Vote for EU Parliament has no market message

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A general view shows press crews working in the hemicycle of the European Parliament during the announcement of the European Parliament elections results in Brussels.

Elections to the European Parliament are an important political test at the time when the euro area is emerging from its worst economic and financial crisis. But these elections will have no impact on the area's economic policies or on the euro's standing in world currency markets.

There are two reasons for that.

First, economic policies remain within the purview of each nation state, even though they may be a matter of a politically negotiated oversight by the E.U. Commission (the E.U. executive body).

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Market scrutiny, however, is not negotiable. That is a hard-learned lesson of the financial crisis and its aftermath. And the message is so clear that no political forces – be they right, left or center – would get the mandate to gamble with markets' confidence.

Second, the euro's value is determined by the monetary policies of the European Central Bank (ECB) – an independent supranational agency entrusted with price stability in the currency union.

Fury of the extremes

These elections will be one more opportunity for voters to express their discontent with excessive austerity policies imposed on a number of euro area economies which mismanaged public finances and compromised the stability of the banking system to the point where massive bailouts caused soaring debts and deficits.

That is the story told by opinion polls. As expected, they show that high unemployment and weak economic activity, caused by an unnecessarily harsh and precipitous fiscal retrenchment, are heavily sanctioned by most of the euro area electorate.

But these polls also show something of a surprise: A strong unity of views of extreme right and extreme left political forces in their ferocious condemnation of a deeply damaged social welfare system in an area where 19 million people out of work represent 11.8 percent of the total labor force.

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How much of a real clout these political antipodes will have is not clear. One can probably expect that they will score some points with their view that Germany is using the euro to foist its own policies on the rest of the monetary union. But it does not look like they will get much following when they advocate abandoning the euro and returning to old national currencies. I have seen no significant vote for that policy option in any euro area country.

Still, with these radical E.U. opponents poised to win close to 30 percent of the popular vote, their views can't be ignored on a broad range of issues, going from (a) economic management to (b) immigration, (c) free-trade agreements and (d) the nature and scope of the European integration.

The latest estimates indicate that extreme right parties could take a substantial number of seats from the largest center-right bloc (European People's Party -- EPP), while the center-left coalition (Progressive Alliance of Socialists and Democrats) could gain a few seats. In spite of that, the EPP will again emerge with the largest number of seats, and that will give it an edge in the choice of the next president of the E.U. Commission scheduled to take office next November.

Will the best candidate win?

That is an important development. The EPP's candidate for E.U.'s president is Luxembourg's former Prime Minister Jean-Claude Juncker. He was also a long-serving president of the Eurogroup, a policy making forum of euro area finance ministers.

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Mr. Juncker is highly qualified to head the E.U. Commission at the time when many influential people are publicly complaining about weak leadership and policy drift of this key European institution. That is a serious charge because the president of the E.U. Commission is expected to provide ideas and analytic input to the European Council (a top decision making body consisting of heads of state and government) about economic and political decisions binding all member states.

With his long years of experience at the European Council and the Eurogroup, Mr. Juncker would be uniquely well suited to do that job. He would probably also form an effective tandem with ECB President Mario Draghi. That is a matter of particular importance because the Commission is taking on a greater role in supervising and coordinating euro area's fiscal policies.

Equally important is the fact that Mr. Juncker is well known in the financial markets for his fiscal conservatism and a moderating influence against regulatory overreach.

But being the leader of the parliament's largest voting bloc may not be enough for Mr. Juncker to get the job. Indeed, despite all the talk about the increasing functions of the parliament in European affairs, the final decision on this appointment will almost certainly be taken by the heads of state and government. To be more precise, I think the European Council will again rubber stamp the usual French-German backdoor fixing.

This brings us back to the first paragraph where I said that these elections will have no impact on euro area economic policies. These are firmly in the hands of national governments, and any adjustments at the euro area level are subject to political negotiations.

Investment thoughts

Elections to the European Parliament will give rise to extreme right and left political forces as people voice their disappointment with economic policies of mainstream parties. Governments in some countries – such as France and Italy – should take that very seriously because these are not new political forces.

The election outcome will have no effect on euro area's current growth dynamics. Its slow recovery remains on course.

The ECB is expected to do "something" late next week, but I don't see what they can do other than a symbolic gesture of some sort to show the markets that they want to be cooperative. In fact, nothing of any substance can be done because the ECB can't force the unwilling banks to lend from an already existing huge pool of cheap euro liquidity.

Under these circumstances, copying the Federal Reserve's asset purchases to "please" the markets would be an obvious mistake.

Michael Ivanovitch is president of MSI Global, a New York-based economic research company. He also served as a senior economist at the OECD in Paris, international economist at the Federal Reserve Bank of New York and taught economics at Columbia.

Follow the author on Twitter @msiglobal9