Geopolitical Update: Europe braces for Sweden & Bavaria Elections

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Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, 23 Aug 2018 – Switzerland (public release 28 Aug 2018)

Before going into our research update on the upcoming elections in Sweden and the German state of Bavaria, allow us to highlight some noteworthy developments we are currently monitoring and analysing:

  • Russia and China are preparing their probably largest ever joint military exercises as Beijing vows to resist the USA
  • Defiant Berlin is stepping up the measures to circumvent US sanctions against Iran. We have warned that with Fiscal Integration “stuck”, the EU will speed up Military and Financial Integration
  • Japan is sending war ships to the South China Sea right after India & Japan announce closer Military Cooperation. The Aircraft Carrier USS Ronald Reagan and its impressive Strike Group has moved in position as another US Carrier Strike Group is underway
  • We ascertain that Washington is resorting to “chaos” to contain the rise of the USD, buying time for the FED
  • Israel is in a diplomatic frenzy to avert a new war with Hamas. The IDF fears it could lead to conflict on several fronts. Ankara is raising the stakes in Gaza strip – Is Ankara deflecting from the domestic crisis?
  • Geophysics: Several government around the Pacific Basin are preparing for a natural event

We are focusing our analysis on the German Political Process, because we believe it matters for Europe, the world and increasingly the EU/EURO projects. Not only is Germany the economic engine of Europe, it is deepening its embrace of China & Iran (US foes) and moving to help European firms defy US sanctions on Iran.

Europe looks to Sweden & Bavaria – Overstated fears could give EU & Euro a bumpy ride

The upcoming elections in Sweden are likely to see plenty of drama and media coverage. The anti-establishment Sweden Democrats (SD) led by Jimmie Akesson could become the largest party, but we expect mainstream parties to unite to block it – as we saw in the Netherlands. Still, the concerted bashing of the right-wing Democrats as outright fascists (as currently done by mainstream party leaders) could further add to their momentum. Our analysis shows that the majority of SD supporters are not against immigration in itself, they oppose massive & illegal immigration though. Our analysis shows that the fears that media is drumming up in Sweden are overstated. Although a highly liberal society is experiencing a shift to the right, this could be seen from a historic perspective as a natural return to the mean (center) and also as an understandable course correction following policies that fostered mass & illegal immigration along a sense of security erosion.

The shake up in Sweden could lie ahead: If mainstream parties continue to ostracise the SD, we think the Sweden Democrats could eye the 2022 elections with serious momentum.

Sweden and Bavaria should not be mixed up ..

Many in Europe may want to extrapolate the impressive advance of Sweden’s SD unto Germany’s AfD. Or at least draw the parallels and put them in the same basket. They are painting a picture of European society shifting to the Far Right. Those fears are drummed up by mainstream parties and media, because it helps rally voters to defend the status quo and the European project. After all it works, because state-media is huge and powerful in Europe.

During 2016-2017 we said Germany and France will shift to the liberal left, while consensus feared a shift to the right – Those fears weighed on the Euro for almost two years until the results proved them wrong.

While those protest movements right of the center are rising, their drivers are complex: political, economic, demographic, religious etc. Our research has shown for 7 years now that Western European society as a whole is shifting to the liberal center, not the far right. What many see as a shift to the right in some societies is the exodus of mainstream conservative voters out of formerly conservative parties that have shifted to the political center: This is the case of the CDU and CSU in Germany. And it is happening left of the center as well. After years of shifting to the liberal center, long time SPD supporters are leaving the SPD in large numbers to support a leftist party that deserves that name: Die Linke. The SPD is literally imploding, yet no one decries that Germany is shifting dangerously to the left.

The Sweden Democrats and Germany’s AfD are both nationalistic right-of-center parties, but they are different in many ways. Sweden is overall a liberal secular society, while Bavaria is conservative and zealously Catholic. Moreover, the SD has been able to reach further into society than the AfD in Germany. Thus, while on the current trend the SD could have a chance to shape politics or even the government in Sweden by or after 2022, the AfD – with its leadership chaos – is far away from that scenario.

Pressure on the EU & Euro could climax in October

Should the government parties in Sweden and Germany see humiliating losses during September-October as right-wing parties extend their rise, the European common currency could see renewed weakness. If the government parties implode, this could weigh on Merkel’s hand in the last stretch of the BREXIT deal, providing an unexpected respite for Britain.

Depending on the results, the CSU could extract maximum concessions from Merkel or shake up her government just as she needs to exercise maximum pressure on London. But after that the common currency is likely to benefit from chaos in both Washington and London in November. Surprises to this scenario could come from a number of assertive states in Europe, the Middle East and Asia. These know well that the West will be self-preoccupied this Fall. But a surprise could also come from London itself, where conservative MPs are hoping to get their party back from the liberal wing – of which Theresa May is part of. That is a factor to watch.

German government parties are imploding in the powerhouse state of Bavaria

The 2nd week of October could see one of the worse election results ever in the history of a modern German government. The government coalition parties around Mrs. Merkel could “implode” and lose almost a combined 20% of voter support in a powerhouse of the German economy.  To lose 1/5 of the popular vote is more than just an earth-shattering result in stability-obsessed German politics. This could be a watershed moment for the German Political Process and Project Europe.

