The political earthquakes which could shake Europe’s economy this year
Daily Telegraph 01-Jan-17
Markets never thought there was a real chance that Britain would vote to leave the EU.
Donald Trump’s candidacy for the US Presidency was mocked, even as polling day drew close.
And who could have predicted Leicester City Football Club winning the Premier League?
This run of remarkable events defying conventional wisdom has led to the curious development of a view that unlikely events are now far more likely – even certain – to come to pass.
Of course, the victory of the underdog could have an effect on morale in, say, a political campaign, but when these unexpected events are so dispersed across the globe it still seems implausible that every apparently marginal candidate will win their elections.
Nonetheless, the fact that the world can change in unexpected ways underlines the necessity for businesses and households to plan for such outcomes, just in case the odds are defied again.
Europe faces a wave of elections in 2017, which suddenly feel harder to predict.
The Dutch will hold a general election in March, while French voters go to the polls to pick the President in April.
Angela Merkel will fight for her future as Chancellor of Germany in 2017’s general election which is expected to take place in September.
Italy is not due for a vote until mid-2018, but its newly appointed Prime Minister Paolo Gentiloni could call an election in early 2017.
At the same time Greece is in the midst of another row over its bailout packages.
Votes in 2016 will continue to have ramifications, with Theresa May set to trigger Article 50, beginning the Brexit process, by the end of March, and Donald Trump taking up his position as US President in January.
The chance of a political shock leading to economic collapse remains distant – the PMI surveys of private sector growth are proving resilient, and economists at JP Morgan predict the eurozone economy will expand my 1.5pc in 2017 and the same in 2018, barely changed from the 1.6pc achieved in 2016.
That can only be a central forecast, however – so what happens if the European establishment is turfed out by the voters over the next 12 months?
The most vivid potential upset would come if Marine Le Pen, the Front National candidate, won the French Presidency.
Currently it is assumed that she could repeat her father’s achievement from 2002, reaching the second round of voting before being defeated by a mainstream candidate who could win the backing of the centre-left and centre-right voters.
But that still leaves her a chance of victory, which could shatter the Franco-German alliance at the heart of the EU and the eurozone.
“The French election has the potential to be most disruptive.”Anna Stupnytska, Fidelity International
It would have serious ramifications for the freedom of movement in the bloc as well as policies towards immigrants from outside the EU.
“The French election has the potential to be most disruptive,” says Anna Stupnytska, global economist at Fidelity International.
“We’re used to thinking about Europe and France as more of the same, sluggish, boring, always muddling through. Next year is likely to be different.”
If Francois Fillon, the candidate of the centre right, wins, she anticipates a productive programme of economic reforms which could boost the economy in the years ahead.
By contrast Marine Le Pen “is anti-reform, and the future of the European project could be undermined,” says Stupnytska.
“Despite all the apocalyptic scenarios if Trump won or Brexit happened, markets actually took events in their stride. This feels different though – [Le Pen] might have the potential to undermine the whole European project.”
The far-right candidate has indicated she wants to hold a referendum on French membership of the EU, something which could tear away a central pillar of the entire Union.
In the short-term, the result could be market turmoil, which could spread to the real economy, prompting the European Central Bank to cut rates and ramp up its quantitative easing (QE) programme again to prop up markets.
As recent eurozone history has shown, the ECB would have to focus on stopping contagion, and do its best to support the weaker countries including Italy and Portugal.
The next major risk which could spread around the peripheral economies is a change of Italian government.
Prime Minister Matteo Renzi stood down after his comprehensive defeat in December’s referendum on constitutional reform, but his replacement, Paolo Gentiloni, is thought to be considering holding a new election.
That could lead to gains for the eurosceptic Five Star movement founded by comedian Belle Grillo, who also wants a referendum on EU membership.
Markets are perennially nervous over Italian government debt as investors worry that the country could leave the euro, so this move would set off further market turmoil.
“If Five Star were to end up in government, then an In/Out euro referendum in Italy is potentially on the table. This means that for investors redenomination risk is once again part of their thought process – the same way it was for Greece,” says Marchel Alexandrovich, senior European economist at Jefferies International.
“Back in 2012, Draghi’s ‘the euro is irreversible’ comment helped put a safety net under the European markets. But five years on, we may find ourselves in a similar position and this time around it won’t be the ECB deciding if the euro is irreversible, but rather the European voters themselves.”
The traditionally less troublesome Netherlands could also prove to be a source of discontent.
Its far-right Party for Freedom (PVV) is currently leading the highly fragmented polls and is on course to take 21pc of the vote.
Such a result could give it clout in coalition negotiations, if the party and its leader Geert Wilders could find backers among the other parties.
On current polling he does not look likely to be able to scrape together the eurosceptic majority in parliament needed to hold a referendum on the EU, but analysts warn the PVV’s strength could still be a thorn in the side of the rest of the EU.
“While the risk of Nexit [a Dutch exit from the EU] is small, there are other ways the Dutch might derail EU policymaking. For a start, there is little chance of the Dutch approving significant debt relief for Greece,” says Stephen Brown at Capital Economics.
“And sweeping changes to the EU will require Dutch politicians to pass new laws or treaty changes, which would almost certainly trigger referendums under the Advisory Referendum Act. So while the Dutch may not want to leave the EU altogether, rising eurosceptic sentiment may nevertheless contribute to its downfall.”
Germany is the eurozone’s core pillar of strength, but even there it is not unimaginable that Angela Merkel could lose out in the next round of elections.
The refugee crisis has dented her popularity and helped the far-right AfD party, though she remains ahead in the polls.
Chancellor Merkel has tilted her policies to deflect that threat, leading some analysts to contemplate the idea of a more left-wing coalition taking power after the election.
This raises the intriguing possibility of a new government which may be prepared to spend more government money, particularly on infrastructure investment, something which Mario Draghi at the ECB would favour.
It could also lead to a Germany which is more open to the idea of sharing risk across eurozone governments, reducing the hazard posed by high debts in the peripheral economies and resolving some of the perennial crises afflicting the currency bloc.
Out of electoral disruption could come more unity in Europe – now that really would be an unexpected turn of events.
End of report.
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