Listen: The Decisive | Episode 3 - Election impact: European Parliament

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Welcome to another episode of The Decisive podcast. I'm your host, Kristen Hallam, Lead Content Strategist for Global Intelligence and Analytics. Today, I have Dijedon Imeri joining us to discuss the European Union parliamentary elections and their potential impact on the business landscape. Dijedon is a Principal Analyst for Europe/CIS country risk, at S&P Global Market Intelligence. Welcome, Dijedon.

Dijedon Imeri

Thank you, Kristen. It's a pleasure to be here.

Kristen Hallam

So we're a few weeks out from the elections now and the dust has settled a bit. Let's start off with a quick recap of what happened. Dijedon, can you walk us through the results, please?

Dijedon Imeri

Yes, sure. One of the biggest topics around these elections was the far right and how they would perform in these elections. There was a lot of talk in the run-up to the elections and also afterwards in mainstream media about a surge of the far right.

So that is a sizable chunk and provided that they are actually able to overcome a lot of their differences, which is not really likely for several reasons, but assuming that, then there would indeed be a very formidable bloc. Now we have to weigh this against the fact that despite some setbacks, the mainstream political groups that are pro-EU and in favor of the European Green Deal retain between them a majority of seats.

So despite a lot of the precipitous losses suffered by, for example, Renew Europe and the Greens, for example, this was somewhat compensated by the strong performance of European People's Party, the EPP, to which Ursula von der Leyen's CDU party belongs. So assuming that this sort of centrist and mainstream bloc opts to continue their cooperation, they will be able to determine the policy direction going forward.

And then we'll get into this later as well, this entirely depends on what the EPP wants to do. On some issues, there might actually be convergence between the EPP and political groups to the right of it. And this might result in cooperation, at least on an ad hoc basis. We don't think it will be formalized because the EPP wants to hold on to its sort of pro-EU credentials. But certainly, on an ad hoc basis on individual policy issues, there might be a convergence.

Question and Answer

Kristen Hallam

Thanks for that overview. That's really helpful context for us to have for the rest of our conversation today. Can you tell us what were the key issues driving voters in this election?

Dijedon Imeri

Yes. It's interesting. If you have a sort of national breakdown, if you look at individual countries, there are obviously some recurring themes, but with different emphasis. So for example, the Nordic countries, they ran against Ukraine insofar as the more left wing and green parties were able to prevail in those countries, which stands in sharp contrast to countries like France, Germany, Austria as well as Italy, where the far right were able to achieve the biggest gains.

But obviously, some of the recurring themes include the cost-of-living crisis, which, although inflation is coming down, there remains a key concern for European citizens, things like migration as well, and also climate policy. And this last one is an interesting one because although there remains a very broad public support for climate action in Europe, there are some key and influential constituencies that are skeptical of the European Green Deal or at least elements of it. And here, I would highlight the protesting farmers, for example, who made a concerted effort to protest aspects of European Green Deal, putting pressure on EU institutions and also political groups running for these elections kind of change track and review and revisit some of the policies that impact the agricultural sector.

And to this end, for example, the European Commission backtracked on its proposal to half the pesticide used by 2030. And you also had mainstream political groups like the EPP shifting towards the right on a lot of these individual issues in order to court protesting farmers. And this was reflected in their political programs and manifestos. And I think this was reflected in the rightward shift of the European Parliament.

But again, as I mentioned earlier, this shift wasn't so dramatic in terms of the actual results. If you look at them at a superficial level, the crucial point is to look at the rightward shift that was imminent to or that happened within mainstream groups like the EPP, which, to be sure or to be very clear, they remain formally very much committed to the European Green Deal, and they are very serious about maintaining their pro-EU credentials.

And it remains to be seen going forward in the next coming weeks and months to what extent this was purely a tactical consideration or whether we're seeing a genuine shift towards the right. The shift towards the right in the European Parliament might actually be a bit more significant than is immediately obvious or transparent when we just look at the election results at a superficial level.

Kristen Hallam

Interesting to hear. Some themes that are common in other elections in other geographies as well. And I think we'll be talking more about climate later in our conversation. But let's step back for a moment and talk about the role of the European Parliament compared with the role of the European Commission and the Council of the EU. How do these different bodies work together?

Dijedon Imeri

One way to conceptualize is as a triangle that determines and shapes the policies and legislation of the European Union. If you want to draw parallel to a national government and the sort of traditional division of powers, the European Parliament falls more squarely into the legislative branch type of role, in that it enacts and ratifies legislation.