The prospects for the government parties have worsened even further in recent weeks:

The pressure is mounting on Merkel’s coalition as the SPD is likely to lose over 40% of its voters in Bavaria. SPD and CSU voters are abandoning their parties in large numbers just as Mrs. Merkel mobilizes once again all resources to stay in power. German media has for too long treated the exodus from the center parties in favor of the AfD as an East German phenomenon. This will be a day of reckoning for Germany and its all-powerful media establishment.

Why are voters leaving the government parties? 

Official Berlin and most of German media blame the right wing AfD for using the immigration crisis to polarise Germany. But we don’t quite agree with this so popular and convenient narrative. Massive illegal migration might have been the trigger, but the AfD was waiting to happen. Our analysis shows that Mrs. Merkel’s obsession with power has enabled the rise of the Greens, the Left and the AfD.

A closer analysis shows that Mrs. Merkel has been able to stay this long in power by shifting the traditional big parties away from their original political camps into the center. The CDU and CSU used to be conservative (right of the center) parties, while the SPD used to be a leftist party – clearly left of the center. The SPD was long “die Arbeiter-Partei” (the party of workers and state employees). But under Merkel all these three big parties have gradually but relentlessly been shifted to the liberal center of German politics. So much that there is no longer a great difference between CDU, CSU and SPD – except during election seasons.

Those who have followed the German Political Process over recent decades witnessed the demise of the FDP – long used to be part of the government in Berlin, the FDP faced a collapse and had to distance herself from Berlin power politics, Merkel and her coalition in order to get back a profile. A mix of old liberal roots with a clearer vision for Germany. Under Christian Lindner the FDP began a long and painful recovery process. The fate of the FDP over the past decade sheds light on the implosion of the other (junior) coalition parties CSU and SPD.

The fact is, German mainstream parties have abandoned their traditional political beliefs and manifestos in order to perpetuate their rule in Berlin. This is the main reason why so many mainstream conservative citizens (long time CDU or CSU supporters) are willing to vote for the AfD, although they tacitly disagree with their rhetoric and style. Those who have abandoned the mainstream parties for the Greens or the AfD are not necessarily extremists.

This drive to the center by the big parties has left a massive vacuum on the left and right of the political spectrum. That helps explain the rise of the Greens (on the left) and rise of the AfD (on the right). Many supporters of the Greens and the AfD don’t quite like our analysis, because it demystifies what they see as their tremendous success. In our view, the Greens and the Left are far better run than the AfD, but that – it seems – is a secondary factor.

Polarisation – AfD rather a symptom than main driver

Many political experts say Germany is failing into an irreversibly polarised and dangerous spiral. But I tend to disagree. I believe that if the CDU, CSU and SPD have the courage to embrace their original raison d’être and political beliefs, the rise of the AfD and even the Greens could be reversed. Unfortunately, Mrs. Merkel is currently managing Germany and Europe by fear: a) If you don’t support the EU, you are risking another war in Europe; b) If you don’t join the government coalition, you are enabling the AfD .. etc.

Another important structural factor is the large and steady number of under-privileged Germans – almost 20% of the population. Some 15 million have already received Hartz IV aid. This group (most of them working poor) is not large enough to topple a government, but large enough to underpin dissatisfaction and polarisation. Especially when the mainstream parties have left a massive vacuum on the left and right of the political spectrum. Demographic shifts also underpin both drivers. Thus, structural (political, socio-economic) factors are overlapping and eroding the Political Stability that Germany has enjoyed since WW2. Global geopolitical forces are surely at work in Germany too, but a great deal of the fading Political Stability in Germany is home-grown.

Rather than addressing these structural self-inflicted problems, Berlin has focused on vilifying the AfD and anyone that would associate with it. It makes those supporters more “entrenched”. The drumming up of the return of a “Nazi threat” worked well in 2017 to rally German voters around the European Integration Process. But even SPD and CSU leaders are now wondering if staying in power will ultimately cost too much. Nevertheless, the shift to the center is not exclusive for the mainstream parties. Even the AfD and the Greens – going after the vacuum – are moderating some positions to shift to the center and attract more frustrated mainstream voters.

Final thoughts: Germany matters

Assuming Merkel manages to convince the CSU to stay in the coalition and barring other new events, the Bavarian elections should see the peak of skepticism on the EU & EURO for this autumn. From the middle of October onwards markets are likely to focus on the BREXIT Deal (possibly a no deal) and the US Mid Term Elections. Both processes are likely to be chaotic and the Europe may be the temporary Safe Haven. We saw this after the French elections.

Being little understood and underestimated by many observers, the German Political Process is likely to weigh on Europe and the EURO in coming years. Being so exceedingly stable, German politics became a boring and superficial subject for global investors and political analysts. They simply had to listen to the chancellor, the rest was often a waste of time. This is likely to come back on them with a vengeance.

Christian Takushi MA UZH, Macro Economist & Geopolitical Strategist, 23 Aug 2018 – Switzerland (adapted public release on 28 Aug 2018)

Disclaimer: None of our comments should be interpreted or construed as an investment recommendation
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