Italy pushes EU further into the crisis and Nordic political stability – Quantified

After the Brexit vote, the Austrian, Eastern European and Italian elections, it is clear that the EU has some issues to tackle. European citizens are expressing their concerns. The question is if the remedies will be in place in time to avoid a too damaging blow to the union and the Euro (EUR) potentially through bigger anti-EU parties coming into power.

The less the political parties in power have been able to deal with current issues and at times pretending there are no problems stemming from it, the more the anti-immigration and anti-EU parties have grown in size. We have seen the Socialdemocratic parties weakened in several countries like Greece, France, Germany and the Netherlands.

Earlier this year I wrote an article about the political stability the Nordics have historically been offering and thoughts around the Nordic currencies. Some of my fears for EU have materialised since then, particularly the Italian election.

The new government of Italy is clearly anti EU (and establishment) and anti immigration. They are now refusing NGO vessels with migrants to enter Italian ports, and this is putting the EU on a real test.

Can these difficult times for the EU quickly disappear? This is not likely, even if there was political will, it will take time to turn the EU and also create confidence among the citizens that today vote to show their protest.


Nordic political stability compared to European countries

Several of you have asked me if we could quantify the Nordic political stability compared to other countries and regions, and we can!

GRAPH 1 – Political stability and absence of political violence and terrorism (1998 – 2016)

Nordic political stability

Source: The World Bank (http://info.worldbank.org/governance/wgi/pdf/pv.pdf), Alfred Berg (Nordics is the GDP weighted sum of the individual Nordic countries), Rank 100 is best, Rank 0 is worst, June 2018

As seen in the GRAPH 1, the Nordics stands out in terms of political stability since a long time compared to big European countries. Two years have passed since the World Bank updated this data, and things have happened since then around the world, both changes in the political landscape and politically oriented violence in the form of terrorism, but not that much in the Nordics, with the exception of the 2017 Drottninggatan Terror in Stockholm, Sweden.

As a side point, it is interesting though to see that all the countries and regions in the graph are on a falling trend as a group, is it the political stability that has been falling or is it the politically motivated violence like terror that has been increasing?

How come the Nordic political stability stands out as so much?

In the Nordics, we have

  • a long history of coalition governments,
  • a history including minority governments,
  • typically main parties that are all close to the European political centre,
  • a history of valuing pragmatism over ideology,
  • strong social models, with strong social welfare and
  • high trust in our efficient public services asking for high taxes that we pay with a smile.

To make it simple, the main political parties tend to agree rather “easily” and the average elector is in general quite happy about this and her/his life.

Can we expect this to continue? Yes, I think we can as most of the above explanatory factors are stable over time due to the deep cultural links.

Denmark, Finland and Norway have stable coalitions that agree on EU/EEE adherence and on the immigration policy. Sweden has a coalition that turned painful due to the 2015 immigration wave, where the different parties in the coalition have taken very different stances in the matter.

The next potential indicator of the Nordic political stability – Swedish elections

Swedish elections will be held in September this year. The current opinion polls show a weakening Socialdemocratic party (S) and a strengthening immigration and EU sceptic party, Sverigedemokraterna (SD). Sweden stands out as the Nordic country where the size of the immigration was by far biggest per capita and where the real discussion on how to handle the immigration took the longest to start, this can explain why SD is growing so much in the polls. Anyhow, I think Sweden is likely to find a way to cooperate among the biggest parties to continue the calm river of Swedish politics and by this contribute to the overall Nordic political stability.

Why is political stability important?

Political stability gives citizens and companies visibility on the environment they operate in and that impacts them, this creates confidence. Confidence is great for investments as you can apply a lower risk on the future cash flow. Good investments are good for company profits, for employment and GDP growth.

How can this be played through investments?

The important point here is the Nordic political stability relative to the EU and the risk of decreasing political stability in the EU and potentially following doubts about the future of the EU and the Euro.

This can make investors looking to diversify away from the EUR to other floating European currencies. The Norwegian Krona (NOK) and the Swedish Krona (SEK) are both historically weak to the EUR and now may be an opportune moment to do this diversification out of the EUR into the NOK and the SEK.

Other articles discussing the Nordics and Nordic currencies:

1 The Norwegian Central Bank has little control of the Norwegian Interbank rates

2 Potential global trade war – Nordic exports and currencies

3 Weakening of Nordic currencies due to differing growth prospects?

4 Nordic Stability vs. European Instability? Italy next…

5 Why is the Norwegian Krone so weak despite the stronger oil price?

6 The Nordic housing market: a slowdown but no collapse

Dag A.D. Messelt
Head of Nordic Investment Specialists and
International Business Development
BNP Paribas Asset Management – Alfred Berg

On the same subject:

The Norwegian krone’s correlation to the Brent oil price

«When the oil price tanks eyes turns to the NOKie». We often see the Brent oil price as a factor for explanation of the moves in the Norwegian krone (NOK) versus other currencies, but how does it really work over time? We have been looking closer to this relationship and have some interesting findings. These findings can be split in three levels:

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