The dark clouds over Europe… again
It is ironic that the North Atlantic area has become the global epicentre of political risk
As some leading indicators seem to herald a more promising outlook for the Eurozone with the beginning of a decline in overall unemployment and gross domestic product (GDP) growth expected at 1.5 per cent this year and in 2018 after 1.7 per cent last year, new clouds are gathering over the continent.
This is the year of living dangerously for Europe: In the Netherlands the latest polls indicate that the farright Party for Freedom of Geert Wilders could win the greatest number of seats in the March elections — but without getting a majority. Mr Wilders has pledged to get the Netherlands out of the European Union (EU) and the euro if he gets to power. Since no other party would form a coalition with the Party for Freedom, Mr Wilders has almost no chance to become prime minister. But the two traditional parties — from the centre-right and from the social-democrat wing — who have governed in coalition since 2012 are in free fall. So the Netherlands are heading for a period of political uncertainty and instability. Whatever government emerging from protracted negotiations will face the unrelenting pressure of an emboldened far right.
France is bracing for its presidential elections in May, to be followed by parliamentary elections. Here again the picture is of total uncertainty: The established, predictable, candidates from the left and from the right have been swept away, and the remaining established candidate from the right, former Prime Minister François Fillon, is in deep trouble because of a money scandal. The odds are for far-right leader Marine Le Pen to come first in the first round of the election and to face Emmanuel Macron, an outsider, former economy minister who broke ranks with President François Hollande, in the second round of the election. Mr Macron would be expected to win although a surprise victory of Ms Le Pen cannot anymore be totally ruled out. Here again, whatever the outcome of the presidential election, the ensuing parliamentary elections are not expected to provide whoever is elected at the Élysée Palace with a stable and reliable majority.
Everybody is also pondering what will happen in Germany’s Bundestag elections next September. The expectation has been for Angela Merkel to win a fourth term as Chancellor but two factors may throw a spanner in the works. The first one is the fact that German people remain very disturbed and upset by the influx of more than 1.2 million refugees and economic migrants over the last two years. It is now clear that the financial burden of taking care of them will fall on the shoulders of the German taxpayer: According to the most optimistic estimate from the government’s Institute of Employment Research only 50 per cent of these migrants will be able to sustain themselves in five years. Then there is the lingering feeling of insecurity generated by the terrorist acts of jihadists infiltrated among the migrants, the last one being the attack in the Christmas market in Berlin which killed 12 people and injured 48 others. The far-right party “Alternative for Germany” is now expected to enter the Bundestag next September — the first time since World War II that an extremist party will be represented in the German Parliament.
The second factor is the appointment of Martin Schulz, the former president of the European Parliament, as the new leader of the Social Democrat Party. With a charisma that his predecessor did not possess, Mr Schulz is already proving to be a formidable opponent for Ms Merkel, overtaking her 50 per cent to 34 per cent if the elections had taken place this month.
While Italy is not supposed to hold elections before 2018, nobody knows how long the present government of Mr Gentiloni will last. It continues to struggle with an anaemic economy expected to grow only one per cent this year but also confronts political challenges from the far-right Five Star Movement of Beppe Grillo and within its majority as former Prime Minister Matteo Renzi is already plotting his return to power after his resignation last December in the aftermath of the defeat of a constitutional referendum.
Of course, many things can happen in the coming months and pessimistic scenarios might not necessarily materialise. However, beyond specific national political deadlines this year, it is the overall context in the Eurozone which sets alarm bells ringing again. The EU is not about to enter the Brexit negotiations with London in the best conditions. The desire of some EU members to “punish” the UK for last June’s vote is not only childish but self-defeating, increasing the risks of an outcome that would be at least as detrimental to the EU as it could possibly be for the British. The protracted negotiation to be expected will definitely be a factor in potential frictions in Brussels and among EU members.
But Brexit might not be the most crucial challenge Europe and the Eurozone will face in the coming months. Despite the improvement of some leading indicators, storms are brewing on the horizon: France seems set to miss again the three per cent budget deficit to GDP target and Italy will also miss, once again, its public debt to GDP target, with debt even set to increase again. The amount of toxic loans in the Eurozone is now officially at ^1 trillion with about one-third in Italy. The uncertainties and risks surrounding France’s forthcoming election are generating a nervousness in financial markets not seen since the height of the Eurozone sovereign debt crisis. The spread between French and German bonds is now at a four-year high, reflecting the concerns of traders about France’s political situation.
The Greek debt crisis is also coming back at centrestage with major uncertainties about whether Athens will get from the International Monetary Fund (IMF) the ^7 billion it absolutely needs to fulfil its obligations this summer. The IMF and the Eurozone ministers are at odds on the issue of debt relief that the IMF deems indispensable and that the German and the Dutch governments absolutely oppose as well as about the target of 3.5 per cent of GDP primary budget surplus (before interest payments on the debt) the Europeans keep insisting upon and that the IMF considers unachievable without another round of austerity measures, which would be politically and socially explosive.
So the question of Grexit will quite possibly be making again the headlines by this summer while economic analysts and financial markets will continue to wonder at the back of their mind: How long will Italy continue to sustain its membership in the Eurozone?
Political risk in emerging markets was for many years a matter for the US and Europe to worry and patronise about. How ironic it is, looking at Europe’s situation and the initial vagaries of the Donald Trump administration, that it is now the North Atlantic area that has become the global epicentre of political risk.