The European Commission is more of an executive branch and the Council of the European Union shares characteristics with both. In this triangle, the European Parliament occupies a very central role as far as it can grant or withhold the approval of the President of European Commission and other commissioners. So this will be very relevant in the coming weeks.

And with respect to the council, it is still subordinate to the council in many ways because the EU still has a lot of intergovernmental characteristics. So it's not a full-fledged union in many ways. So to take foreign defense policy, for example, these are more the remit of the Council of the European Union. But since the Lisbon Treaty, the European Parliament has been elevated in many ways to an equal footing with the council.

So these two institutions are co-legislators in a vast majority of policy areas, which range from, say, climate policy in the environment, to agriculture, to structural funds and immigration, and also perhaps most importantly, the approval of the multi-annual financial framework or the EU budget. And this is obviously very key because it determines spending priorities and policy direction.

So in this regard, the European Parliament has been elevated, and it is very influential. And through some of these channels, including the approval of EU budget, it also wields indirect influence over policy areas, where it does not have formal remit like say, for example, foreign policy, but also the enlargement process and so on and so forth.

Kristen Hallam

Thanks for putting that into context. That's really helpful for our listeners, particularly those who may not be familiar with these institutions. So back to the parliamentary election results. Do these results have any implications for either the European Commission or for the Council of the EU?

Dijedon Imeri

Yes, I think so. I mean, obviously, the most immediate impact will be on the commission. As I mentioned, the European Parliament has the power to withhold or grant the approval of the nominee of the next President of the commission and other commissioners. So it has a direct influence on the composition of the European Commission, which, of course, sets the policy agenda of the European Union. So that will be the immediate impact.

In terms of its relationship with the council here, it's a bit more complicated. Historically, the European Parliament has played the role of a progressive countervailing force to the council to take the concrete example of climate and environmental policy. Historically, the European Parliament has always advocated and lobbied for more ambitious targets, say, for example, targets for the greenhouse gas emissions cuts.

And as a result of negotiations between these two institutions, the net result has typically been targeted, has been more ambitious than if the council would have been the sole factor to decide these targets. This tension between these two institutions could potentially dissipate somewhat if the rightward shift of political groups like the EPP is genuine. If we need to see a European Parliament that is more cautious when it comes to the scope and pace of the rollout of green regulations and that might reduce the level of ambition that the EU has with respect to the green transition. So that would be one way which is interplay between the council and the European Parliament might be impacted by these elections.

Kristen Hallam

Thanks for illustrating that for us. So what are some of the potential legislative impacts of increased representation of parties that are labeled as right wing or more right wing?

Dijedon Imeri

Before I answer that question, I think it's important to stress that we're not dealing with a monolith. So there are quite a few different parties and groups that comprise this. And they are divided on a lot of issues, including on Ukraine, fiscal policy, but also at the level of political instinct. We have to remember that at a sort of very visceral level, they are quite averse to Pan-European cooperation and agreements.

And I think this fact alone will serve as an impediment to them coming together and forming a sort of united bloc. If that were to happen, they would be a very formidable bloc, I think, with around 156 MEPs. But that's a very big if, and it's not our baseline scenario. However, there are some commonalities.

And if there is convergence on these commonalities, not just within this sort of group of parties and forces that are coming in labeled as far right, but also convergence with more mainstream political groups like the EPP, that's where we can see the meaningful impact on legislation and policymaking.

This will probably be on an ad hoc basis. So it wouldn't be formalized, not least because on the EPP side, they would very much like to continue their formal cooperation with other mainstream groups and avoid affiliating with far right groups. But where there's convergence, there could definitely be ad hoc majorities in place.

Let's take one example. The majority of the legislation that comprise European Green Deal have already been enacted, but there is one important element that is yet to be decided, and this is the 2040 interim greenhouse gas reduction target. As you're probably aware, the 2030 target has already been decided. This is a 55% reduction compared to levels measured in 1990.

And then there is obviously the net zero target for 2050. But the 2040 target is yet to be determined. And back in February, the European Commission came out with a proposal to basically set this at 90%, which is at the lower band of what was proposed by the EU scientific advisers. As you might imagine, the political groups to the left of EPP have largely come out in favor of this proposal.

Those who have been critical with it have said that it's not ambitious enough, but none have wanted to bring it lower than that. In contrast to this, the groups to the right of the EPP have been critical of this proposal saying that it is harmful to industry and European competitiveness.

And interestingly here, the EPP occupies an intermediate position insofar as expressed caution and said that whatever target is agreed, it needs to take into consideration the interest of agriculture and industry. And so here you have a potential area, a piece of legislation, where there might be potential convergence between groups.

