Why are financial markets less flustered by political changes in Europe?

The US presidential election is understandably the main focus for the financial markets in what is left of this year. But the US is not the only country to hold elections this year. There have, for instance, been a number of elections in the EU, and ones in which the far-right parties have generally performed well. But while there was a time when the prospect of the far-right gaining any sort of foothold on power in Europe would have sent financial markets scrambling, that’s not the case anymore.

One source of concern when it comes to the US election is the impact it could have on migration flows should former president Trump win and enact a threatened plan to deport undocumented migrants. In the eurozone, the issue of migration is also a hot topic. It is something that has allowed far-right parties such as the National Rally in France, the AfD in Germany, the Party for Freedom in the Netherlands, and the Brothers’ of Italy to improve their poll standing significantly and, in some cases, such as Italy, take power. And, just this weekend, Austria’s far-right Freedom Party consolidated its strong showing in June’s EU elections.

In short, the rise of far-right anti-immigration parties has become a surge. But what is interesting is that it seems to have ruffled very few feathers in the financial markets. The euro, for instance, does not cower every time another far-right party scores election success. And, while we have seen some modest movement in bond markets, such as the rise in French bonds relative to their German counterparts after French elections in July, the moves have been very sedate. It all seems a far cry from the political situation that existed ten or twenty years ago, when it seemed that financial markets were far more nervous about the creep of far-right politics in the region. Why have things changed, and can we be sure it will continue if, or when, far-right parties score even bigger election successes?

According to the Standard Bank, there are a number of reasons why markets seem less flustered by these sorts of political changes in Europe.

The first is that when such parties have taken any sort of hold on power, they appear to have governed in a way that is far more responsible than many might have feared. Italy, for example, has been dogged by factional infighting for longer than we can remember with government after government falling foul of parliamentary no-confidence votes and being forced out of office. The situation has been so bad at times the country has had to turn to technocrat governments, the last one led by former ECB president Draghi up to 2022. But rather than coming in and accelerating this tradition [sic] of short-lived governments, Italian PM Meloni has presided over notable political stability.

A second, and related, factor is that far-right parties often become less extreme as their chances of gaining power increase. Take the National Rally party in France led by Marine Le Pen. It was created out of the National Front party led by her father, Jean-Marie Le Pen up until 2011. But while election success for the National Front in Le Pen senior’s day would have led to fears of a pullout from the EU, and even in the early days of the National Rally, the Party no longer campaigns on this platform. Many other far-right parties in the EU have also switched much of their venom from the EU towards the issue of migration.

The third factor is that many of the policies of center- or left-of-centre governments in the eurozone are taking a more anti-immigration stance in order to avoid ceding too much voter support to the far-right. The best example of this is in Germany, where the centre-left coalition under Olaf Scholz has risked the ire of others in the EU by reintroducing border checks. The bottom line is that the rightward drift in EU politics is ongoing, but, with each step, it seems as if financial market sensitivity declines. Of course, there could be some sort of political earthquake in the future, but, for now, the tremors continue to be manageable for the financial markets.