European Elections: Its economics vs. polls – Goldman Sachs

Lasse Holboell Nielsen, Research Analyst at Goldman Sachs, explains that populist victories at the expense of mainstream parties in Europe’s upcoming elections would have profound market implications and quantify the probability that current heads of governments will be re-elected using a combination of economic factors and opinion polls.

Key Quotes

“The Dutch experience validates our approach. Robust economic data pointed ton high re-election prospects for PM Rutte, at around 65%-70%. Another Rutte-led government in the Netherlands is likely following the March 15 election.”

“Our model suggests that the re-election prospects of: (i) the Socialist government in France (in the June legislative elections rather than the May presidential election); (ii) the centre-right government in Norway (at the September election); and (iii) the centre-left government in Italy (if elections are called by end-year) are poor. Owing to low real wage growth and poor labour market performance, we find re-election probabilities of around 35%, 20% and 35%, respectively.”

“On the basis of economic data alone, the re-election probability of Chancellor Merkel at September’s federal election in Germany is around 55%. Adding information from polling data reduces this probability markedly, to around 25%.”

“More generally, we find that both voters’ economic conditions and poll data help predict governments’ re-election prospects in DM economies over the past 25 years. Over recent years, the accuracy of our economics-only model in predicting re-election is high (at 83%). But our models relying on polling data have performed somewhat less well.”

“In assessing the political outlook, markets are sensitive to polls at present, while paying less attention to economic drivers of electoral behaviour. By contrast, our results imply that it is economics that matters for election outcomes.”

“Of course, these estimated probabilities should be seen as only one input into an analysis of likely election outcomes. Our estimates capture historical patterns, but if voters’ inclination to reward or punish government shifts as the dimensions of politics increasingly move away from the traditional left / right axis, our model may be less valid.”