GeoLegal Weekly #21 - Halftime in the Biggest Election Year Ever

Results from India, South Africa, and Mexico with the UK and EU up next. Plus some thoughts on the US justice system post-Trump verdict.

There are over 70 elections this year around the world and this creates a mess of political risk for businesses of all sizes (see “Political Stew” in my 2024 GeoLegal Outlook). As we reach the midpoint of the year, 31 elections are behind us and we have some major elections looming close on the horizon. The overall theme seems to be voters looking for change or at least diminished enthusiasm for incumbents. We’ll spend about 2 minutes on Trump and then hit you with some quick thoughts on the EU, UK, South Africa, and Mexico. Results are also in from India - while Modi won a smaller mandate than widely expected, geolegal risk implications are pretty much the same as those I outlined in my guide to the election from a few weeks ago.

US Justice System

I could write an entire essay on the impact of the Trump conviction on the 2024 US election or on the US legal system. But I’ll resist doing that as I suspect you’re fatigued from other people’s hot takes and there’s a lot more going on in the world this week (feel free to reply if you want to trade deeper views on this).

My brief summary on this is:

• Was this a politically motivated prosecution? Sure. District Attorneys are elected in Manhattan, have party affiliations and exercise some amount of influence over whether and how a case progresses. There has been a concerted effort to prosecute Trump in anti-Trump states and no one should buy the “just doing my job” explanations. That the crimes themselves had some amount of electoral motivation and implication is also worth noting. Still, while the choice to prosecute or not may be political, it is not tantamount to planting evidence of a crime. A felony is a felony, even if under novel legal theories. And 34 felonies are 34 felonies.

• Does the conviction damage the US legal system? Yes. I’ve been banging on and on about how legal systems are being asked to carry political water and this will result in severe damage. Here we are. Republicans point to the act of prosecution as weaponization of the law for political purposes. And Democrats point to Republican denials of the verdict as undermining the rule of law and respect for the legal system (as Biden put it: “The American principle that no one is above the law was reaffirmed. It’s reckless, it’s dangerous, it’s irresponsible, for anyone to say this was rigged just because they don’t like the verdict.”) The net effect is damage to the standing of the US legal system in part by convincing a chunk of the population that the legal system is rigged, corrupt and weaponized (as Trump put it, in video you can watch below: “This was a rigged trial by a conflicted judge who is corrupt”).  It also perpetuates a cycle where both sides feel more comfortable using the court system for political retribution even if they publicly denounce it when they are on the receiving end. 

• Can Trump still be president? There are a lot of jobs you can’t get with a felony. President (and lawyer in most states) is not on that list. More interestingly, normal felons would have a problem voting in Trump’s home state of Florida except for the fact the governor says he’ll make sure it’s not a problem for Trump. 

• Does the conviction impact the election? Absolutely. I come down on the side that it will have numerous marginal effects that aggregate to being meaningful. Reuters/Ipsos found that 10% of Republicans would be less likely to vote for Trump given the conviction. I think a few more traditional corporate Republicans will be less likely to stand with Trump given the conviction. But Trump also raised $150mn in donations since the verdict was handed down. I think this probably nets out in Democrats’ favor (though I still am struggling to see how they match the voter enthusiasm of Republicans, 90% of whom are willing to look past 34 felony convictions to retake the White House.)

Now, to the rest of the world.

South Africa

As we saw with the diminished support for Modi, many voters around the world are disillusioned but not ready to fully throw their governing parties out. 30 years ago, the African National Congress, led by Nelson Mandela, won power with more than 62% of the vote in the first post-Apartheid election. In those 30 years, per capita income rose eightfold in China, more than threefold in India, but a mere 40% in South Africa.  Unemployment — already above 20% in 1994 – has now risen to 32%, and the simmering disappointment has led the ANC’s vote to collapse to 40% from 58% in 2019. While it remains the largest party, it must now form a coalition and the choices here are stark. 

It could move right, finding support from the Democratic Alliance, a party that has its origins in the centrist, legal (and largely white) opposition to Apartheid. The choice would reassure markets but could exacerbate discontent among the ANC’s core electorate.

Or the ANC could move left towards a new party led by former President Jacob Zuma (ousted for corruption and currently claiming the results of this election were manipulated) and/or towards the Economic Freedom Fighters led by Julius Malema, a far left figure. But any such move may lead to a revolt in financial markets worried about the nationalization of some industries and perhaps even the expropriation of land owned by white farmers (which would spark comparisons with Zimbabwe).  This story in the Financial Times suggests the depth of the discord within the ANC on the next political steps. 

