A Bet On Europe

Updated: Jul 21, 2020

2016 has been a blatantly bad year for opinion pollsters. The on-going prediction crisis is seen by many as particularly concerning for Europe which is going through important elections and referenda in many countries, including today in Italy. The extraordinarily poor visibility when it comes to political outcomes has been driving up risk premia through increased government bond yields, especially in France since the US presidential election (check the one-month chart here).

A number of parameters have had a negative impact on the quality of polls. The most critical driver has been the response rate which has been gradually declining (to less than 10% of the voting population in the US). This can be attributed to technical (mobility) and social (polling fatigue, privacy) factors. This suggests that respondents have simply become less and less representative of an entire population. There are a number of variables which have had a compounding effect:

  • Participants in polls may not go to vote and likely voters are difficult to identify

  • Polls under-appreciate voters’ propensity to change their mind between the time of the survey and the casting of the ballot

  • Respondents may not be inclined to share their honest opinion due to increased concerns about data protection or if their opinion is seen as unconventional (including when compared to the established media)

Pollsters are well-aware of these limitations and have been using savant formulas to attempt to correct these biases. These models, like the econometrics ones, appear to have recently collapsed. Another profession bites the dust.

Regarding the European Union, here are relevant sources of political risk in the short term:

  • Italy: The risk of an anti-prime minister “no” at today’s referendum is quite elevated. Such an outcome could further open the door to alternative parties, including destabilizing forces when it comes to the EU. Independently, the financial sector would suffer from any political uncertainty since its dealing with a mountain of bad loans would likely be delayed (before being fixed). In any event, political uncertainty, which has been an Italian feature for as long as I remember, is likely to persist beyond the referendum and at least until the general elections to be held by May 2018

  • France: As alluded to above, the financial markets suggest that the probability of a Le Pen win at the presidential election in May has materially increased since the Trump election. The implications of an anti-establishment vote at the May presidential election would admittedly be severe. A Le Pen presidency would open a big, fat and ugly Pandora box leading to a potential reconfiguration of the EU, with all the uncertainty this would entail for the economy and the financial markets

  • Germany: Next autumn’s elections in Germany will be important to assess the growing popularity of alternative parties

Worrisome scenarios could be contemplated by creative minds should populist trends be let to catch fire across Europe. Given the inability to rely on polls, conviction about fundamental political trends will have to drive decision-making processes. So here is mine: To start with, there is no chance of a Le Pen win in France next year. Italians will remain deeply pro-European. Germany will continue to represent a source of political stability in Europe. Beyond the short term, European unity will endure and further strengthen under a new generation of balanced leaders who have remained quiet to date but will be compelled to emerge during times of tension.

Fundamentally, the size and diversity of the European economy will continue to represent in itself a significant source of diversification for economic actors. More specifically, Europe will continue to operate as an advanced technology region in industrials with strong knowledge clusters, for example mechanical engineering in the Nordic region and Northern Italy. Finally, Europe’s history, multiculturalism and geographic location will continue to represent an exceptional strategic door to emerging markets globally.

Forget about the polls, and, beyond them, forget about politics. The degree of uncertainty in Europe is much lower than it seems. Now and in the future as much as in the past, no global business will be complete without an established footprint in Europe, especially in Diversified Industrials.

Sources:

  • The New Yorker, “Politics and the New Machine”, November 2016

  • The Week, “The problem with polls”, April 2016

  • Pew Research Center, “Can likely voter models be improved?”, January 2016

  • The Guardian, “Don’t trust the polls: the systemic issues that make voter surveys unreliable”, January 2016

  • The New York Times, “Why polls have been wrong recently”, January 2016

  • Pew Research Center, “The challenges of polling when fewer people are available to polled”, July 2015

  • The Washington Examiner, “Poll wars: Pew says Internet polls often “more accurate”, candid than phone surveys”, May 2015


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