Authored by Michael Cembalest, JPMorgan Chairman of Market and Investment Strategy,

For investors, one potential landmine is a dramatic change in Europe’s political landscape just as the continent is finally posting positive growth again. Why would anti-establishment parties be rising when its economy is improving?

At our JP Morgan Asset Management Global Investor Summit and International Council meetings in October, we discussed this issue at two client sessions, one with Condoleezza Rice and the other with Henry Kissinger. The charts below are a synopsis of those discussions. Like Harold Pinter’s play Betrayal, this story is best told backwards; starting with what’s happening now, and finding our way back to root causes.

Why is this happening now? And will Trump’s election amplify the confidence of such parties that a global anti-establishment movement will continue?

The rise in anti-establishment parties can be traced to low economic growth in Europe, but also to the growth in asylum-seekers and illegal migration, and concerns about terrorism.





The spike in asylum seekers can be traced to the war in Syria. While local combatants have inflicted a lot of damage, the recent involvement of Russia has arguably worsened the situation for many civilians. As shown, Syrian civilian casualties from Russian bombings are now roughly equal to ISIS inflicted casualties.



Why wasn’t Europe prepared to act more aggressively to counteract Russian involvement in Syria, given the impact of Russia’s involvement on Europe itself?

One answer: the gradual disarmament of Europe.

A second answer: weak growth in Europe (some of which can be traced to the adoption of the Euro itself), which detracts from its ability and willingness to meet NATO spending targets.

The third answer: growing European reliance on Russia for its energy needs (the chart incorporates both crude oil and natural gas), a stark contrast to the 1980’s when Europe produced more than 3x the amount of oil and gas imported from Russia. Absent expanded European gas production and/or a shift from Russian pipeline imports to more expensive LNG imports from the US/Australia, European reliance on Russian energy will probably grow in the decade ahead.

Without sufficient economic or political leverage, Europe and the West have essentially acted as shock absorbers to Russian involvement in Syria. There’s a line of thinking that goes something like this: if we do not have leverage, the next best option is a better working relationship with Russia, with the West’s best interests at heart [oddly enough, a generous read of Trump’s view on Russia could be interpreted this way]. At our conference, there was disagreement on this issue that involved the history of Russia and the West, the impact of the Iraq War on US willingness to use military force, and the costs/benefits of NATO expansion to Russia’s borders.

Either way, both Secretaries of State agreed that the facts on the ground have eroded to Europe’s detriment, and that more European election surprises lay ahead. While Trump’s election may be bullish for US equities in the near term, it may be bearish for Europe, since if his success translates into more success for anti-establishment parties, that could raise the spectre of a disruptive dismantling of the Eurozone itself. These parties are also generally not in favor of the kind of deregulation and tax cuts proposed by Trump.