Meanwhile, an attempt by Australian mining giant BHP to purchase South Africa’s storied Anglo-American failed just last week—but even here, BHP chiefly wanted Anglo’s copper properties in South America and wished to steer clear of regulatory risk in South Africa itself by forcing the divestiture of Anglo’s local assets. 

These elections are a reminder to corporations that economic outcomes translate into political ones that can then transform the entire legal order under which they operate. Even if the ANC leadership chooses to go the more market-friendly route, that path has to alleviate the economic stresses that led to its current debacle. An embattled government (possibly operating without a parliamentary majority) will be under pressure to deliver results. And for corporations operating in South Africa, that could mean greater political and regulatory scrutiny over actions seen as touching on the neuralgic points of the country’s political economy–unemployment, black economic empowerment, and concerns over capital outflows among others.   

United Kingdom

A similar story of disillusionment and the erosion of policy freedom will likely be seen in the UK, where PM Rishi Sunak has called a general election on July 4. The polls suggest a historic drubbing, with the ruling Conservative Party running 20 points behind Labour. The Tories have been in power since 2010, when they ousted Labour’s Gordon Brown after the financial crisis. In 2016, PM David Cameron succumbed to his party’s Euroskeptic ultras by organizing a referendum on Britain leaving the EU. 

The next 8 years saw the party tear itself apart on how “hard” Brexit should be as it ran through PMs like Italy’s Christian Democrats or Japan’s LDP in their fissiparous heydays. Underneath it all, the economy sputtered along for more than a decade. 

Brexit did not lead to a promised boom or to the dissolution of an EU inspired by Britain’s example, but nor did the economy collapse. What happened instead was mostly a gradual shrinking of political and economic horizons, a condition that likely PM Keir Starmer will likely inherit next month. 

Starmer will likely tone down the rhetoric on relations with the EU and allow more regulatory alignment in some areas, easing trade.  But there is little appetite in Labour to tackle the third-rail of UK/EU politics— Freedom of Movement (essential to belong in the single market) — and still less to contemplate re-entry into the EU. 

Meanwhile, corporate Britain seems to be lying low, a likely reflection not just of prudence but also of discomfort with what both parties have to offer, though only one of them has actually had a PM (then foreign secretary) say “[expletive deleted] business.” And the debacle of the Truss mini-budget of late 2022 suggests that even financial markets have become less indulgent of tax-cuts as a prod for unspecified supply-side miracles, at least in the political context of the UK. These may not be dire days ahead for Britain, but it looks like there will be more dour ones.

Britain prides itself on being a business version of Wimbledon - host to the most important players playing the most important matches in the world, even if they are from other countries. What will these developments mean for the UK’s position as a leading center for global markets and the services infrastructure - like legal- associated with them? A recent note by trade expert Samuel Lowe points out that the UK’s most successful export is “other business services,” coming in at 176 billion pounds annually, even higher than the 75 billion pounds of financial services exports (together they leave goods exports completely in the dust). Here too, the story would seem to be more whimper than bang.

In the wake of Brexit, there has been a significant drop in the number of EU nationals resident in Europe, but among professionals in services, the “hassle” factor has shown up in the number of EU nationals flatlining (it has fallen in other occupations) even as non-EU participation has picked up. The EU has managed to repatriate some part of risk-taking by EU-headquartered banks to the continent, but BIS statistics showed that London remained the largest center for global currency trading, though its share of daily turnover had dropped from 43% in 2019 to 38% in 2022, with the US picking about 3%, and the rest mostly going to Germany, France, and Switzerland. And the enormous legacy and network effects from UK law being one of the two (along with NY state) dominant legal codes behind cross-border debt issuance are likely to persist.  Keir Starmer, meanwhile, seems less likely than his predecessor Jeremy Corbyn to kill the fiscal goose nesting in London and the Southeast that generates more than a third of UK GDP.

You can watch the Sunak - Starmer debate below.

EU Elections

The EU itself has elections for the European Parliament from June 6-9. EP elections are typically a lower-turnout affair than national ones (and notorious as a vent for protest votes) but this round will still have two important consequences.

