The upcoming European Parliament elections are the only elections in which we can directly choose our representatives in the institutions of the European Union. Although the European Parliament may not seem as crucial as the activities of the European Commission or the European Council, the election results can change the direction in which the European Union will proceed. Currently, the EU is grappling with many issues, including excessive regulation, the uncertain future of the flagship Green Deal project, as well as immigration and an identity crisis.
In the elections, which will be held from June 6 to June 9, 2024, around 370 million citizens from 27 member states are eligible to vote. Do these elections matter, considering polls that suggest only minor changes in the main governing bodies? Will these elections impact financial markets, which are increasingly less dependent on the economic outcomes of member states, given the significant revenue from the US and even China? What is crucial for the citizens of the European Union?
Excessive Regulation?
When comparing the three largest economies in the world – the US, China, and the European Union – it is often seen that the US is responsible for most innovations, which are then copied in China, while their utilization in the EU becomes possible only after appropriate regulations are implemented. This leads to major innovations being capitalized on outside the Old Continent, often by European companies taking advantage of favorable conditions in other countries.
Of course, this might be an oversimplification, but excessive regulation or bureaucracy often creates barriers that limit potential economic growth and the development of financial markets. For instance, one of the most innovative companies in recent years, Nvidia, has surpassed the entire German stock market in capitalization. This highlights how far behind the European market is compared to the US market. While most regulations aim to protect smaller entities and consumers, sometimes it seems that European officials are overly cautious. On the other hand, Europe lacks spectacular bankruptcies like in the US or the lack of consumer protection as seen in China.
The entire German stock market is currently worth less than Nvidia, despite Germany having many technology companies. Source: Bloomberg Finance LP, XTB
Green Transformation – Opportunity or Decline in Productivity?
The energy transformation in Europe is one of the hottest topics of recent years and could significantly influence the results of the European Parliament elections. It is often said that in European Parliament elections, one can express dissatisfaction with the current government in a given country. This is also linked to the fact that the most determined voters are often the least satisfied, and voter turnout in these elections tends to be low. Moreover, the election results may not necessarily reflect support or opposition to the current policies of the European Union. However, regarding the flagship Green Deal program, it is likely that the election results will lead to a softer approach from the EU towards its currently very stringent stance. For several months, many countries have seen a trend where parties less supportive of the energy transition are gaining traction.
This is why the plan adopted in 2019, aimed at achieving net zero emissions by 2050, faces many challenges. This is, of course, rooted in the energy crisis that peaked in 2022, and is now compounded by farmer strikes dissatisfied with the Green Deal provisions. The EU has had many successes in climate policy. By 2022, emissions were reduced by 32.5% compared to 1990 levels, though much remains to be done. Nevertheless, given the strict guidelines, significant public dissatisfaction, and declining competitiveness relative to other economies, the future of the Green Deal is uncertain.
The EU has committed to ensuring that all new cars are zero-emission by 2035, meaning the end of combustion engine vehicles. Although European manufacturers have heavily invested in electric vehicle production, the entire automotive industry has long sought to delay this deadline. It should be noted that one of the most affected economies in this regard will be Germany, which is already losing market share globally to Chinese electric vehicle manufacturers. Will the new EU authorities soften their stance and support the European industry? On the other hand, Europe is an innovator in green energy, which could be crucial in the coming decades. Despite the many regulations, it still seems that companies lack the necessary support to further increase innovation in this area.
Opportunities for Artificial Intelligence?
Artificial intelligence is one of the most significant technological trends of the past few decades. Since it is still a novelty, the European Union has a substantial opportunity to become a key global player in this market. Foreign investments in EU countries began to decline for the first time since the pandemic in 2023, indicating that the new EU authorities must work hard to increase foreign trade, particularly in exporting products and services related to the latest technology. Europe boasts companies that could compete with Nvidia in the future, such as ASML, NXP Semiconductors, and the UK’s ARM Holdings. Although all these companies are listed on the American Nasdaq, the EU and individual countries should strive to keep these companies’ investments on the Old Continent. Only in this way can Europe remain competitive in the innovation race against the US and China.
Do the Elections Matter?
The current ruling coalition in the European Union holds 420 seats in the parliament. It is expected to retain power, albeit with around 390 seats in the 720-seat parliament. The center-right European People’s Party (EPP), the core of this coalition, has been losing support, looking at previous elections in 2019 and 2014. Therefore, it is unlikely that the direction of the European Union will change significantly in the next five years. However, some softening of the Green Deal approach and efforts to support innovation, particularly in the recent wave of artificial intelligence, can be expected. Conversely, the decreasing number of coalition members may prevent the EU from pursuing further integration, which is currently crucial to keeping pace with the US and China. One of the key factors could be deepening the single European market, particularly in terms of the stock market, tax system, or banking, which could provide stronger support for financing key projects.
Certainly, the technology sector in Europe now deserves the most attention. On the other hand, it is hard to expect the struggling renewable energy sector to gain importance now. The dormant automotive sector may gain significance if the European authorities decide to support the European industry, although it may also benefit from the upcoming lower interest rates. Although past elections have not been turning points for the European Eurostoxx 50 index, it is worth noting that we are in an interesting position at historical highs but with a relatively cheap euro and upcoming rate cuts by the European Central Bank.
Elections to the European Parliament have not typically been turning points for the main European index. Now, however, the results are expected to be closer than usual, although the fundamental factors themselves do not seem very unfavorable for European companies. Source: xStation5
Author: Michał Stajniak, Deputy Director of the Analysis Department at XTB