They're commonly labeled as far right and some groups in the center. And then there's obviously also the implementation phase of the European Green Deal. So as I mentioned, although most legislation has already been ratified, a lot more needs to be done in terms of supportive legislation and say, for example, for the Critical Raw Materials Act.

And here, the European Parliament might play a role in eroding or watering down some of these legislative proposals. And so that will be a key thing to look at. But again, a very central role will be played by mainstream groups like the EPP.

Kristen Hallam

It sounds like lots of moving parts for you to watch there. So Dijedon, what are the potential implications for trade policies and trade agreements with non-EU countries?

Dijedon Imeri

So in terms of trade treaties and agreements, here again, we have to remember that the institutional body that negotiates on behalf of the European Union is the European Commission. The role that European Parliament plays in this regard is obviously in the approval of the next commission. So not just the president of the commission, but also, say, the trade commissioner, et cetera.

And so the composition of the next European Commission will very much help us understand the travel direction. But it's important to put the European Parliament elections in the broader context. And here, it's interesting to see that there's been a lot of momentum behind a more protectionist turn, certainly not at the level of what we've seen in the United States, for example, but in that direction.

And this is how we should interpret the recent decision by the European Commission to introduce tariffs on Chinesemanufactured electric vehicles. This is a provisional measure, but ultimately, it will be determined and decided by the Council of the European Union.

The general shift seems to be in this direction. So probably this will continue to be the theme going forward as EU policymakers seek to shield and nurture sectors that are directly exposed to international competitive pressures.

Kristen Hallam

Again, it's interesting to see the commonalities, political issues, elections in other geographies, particularly that protectionism theme, as you mentioned, a big one in the U.S. So how do you see the European Parliament's role in shaping the EU's foreign policy agenda, particularly in relation to countries like Ukraine, which you mentioned earlier? 

Dijedon Imeri

Here, again, it's important to stress that the formal responsibility, as far as foreign policy is concerned, rests with the Council of the European Union and the European Commission. So these are the bodies that represent the EU on the international stage. And a lot of the instruments at EU's disposal also rest with these two institutions.

So if we take Russia-Ukraine, for example, a lot of the measures that the U.S. brought to bear against Russia are the sole prerogative of the Council of the European Union, notably sanctions. So this is an area which the European Parliament doesn't have influence over as such.

And we can also see this in the context of how the European Union has approached the Western Balkan region as well where the European Parliament has advocated a tougher stance against member states that haven't aligned their foreign policy with the EU because of its limited instruments and ability to respond to these countries. There hasn't really been able to put any meaningful pressure on these candidate countries.

But there are ways in which the European Parliament, at least in theory, can wield a lot of influence. And I mentioned earlier at the beginning of our talk that the European Parliament stands on an equal footing with the council as far as the EU budget is concerned. So the budget has to be approved by both of these institutions, by both the Council and the European Parliament.

This is a channel through which the European Parliament is able to influence foreign policy. If you take a very concrete example, earlier this year, there was a revision to the EU budget, which included the Ukraine facility worth around EUR 50 billion, which is obviously very crucial to the Ukrainian war effort. That had to be signed off, not just by the council but also by the European Parliament.

And so that will be a potential area, where the European Parliament could, in theory, play an obstructive role. But with respect to Ukraine specifically, again, it's not likely to happen. Most of the political groups in the parliament are still very much in favor of continued support for Ukraine. And this includes even elements of the far right.

So going back to the earlier theme, but we're not talking about a monolith here, so the European Conservatives and Reformists Group, for example, which includes Italy's Brothers of Italy, are much more sympathetic to provision of continued military and financial support for Ukraine. This stands in contrast to the Identity and Democracy group, which is a bit more skeptical of this and have lobbied for peace negotiations with Russia.

So they're not really united on this particular issue. So with respect to Ukraine, for the time being, we'll see a lot of continuity. And this will be especially the case if the council's nominations for the President of the European Commission, namely Ursula von der Leyen and the nominee for the next top diplomat to replace Josep Borrell, Estonia's Kaja Kallas, if they are approved, then we'll see a high degree of foreign policy continuity.

Kristen Hallam

More things for us to watch out for there.

Dijedon Imeri

That's right.

Kristen Hallam

Yes. Dijedon, how do you see the European Parliament's role in influencing and determining the content and the scope of rules and regulations that are exported abroad? Because, of course, the EU can be a bellwether for regulations in other countries and have a lot of influence, particularly on climate.

