The Socialist/Green contingent has declined considerably from 44% of the total to 33%, while the Center-Right has increased moderately, from 40% to 45% (the Group III - liberals and miscellaneous - is a bit overstated for 2009, because many of the small parties haven’t yet sorted out which European grouping they will align with). Individual countries swing left and right, as in the United States, but there are enough countries in the EU for these swings to cancel out, leaving only a steady movement towards the Center-right.
One of the causes of this movement is the expansion of the EU - with the exception of the Scandinavian countries, which entered in 1995, most of the new countries are former members of the communist bloc, with an aversion to many aspects of government control. Nevertheless, it’s completely consistent across all four elections, not a temporary mood swing. What’s more, it’s substantial enough to make a big difference in EU policymaking, taking it strongly in the direction of free markets, if not necessarily in the direction of smaller government. A coalition majority sufficient to push through legislation would have been socialist-dominated in 1994; it would now be center-right-dominated.
Investors would do well to bear this trend in mind. Productivity growth has been generally slower in Western Europe than in the United States - but not much slower. In Eastern Europe, however, productivity growth has run at East Asian levels of 5% per annum or more, as the generally excellent education systems and heavy foreign investment of those countries has allowed them to catch up with the rich West. Overall, it’s likely that European productivity growth will speed up in years ahead, translating into faster growth in the overall economy, as EU policymakers remove additional trade barriers and pursue reforms that are modestly free-market in focus.
In the United States, meanwhile, the Barack Obama administration looks likely to substantially increase the government’s share of gross domestic product (GDP), taking the U.S. economic picture much closer to that of Europe. That may cause U.S. productivity growth to slow to European levels. Of course, as investors we would pay more for an increasing productivity growth trend than a declining one - which is why it is strange that most Price/Earnings (P/E) ratios in the EU are below the 13.6 average of the U.S. Standard & Poor’s 500 Index.
To celebrate the EU election result - or to position yourself for the region’s favorable prospects - you might look at the Vanguard European ETF (NYSE: VGK), which tracks the Morgan Stanley Capital International Europe Index. With net assets of $1.54 billion and a Price/Earnings Ratio of 8.2, it’s a way to get into a huge market on a bargain basis.
