Thread by @Mij_Europe

As Easter ends, I find myself on West Coast (SF now; LA from Weds) talking to US investors about EU political risk. It's an interesting moment for EU - Germany, France, Italy & Spain are all "in play" - and EP elex could impact pol stability in each. Thread on how we see things

In Germany, atmosphere in Govt is stable & both CDU & SPD have incentives to avoid an early divorce, but there's plenty of reasons why Grand Coalition might still unravel this year (we think 45% probability)

Situation is particularly bad for SPD, who've been overtaken by Greens. CDU has been providing SPD with minor concessions to keep them in Govt, but bad showing in EP or 4 upcoming regional elex might encourage them to exit. The SPD's "halfway consultation" might be another reason

@akk rightward shift to strengthen her relationship with the CDU's conservative wing & CSU has also alienated the SPD. Officials also think Grand Coalition is running out of common ground (having implemented 40 major initiatives in year 1); what's left to do is more controversial

So don't look to Berlin for EU leadership this year. Germany is likely to remain inward looking; with lots of uncertainty about the fate of the Govt, Merkel & @akk as her successor hanging over Berlin & EU

What about France? @EmmanuelMacron will announce conclusions of the "Great Debate" on Thurs. While initially outraged that the Govt's proposals were widely leaked, senior officials now believe Macron has a "double take" which he could ultimately use to his advantage

So on Thurs Macron will emphasise leaked ideas which received a broadly positive response; downplay those which fell flat & add a few new ideas/details. The leaks - not denied by Elysée - suggest Macron has chosen radical end of policy options to try & end Yellow Vests rebellion

Overall intention of Govt is to respond to demands for more direct democracy & a fairer tax system revealed by over 3m contributions to Great Debate. This has been well received by French media & opinion polls but inevitably rejected by spokesppl for flagging Yellow Vest movement

But poor turnout (only 9K in Paris last Sat) & violence could destroy remaining sympathy for YV. & while weekly protests will continue, they no longer represent an existential threat to Macron's Presidency. Reflected in polls for YV candidates in EP elex (~2%). Macron's LREM ~22%

So Yellow Vests are dead but not yet buried. And while victory for Macron's LREM in EP elex - possible but uncertain - would have little practical effect on his ability to govern, it would symbolically relaunch his Presidency. Much will depend on Macron's performance on Thurs

As Macron's fortunes rise, so do @matteosalvinimi. We continue to see Italy as EU's biggest risk in short & medium term. Due to tensions between coalition partners ahead of EP elex, risk of early elex, economic slowdown & fiscal risks, which'll resurface in Sep due to 2020 budget

Disparity between League & 5S continues to grow (5S now at ~20% compared to 32% last year; League > 30%, approaching 35%, albeit now with possible ceiling). Creates incentives for League to pull plug on coalition and force an early election (20% risk, rising to 40% by year-end)

But 5S has proven a malleable partner; a coalition with @berlusconi would be more diff for Salvini. Party seen to trigger Govt collapse also usually punished by voters. Timing also a issue - elex aren't held in Summer as turnout would be low; nor in Autumn to avoid budget cycle

Still, a stronger performance by League in EP elex would make early elex more likely. As would a deteriorating economic outlook (as it would make it harder for Govt to navigate 2020 budget debate & increase risks for League - as slowdown will also undermine their support too)

€6m question: would a Salvini-led right wing Govt be greater risk to EU than current 5S-League coalition? Many senior officials believe League-led Govt would adopt more sensible economic policy. But Salvini's ambitions for EU obviously concern many in Bxl, Paris, Berlin & beyond

Spain also has elex on 28Apr. The Socialists (PSOE) have consolidated their lead, will probs secure largest number of votes & seats. But PSOE’s rise comes at expense of more plausible coalition options. Basecase remains failed talks & repeat elex. But no market/econ impact likely

There's also obv lots going on in Poland & Hungary. We are relatively constructive on Poland (PiS is under pressure ahead of EP elex & looks likely to lose its majority in parliamentary elections in Nov). Bigger & trickier risks in Hungary, as Orban has until at least 2022

So what does all this mean for EU? A few tentative conclusions. 1/ Post EP elex, @EmmanuelMacron & @matteosalvinimi are likely to be the two leaders with most agency in EU. 2/ Germany likely to remain inward looking; lots of uncertainty about fate of Govt, Merkel & @akk

3/ This likely hurts @ManfredWeber and benefits @MichelBarnier for @EU_Commission Presidency & Macron's agenda for a "more protective" EU. This agenda will likely be key to next economic mandate of COM (reform of trade & comp policy); MFF, migration, SM will also be priorities

4/ More "€ deepening" only likely in event of crisis eg in Italy; 5/ in these circumstances treaty change also becomes more possible (to fix €; but to also address EU's relations with awkward 3rd countries eg UK, Turkey, Switzerland). Will update #Brexit views Thurs/Fri /ENDS