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The 2024 European Parliament election, held from June 6 to 9, represents a crucial turning point in the economic and financial landscape of the European Union, marking a decisive shift to the right with the European People’s Party (EPP) emerging as the dominant force in the European Parliament. This shift has profound implications for the future economic policies and stability of the EU. The eurozone’s economy, already grappling with sluggish recovery and a significant downturn in German production, faces new challenges as the political landscape shifts towards more conservative economic governance. The Composite Purchasing Managers’ Index (PMI), which has been persistently below 50, reflects a mild contraction and highlights the region’s struggle to regain momentum amidst lingering impacts from a severe energy shock and insufficient fiscal stimulus compared to the more robust recovery in the United States. The shorter debt maturities in Europe have exacerbated the situation, as interest rate hikes are felt more acutely, contributing to a fragile economic outlook.

Inflation, which has recently peaked, is now on a downward trajectory, with headline inflation in the eurozone falling below 3% and core inflation slowing to approximately 3.5% year-over-year. High-frequency measures suggest an even steeper decline, with core inflation on a three-month annualized basis dipping below the European Central Bank’s (ECB) target of 2%. This declining inflationary trend provides a glimmer of hope, suggesting some relief for consumers and businesses alike. However, the new political environment resulting from the elections introduces a layer of complexity that could influence the direction of these economic trends. The EPP’s dominance, likely leading to Ursula von der Leyen’s reappointment as the President-designate of the European Commission, signals a potential shift towards tighter fiscal and regulatory policies aimed at ensuring economic stability and curbing any resurgence of inflation.

The election results underscore a broader realignment in economic policy priorities, potentially leading to a greater focus on national agendas and looser fiscal policies at the country level. This shift could result in increased tensions between individual EU member states and the European Commission, as nations may pursue more independent fiscal strategies that could create uncertainty in financial markets. The rightward shift in political sentiment across many EU countries raises concerns about the bloc’s future economic coherence and its attractiveness to international investors. The potential for policy divergence within the EU, coupled with a less predictable political environment, could diminish investor confidence and lead to increased market volatility.

The EPP’s ascendency and the corresponding surge in support for right-wing parties signal a move towards a more conservative economic stance that prioritizes fiscal discipline and economic prudence. However, this shift also brings with it challenges, as more stringent fiscal policies could stifle growth and lead to renewed austerity measures that may not sit well with a public still recovering from the economic impacts of recent crises. The election outcome necessitates a delicate balancing act for European policymakers, who must navigate between maintaining fiscal responsibility and fostering economic growth and stability.

At the national level, the election’s results may embolden governments to pursue more aggressive economic policies tailored to their domestic needs, potentially at the expense of broader EU cohesion. This realignment could lead to increased fiscal spending in some countries, aimed at boosting domestic growth and addressing social issues, but it also risks exacerbating tensions with the European Commission over budgetary constraints and fiscal compliance. The resulting uncertainty could impact bond markets and lead to higher borrowing costs for countries perceived as deviating from EU fiscal norms.

In the longer term, the political shift could reshape the EU’s approach to economic policy, with a greater emphasis on competitiveness, deregulation, and market-oriented reforms. This shift might foster a more dynamic economic environment, encouraging investment and innovation, but it also poses risks if not carefully managed to avoid deepening economic disparities among member states. Policymakers will need to address these challenges proactively to ensure that the EU remains a cohesive and attractive economic bloc on the global stage.

The 2024 European Parliament election thus represents not only a political realignment but also a critical juncture for the European economy. The rise of the EPP and the broader shift to the right underscore a growing preference for economic stability and conservative fiscal policies, which will shape the EU’s economic landscape for years to come. The task ahead for European leaders and institutions is to manage these changes effectively, balancing the need for fiscal discipline with the imperative to support economic recovery and growth across the region. The economic and financial implications of this election are significant, heralding a new era of economic policy that will require careful stewardship to ensure a stable and prosperous future for the European Union.

Written by: Nenad Stekić