Europe's new power elite

Europe's new power elite

The European Parliament’s new appointments to top jobs will have important implications for the markets.


The market has certainly seen Christine Lagarde as pro-easing, rather than a Germanic monetary purist, and reacted favourably.
Michael Browne
A new head of the ECB

The European Parliament reopened this week, with suggested appointments for the top jobs proving very revealing.

On Tuesday, the European Council officially nominated the International Monetary Fund’s (IMF) managing director Christine Lagarde, to become the next president of the European Central Bank (ECB). Lagarde took over the IMF post in June 2011 at the height of the Greek crisis, replacing the disgraced French politician Dominic Strauss-Kahn. She provided a steady hand during this period and a figure head, leaving the technical work of renegotiating Greek debt to the bank technicians.

The ECB role is different, being as much a technical one, as a ‘presidential’ one. We have not had a non-expert in the post before, although it is quite possible that bringing pragmatism will be useful – but I do not expect her to be radical. For the ECB, this is a continuity candidate and, as the appointment is for eight years, it is an important one. The market has certainly seen her as pro-easing, rather than a Germanic monetary purist, and reacted favourably.

Pro-European appointments

The appointment of long-term Merkel ally Ursula von der Leyen as Head of the Commission is very significant. Controlling the direction of policy and the resources of the EU will now give it a strong German flavour. A deeply pro-European politician, she has previously called for a European army and had run-ins with the populist Hungarian Prime Minister Viktor Orbán. A controversy over defence contracts meant that she was ruled out as Merkel’s successor a couple of years ago and this role looks like a consolation prize. But I expect her to be busy and not afraid to tread on toes, especially those of the populists.

The other selection of interest is that of the Brussels insider, former Belgian Prime Minister Charles Michel, as Council of Ministers President, replacing the pragmatic, conciliatory Donald Tusk. He is young, was under a lot of pressure in Belgian politics and is a federalist.

Closing of the ranks

This is perhaps the most important issue: these appointments smack of the thesis ‘the trouble with Europe is it is not integrated enough, we should do more’. I expect the UK to be the first country to struggle with this, as it attempts to re-negotiate Brexit. This looks like a closing of ranks and the risk of a hard Brexit has risen.

The same risk of conflict will come from the populist politicians around Europe, who did well in the last elections and have clearly been shunned. Italy and the Eastern European states have lost out on the top jobs and thus influence. Again, the risk of conflict is obvious, and we believe the risk of an Italian debt crisis in the next five years is high.

Return to horse trading

The Spitzenkandidaten system, where the largest party in the European Parliament nominates its candidates for positions, has been well and truly dumped. The return to horse trading (rumoured to have been led by Macron) will make the EU look less accountable to its electorate, not more.

These appointments still have to get through the European Parliament and there could well be significant resentment from the leading political groupings there who dislike the ending of the Spitzenkandidaten system, as well as the populists. They will also decide on who to make the Leader of the Parliament, the one job still in their control.


Definitions:

"Brexit" is a shorthand term referring to the UK vote to exit the European Union.

The International Monetary Fund (IMF) is an international organization of various member countries, established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements.

Top

Important Information

 

All investments involve risk, including possible loss of principal.

The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Legg Mason nor any of its affiliates guarantees any rate of return or the return of capital invested. 

Equity securities are subject to price fluctuation and possible loss of principal. Fixed-income securities involve interest rate, credit, inflation and reinvestment risks; and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

International investments are subject to special risks including currency fluctuations, social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Commodities and currencies contain heightened risk that include market, political, regulatory, and natural conditions and may not be suitable for all investors.

Past performance is no guarantee of future results.  Please note that an investor cannot invest directly in an index. Unmanaged index returns do not reflect any fees, expenses or sales charges.

The opinions and views expressed herein are not intended to be relied upon as a prediction or forecast of actual future events or performance, guarantee of future results, recommendations or advice.  Statements made in this material are not intended as buy or sell recommendations of any securities. Forward-looking statements are subject to uncertainties that could cause actual developments and results to differ materially from the expectations expressed. This information has been prepared from sources believed reliable but the accuracy and completeness of the information cannot be guaranteed. Information and opinions expressed by either Legg Mason or its affiliates are current as at the date indicated, are subject to change without notice, and do not take into account the particular investment objectives, financial situation or needs of individual investors.

