The result in the Dutch election has been a relief to markets all round. As it was Far-right candidate Geert Wilders made only a relatively small impact, with his PVV winning fewer seats than it achieved in 2010. This begs the question, are markets making too much of the risk of populism in Europe?
Of course, the Dutch election is not the main event. That will happen in a month’s time, when France goes to the polls. Marine Le Pen currently enjoys support from around a quarter of the nation (26.5%), with nearest rival Macron just a touch behind (25.8%). It seems likely that Marine Le Pen will go through to the second round of polling, but her chances of winning that second round are generally reckoned to be zero.
The trouble is, 2016 brought surprises and this has influenced investor thinking. Surely, if Trump can happen, and Brexit can happen, Le Pen can happen? But for Trump and Brexit, the polls were far more marginal, it was within the few percentage point margin that the pollsters allow themselves. That is not the situation in France.
Europe has a different history with populist politics and that alone may see the rest of the population work harder to defeat them. Equally, the experience of Brexit and Trump means that established parties will recognise they cannot be as complacent as those in the UK and US.
2016 brought surprises and this has influenced investor thinking. Surely, if Trump can happen, and Brexit can happen, Le Pen can happen?
Also, the biggest tensions in the Eurozone – where Northern European countries were angered at having to bail out their profligate neighbours in the South – have dissipated. Economies are healing, employment levels are rising and this is likely to dampen nationalist fervour.
However, the consequences of a Le Pen victory would be so vast that markets cannot ignore the possibility, however small. It would almost certainly represent the end of the European project as it stands today. It would cause considerable disruption in fixed income markets, in particular.
There is also the danger, as happened in the UK, that even if populist parties don’t win, they steal the narrative, pushing established politicians into decisions they don’t like.
With this in mind, it seems that markets are judging the risk about right. Wilders failure is undoubtedly encouraging for other European politicians, but the stakes are far higher elsewhere.