France and the Netherlands where the impact of the 2008-09 recession still bites that voters used the EP elections to vent their frustration. Economic performance across Europe remains very uneven, and very tough fiscal choices lie ahead.
At the national level, the big winner was Italian Prime Minister Matteo Renzi. His Democratic Party won a resounding 41% of that countrys EP vote, compared with just 21% for the left-populist Five-Star Movement. After only a few months in office, Renzi effectively has a renewed mandate to keep pushing for economic and political reform.
The biggest loser was French President François Hollande. Already plummeting in national opinion polls, his party was pushed into third place while support for the far-right Front National (FN) surged to 25%. The FN has only two deputies in the national parliament, but its showing in the European vote will further undermine an already-weak administration and make it harder to gather support for his governments tentative reform program.
By contrast, Chancellor Angela Merkels conservatives claimed first place in Germanys EP vote, while the euro-sceptic AfD won just 7%. Already at odds on a number of fronts, the EP election has further driven a wedge between Germany and France, the Unions two pillars..
None of the euro-sceptics elected to the EP last weekend will have any direct say in their respective national parliaments. But claiming seats at the EP gives euro-sceptic parties access to more funding and raises their profile at the national level. The results will also shift the national political discourse to the right in countries such as France, Netherlands, Denmark and the United Kingdom, where we can expect to see renewed debates about immigration and welfare policies.
So what does all this mean for the EU? For the next few months, policy-making will slow even more than is usual after a parliamentary vote. The new European Commission (the EUs executive arm) must be appointed, along with a new Commission president. The EP is already showing signs of pushing back against the practice of positions being filled through back-room horse-trading among national governments. This could lead to a prolonged stalemate over appointments, which will hardly endear the European politicians to the voters.
To function as a true Union and unleash their full competitive potential, the 28 countries need a more unified approach to policy-making that tackles the rigid labor and product markets still plaguing some members and begins to reduce chronic high unemployment. The results of this election will likely have the opposite effect. Although elected to a European parliament, the various representatives are beholden to national electorates and national party organizations. A lot of them will now be even more leery of advocating anything that voters back home will see as more Europe. They will certainly be in no hurry to propose changes that would need ratification by national parliaments.
All of which suggests that any new reform proposals will be delayed until at least the end of this year; that moves toward increased fiscal integration will slow even further; and that completion of banking sector reforms could be delayed. Ultimately, it means that the European Central Bank will continue to be the only European institution capable of undertaking meaningful actions.
The EU did not fall apart in 2009-11, and it will not as a result of these elections. But it will continue to muddle through with ad-hoc responses to crises. Meaningful policy change will continue to occur mostly at the national level which means some countries (Germany, Netherlands, Sweden, the United Kingdom) will continue to have more competitive economies while others may be left behind.