The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Legg Mason or its affiliates or any of their officer or employee of Legg Mason accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Legg Mason. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of, and observe such restrictions (if any).

This material may have been prepared by an advisor or entity affiliated with an entity mentioned below through common control and ownership by Legg Mason, Inc.  Unless otherwise noted the “$” (dollar sign) represents U.S. Dollars.

This material is approved for distribution in those countries and to those recipients listed below. Note: this material may not be available in all regions listed.

All investors and eligible counterparties in Europe, the UK, Switzerland:

In Europe (excluding UK and Switzerland), this financial promotion is issued by Legg Mason Investments (Ireland) Limited, registered office 6th Floor, Building Three, Number One Ballsbridge, 126 Pembroke Road, Ballsbridge, Dublin 4, D04 EP27. Registered in Ireland, Company No. 271887. Authorised and regulated by the Central Bank of Ireland.

All Qualified Investors in Switzerland:
In Switzerland, this financial promotion is issued by Legg Mason Investments (Switzerland) GmbH, authorised by the Swiss Financial Market Supervisory Authority FINMA.  Investors in Switzerland: The representative in Switzerland is FIRST INDEPENDENT FUND SERVICES LTD., Klausstrasse 33, 8008 Zurich, Switzerland and the paying agent in Switzerland is NPB Neue Privat Bank AG, Limmatquai 1, 8024 Zurich, Switzerland. Copies of the Articles of Association, the Prospectus, the Key Investor Information documents and the annual and semi-annual reports of the Company may be obtained free of charge from the representative in Switzerland.

All investors in the UK:
In the UK this financial promotion is issued by Legg Mason Investments (Europe) Limited, registered office 201 Bishopsgate, London EC2M 3AB. Registered in England and Wales, Company No. 1732037. Authorized and regulated by the Financial Conduct Authority. Client Services +44 (0)207 070 7444

All Investors in Hong Kong and Singapore:

This material is provided by Legg Mason Asset Management Hong Kong Limited in Hong Kong and Legg Mason Asset Management Singapore Pte. Limited (Registration Number (UEN): 200007942R) in Singapore.

This material has not been reviewed by any regulatory authority in Hong Kong or Singapore.

All Investors in the People’s Republic of China ("PRC"):

This material is provided by Legg Mason Asset Management Hong Kong Limited to intended recipients in the PRC.  The content of this document is only for Press or the PRC investors investing in the QDII Product offered by PRC’s commercial bank in accordance with the regulation of China Banking Regulatory Commission.  Investors should read the offering document prior to any subscription.  Please seek advice from PRC’s commercial banks and/or other professional advisors, if necessary. Please note that Legg Mason and its affiliates are the Managers of the offshore funds invested by QDII Products only.  Legg Mason and its affiliates are not authorized by any regulatory authority to conduct business or investment activities in China.

This material has not been reviewed by any regulatory authority in the PRC.

Distributors and existing investors in Korea and Distributors in Taiwan:

This material is provided by Legg Mason Asset Management Hong Kong Limited to eligible recipients in Korea and by Legg Mason Investments (Taiwan) Limited (Registration Number: (98) Jin Guan Tou Gu Xin Zi Di 001; Address: Suite E, 55F, Taipei 101 Tower, 7, Xin Yi Road, Section 5, Taipei 110, Taiwan, R.O.C.; Tel: (886) 2-8722 1666) in Taiwan. Legg Mason Investments (Taiwan) Limited operates and manages its business independently.

This material has not been reviewed by any regulatory authority in Korea or Taiwan.

All Investors in the Americas:

This material is provided by Legg Mason Investor Services LLC, a U.S. registered Broker-Dealer, which includes Legg Mason Americas International. Legg Mason Investor Services, LLC, Member FINRA/SIPC, and all entities mentioned are subsidiaries of Legg Mason, Inc.

All Investors in Australia:

This material is issued by Legg Mason Asset Management Australia Limited (ABN 76 004 835 839, AFSL 204827) (“Legg Mason”). The contents are proprietary and confidential and intended solely for the use of Legg Mason and the clients or prospective clients to whom it has been delivered. It is not to be reproduced or distributed to any other person except to the client’s professional advisers.