First, the European Commission (the powerful pan-EU technocratic body that oversees the single market) needs the confidence of the parliament, a process that will lead to lots of inter-party and inter-state horse-trading. This horse-trading over key appointments to the Commission will matter to the rest of the world as well, because the EU has long styled itself as a “Regulatory Superpower” whose reach is extraterritorial. Those pop-ups asking if you will accept cookies even if you are far from Europe are a result of the EU’s General Data Protection Regulation (GDPR), and a similar dynamic led to the restructuring of investment bank research desks towards “unbundling” in the wake of the EU’s Markets in Financial Instruments Directive (MiFID 2).  And for all the snide complaints (or alternately as a result of the fact) that the EU’s regulatory superpowers are the obverse of its relative economic and technological underperformance, the EP has been the first to deliver legislation on AI regulation that will impact the rest of the world. As a recent note by the Brookings Institution mentions:

the “EU is establishing a European AI Office within the European Commission to enforce, in particular, rules on general-purpose AI models, strengthen development and use of trustworthy AI, and foster international cooperation…EU policymakers anticipate this centralized structure to be ‘the first body globally that enforces binding rules on AI and is therefore expected to become an international reference point.” 

And second, these elections could mark another stage in the gradual process where large chunks of the European hard right move from skepticism about EU membership (and specifically the single currency) towards issues of culture and migration as their key issue.  The champion here is Italian PM Giorgia Meloni, who has combined harsh anti-immigration rhetoric and measures with a pro-EU, pro-Euro, pro-Ukraine message that has outflanked rival Matteo Salvini in both popularity and power. Meanwhile, the German CDU (which is in the center-right of European party families) seems to be moving in a similar direction on cultural issues as new leader Friedrich Merz sheds Angela Merkel’s legacy on refugees. France’s Marine le Pen has made a similar move on the euro and EU gradually over a decade, but remains focused on immigration — still more of a  rhetorical “sovereignist” and “wobbly” on Russia.  And if her party does well in the EU elections (as it almost certainly will), it would reduce the prestige of French President Emmanuel Macron, the most vocal champion of deeper EU integration on economics and security. 

But even given these reservations, a further truncation of overt Euroskepticism to the fringes of extreme left and right would reduce what seems increasingly like an overhyped tail-risk. These elections could continue the muddle-through grind that settles with incremental (and occasionally technocratically opaque) measures to keep the EU and Euro shows on the road.  The (now even broader) middle of EU politics seems to understand even more than ever that between what’s happening in the US, China, and Russia, it must hang together lest it hang separately—a Franklin moment, one might call it. 

Mexico

With her overwhelming (58% of all votes cast) victory in Sunday’s Presidential election, Mexico’s Claudia Sheinbaum would seem to be less affected by some of these domestic political constraints. But the sheer scale of victory, with her party winning 2/3 of the seats in congress, led the morning after to a rout in currency and equity markets.  Markets are a reaction function as constraining as politics itself.

Mexico had been a market darling despite misgivings over the populist instincts and policies of Sheinbaum’s predecessor, the left-populist firebrand Andres Manuel Lopez Obrador (AMLO), driven by hope it would be the biggest beneficiary of US nearshoring. But this has now been overshadowed by fears that some of AMLO’s pet projects, particularly changing the constitution to allow the popular election of Supreme Court Justices, could now come to fruition. 

The President-elect appears to have more technocratic instincts than AMLO, sparking hope in some quarters that she will push away from her predecessor’s obsession (a long-standing one on the country’s left) with big-project, fossil-fuel nationalism. But it remains to be seen whether AMLO will disappear quietly or remain powerful via his influence on the public, the party, and on ruling party legislators. And if Sheinbaum’s interactions with AMLO and with investors will require some finesse, managing the relationship with Donald Trump, should he become President, could be an overwhelming diplomatic challenge. 

Mexico’s long-standing issues of law and order/violence have worsened steadily over the years through various strategies, whether overt militarization in close cooperation with the US (under Felipe Calderon 2006-12) or a more laissez-faire argument that US consumption was the primary problem, not Mexican production or transit (AMLO 2018-24). Businesses are indeed concerned about the conditions under which criminality can become an issue, but the real political neuralgic points of the relationship across the Rio Grande are drugs and migration, and GOP from Trump down has been extremely vocal about this. Add in Chinese efforts to increase investments in Mexico, particularly in the automotive sector—where even production aimed at local markets will be seen as an endrun around US tariffs—and the new President’s hand looks far less strong than her margin of victory might suggest.

That’s it for this week.

-SW and KS