Dijedon Imeri

Yes, indeed. And I think this also dovetails with your previous question. So this is another channel through which the European Parliament can actually influence foreign policy because to the extent that we can speak of a coherent foreign policy strategy of European Union, I think climate issues play a very significant role.

The EU has sought to carve out a leadership role for itself as a proponent for the green transition both at home and abroad. This is very evident if you look at the design of policies like the Carbon Border Adjustment Mechanism, which really seeks to incentivize the adoption of similar regimes abroad.

The European Parliament has played a very crucial role in terms of increasing the level of ambition as far as regulations are concerned. And then by extension, also the level of ambition for the best practices and regulations that the EU seeks to export abroad as well.

And so if this kind of ambition is lowered as a result of a rightward shift, which again remains to be seen, then by extension the regulations and best practices, the ambition of those of the EU seeks to export will also be lowered. Another area in which the European Parliament plays a very important role is in the area of green aid. As I mentioned, the European Parliament also is a co-legislator of the EU budget.

So if we see a European Parliament that is less willing to contribute to things like the loss and damage fund, then that might also undermine the EU soft power abroad, especially with developing countries. And that might undermine the EU's leadership status as far as the green transition is concerned.

Kristen Hallam

So what indicators should businesses and investors monitor to assess the evolving risk environment in the EU following the elections? And you've already hinted at a few of them.

Dijedon Imeri

The key indicator will be the composition of the next European Commission. And on the one hand, this might seem like a straightforward thing. Obviously, as I mentioned, between them, the mainstream pro-EU bloc retained its parliamentary majority.

We're talking about the EPP, the Socialists and Democrats and the Liberals, who have just under 400 MEPs, which, in theory, should be more than enough. Ursula von der Leyen, who was just nominated for a second term last week by the Council of the European Union, would only need a simple majority in the European Parliament, so 361 MEPs.

And this vote will maybe happen as early as this month, so at the first plenary session of the European Parliament on the 18th of July. But we have to remember that some of the political parties that comprise this mainstream bloc, have voiced skepticism about supporting von der Leyen again.

So assuming a defection rate, she might have a very thin margin indeed to be reappointed. Just for context, when she was approved, the first run in 2019 for her first term, she did so with a very thin majority of 9 MEPs. And so yes, it's a very tight race indeed for her.

And so it might be the case that she cannot rely exclusively on the support of her allies as she might indeed have to venture outside of this bloc to look for a sort of fallback and this presents her with additional challenges. So if she were to go to the left of the EPP and she were to court the Greens, for example, this would risk incensing her own CDU party, who have voiced skepticism about collaborating with the Greens.

Conversely, if she were to court groups to the right of EPP, so there have been speculations about her collaborating with the Brothers of Italy, Italian Prime Minister, Giorgia Meloni, that would probably alienate the Socialists and Democrats and Renew Europe, both of whom have said that they would discontinue, let's say, their cooperation with von der Leyen and the EPP if that were to happen.

Obviously, this is a secret ballot, so that gives her some maneuverability to cobble together some form of a majority of support. But again, she is in a very difficult situation with respect to achieving this level of support. And depending on which way she goes, whether she goes to the right or to the left, that would inevitably also entail striking some type of bargain, which has ramifications for things like the level of ambition going forward for green regulations, et cetera.

Kristen Hallam

I'll put that date in my calendar for sure. So it's time to wrap up our conversation, Dijedon. Any final thoughts for our listeners?

Dijedon Imeri

It would be remiss of me to not talk about the obvious one is perhaps beyond the scope of this particular conversation but it’s still worth mentioning, the French elections, the snap elections rather, which were triggered as a direct consequence of the European Parliament elections.

And I think this is a very good example of how the European Parliament elections feed into the dynamics at the national level. And obviously, depending on the outcome of what happens in France, that will feed back into what happens at EU level.

So there is this dialectical relationship. And this is very important because France is not any member state. I think a Eurosceptic turn in smaller member states would be better absorbed. But France is, alongside Germany, one of the two biggest economies and founding members of the EU that has been a driving force behind the European integration.

And so a reversal of that would have huge implications, assuming that the National Rally, the far right party that came on top in the first round of elections. The second will be held on this coming Sunday. But assuming that they remain true to the anti-EU agenda, that could spell trouble for the future of the European project. So this is a very big one to consider and look out for.

Kristen Hallam

Thank you for flagging that. We are planning a podcast episode on the outcome of the French elections, the final outcome, so something to stay tuned for. And now all that's left for me to do is to thank you so much, Dijedon, for taking the time to share your insights with us. Thank you for listening to The Decisive podcast from S&P Global. Please subscribe and join us for next week's episode. Until then, stay curious and informed.