Just over a year ago, we ran a short piece on the flood of European elections scheduled in the weeks and months ahead. Crucial votes were to be cast in Austria, Italy, the Netherlands, France and Germany, and markets were nervous. Mindful of the swell in nationalism and the repeated failures of political forecasting that characterised 2016, we included in the piece a series of ‘shock factor’ ratings.
The intention was not to simply offer a crude probability for each political outcome, but to highlight the potential for each event to upset financial markets’ apple cart. In a sense, this was a futile exercise. The interlinked nature of European states’ politics, monetary policies and markets means forecasts cannot and should not be made in sequential isolation. Attached to unknown or unknowable parameters, predictions of political risk have a reliable habit of failing.
And so it proved: of all of the earthquakes that might have been – chief among them the prospect of a President Le Pen – it was the German election that provided the largest shock. After shedding votes to the resurgent far-right party Alternative for Germany (AfD), fragile coalition talks spearheaded by Chancellor Angela Merkel’s Christian Democratic Union (CDU) broke down in November. Suddenly, the dependable, rational nucleus of European economic and political power was infected with stalemate and division.