Up­com­ing votes could test eu­ro­zone’s sta­bil­ity again

Slow growth, high debt baf­fle pol­i­cy­mak­ers

Kuwait Times - - BUSINESS -

The eu­ro­zone could be in for a rough few months. A rapid-fire se­ries of elec­tions in Italy, the Nether­lands and France plus Bri­tain’s up­com­ing move to­ward leav­ing the EU could buffet the 19-coun­try mon­e­tary union just as it is strug­gling to fi­nally leave be­hind its trou­bles with slow growth and high debt. An­a­lysts say it will take more than one un­ex­pected out­come to pro­voke a re­newed eu­ro­zone cri­sis that goes be­yond tem­po­rary mar­ket tur­bu­lence around the time of the votes.

But mul­ti­ple sur­prises and fall­ing domi­noes can­not be ruled out. That’s es­pe­cially true af­ter the un­ex­pected votes in Bri­tain for Brexit and for Don­ald Trump in the United States on Nov 8. “Since the 9th of Novem­ber, times have changed,” said Carsten Brzeski, chief Ger­man econ­o­mist at ING-DiBa bank. “You can walk through all these po­lit­i­cal events one by one,” he said. “I think each has the po­ten­tial to de­rail the eu­ro­zone, to fur­ther dis­in­te­grate the eu­ro­zone, to maybe pos­si­bly even lead to a breakup of the eu­ro­zone - but only in the worst, worst-case sce­nario.”

Here are the key dates:

* On Dec. 4, Ital­ians vote on con­sti­tu­tional changes that would limit the power of the up­per house and make it eas­ier for govern­ments to pass leg­is­la­tion. Prime Min­is­ter Mat­teo Renzi has said he will re­sign in case of a “no” re­sult. New elec­tions, if held, could bring to power the Five Star Move­ment, which has said it wants to hold a ref­er­en­dum on euro mem­ber­ship.

* On March 15 in the Nether­lands, the an­ti­im­mi­gra­tion, anti-EU Party for Free­dom stands to do well in na­tional elec­tions and could in­flu­ence the stance of any new govern­ment.

* By the end of March, Bri­tish Prime Min­is­ter Theresa May is ex­pected to for­mally start Bri­tain’s talks to leave the EU, which are due to last at least two years. Mar­ket and busi­ness con­fi­dence could take a hit if it looks like Bri­tain could leave with­out some priv­i­leged ac­cess to the EU sin­gle mar­ket.

* On April 23 and May 7, France holds pres­i­den­tial elec­tions. Far right Na­tional Front leader Marine Le Pen is ex­pected to at least make the sec­ond round. She wants France to leave the EU. And un­like Bri­tain, France is a mem­ber of the euro, and its exit from that would likely be even more dis­rup­tive.

Polls in­di­cate Le Pen doesn’t have much of a chance of win­ning. Prob­lem is, that’s what many peo­ple thought about Bri­tain’s EU vote and Trump’s chances in the US elec­tion.

So Le Pen is mak­ing pro-EU politi­cians and econ­o­mists more ner­vous than be­fore. Should in­vestors out­side Europe be wor­ried? It’s hard to tell. Craig Macken­zie, se­nior in­vest­ment strate­gist at Aberdeen As­set Man­age­ment, says the lack of a plunge in stocks af­ter the US and UK votes “is teach­ing the mar­ket that po­lit­i­cal shocks are not nec­es­sar­ily the start of the next bear mar­ket... The mar­ket is harder to shock.”

While a less likely Le Pen vic­tory would be “an im­me­di­ate ex­is­ten­tial threat” to the EU, the Ital­ian trou­bles re­quire mul­ti­ple steps to ma­te­ri­al­ize and “won’t be a short, sharp shock.”

Right now, com­pa­nies and in­vestors are hardly pric­ing in a new cri­sis. Eu­ro­zone busi­ness ac­tiv­ity is strength­en­ing and Ger­man eco­nomic con­fi­dence is at a 31-month high. Over­all, Europe is en­joy­ing mod­er­ate growth, fol­low­ing a cri­sis over high debt in 2009-2012 that pushed Greece, Ire­land, Por­tu­gal, Spain and Cyprus into need­ing bailout loans and raised the pos­si­bil­ity the euro would break up.

Com­merzbank chief econ­o­mist Jo­erg Krae­mer says the big­ger risk is in Italy. He cau­tions that there would have to be sev­eral trig­gers over a pe­riod of months: first, a “no” in the ref­er­en­dum, then new elec­tions, and then a win by the Five Star Move­ment. Krae­mer and other an­a­lysts think a care­taker govern­ment is more likely, at least at first. But reg­u­lar elec­tions would be held in 2018 in any case. Krae­mer ar­gues that a Five Star govern­ment would likely spend more money and bust the eu­ro­zone’s rules lim­it­ing deficits, adding more debt to Italy’s al­ready heavy bur­den of 135 per­cent of eco­nomic out­put.

More deficit spend­ing and debt “will cre­ate a huge con­flict with the fis­cal rules and the Euro­pean Com­mis­sion,” Krae­mer said. “And in such an en­vi­ron­ment there is a sig­nif­i­cant risk that pri­vate bond in­vestors will go on strike and refuse to buy Ital­ian govern­ment bonds. That means there is a sig­nif­i­cant risk that we will see a re­turn of the south­ern debt cri­sis if the Five Star move­ment con­tin­ues to lead in the polls and there are early elec­tions.”

Italy also faces po­ten­tial dis­rup­tions in com­ing weeks from trou­bled bank Monte dei Paschi di Siena. The bank is try­ing to off­load bad loans and raise new cap­i­tal. If it fails, it could need a bailout from the govern­ment. But in that case new EU rules would trig­ger losses for some bond hold­ers, in­clud­ing many small re­tail savers po­lit­i­cal poi­son. The cur­rency union has new safe­guards against tur­moil. Bank­ing su­per­vi­sion was tough­ened and moved to the EU level, less­en­ing the chance that bad banks will bring down govern­ment fi­nances.

And the Euro­pean Cen­tral Bank has been buy­ing govern­ment bonds to raise in­fla­tion and growth. In coun­tries like Italy, that has driven bond prices up and in­ter­est yields, which move op­po­site to bond prices, down. That’s key be­cause it was ex­or­bi­tant bond mar­ket rates in 2011 that threat­ened Italy’s fi­nan­cial sol­vency.

The ECB also has a spe­cial pro­gram dubbed out­right mon­e­tary trans­ac­tions, or OMT, un­der which it could buy a coun­try’s bonds to pre­vent it from fac­ing ru­inous bor­row­ing costs. But the ECB’s bond pur­chases will have to end at some point. Right now the ear­li­est end is March, 2017, although that may be ex­tended by three or six months at a Dec. 8 meet­ing.

And Krae­mer warns that de­ploy­ing the OMT could strengthen sup­port for anti-euro par­ties in Ger­many and the Nether­lands, where stim­u­lus skep­tics ar­gue such as­sis­tance only un­der­mines the will to re­form shaky govern­ment fi­nances. Right now, it’s all hy­po­thet­i­cal. “I still hope that by the end of this pe­riod, we have a cou­ple of elected lead­ers who can get across more in­te­gra­tion at the eu­ro­zone level,” said Brzeski. “The neg­a­tive sce­nario is, I’m wrong with at least one of these out­comes, we get a move to­ward more na­tion­al­ist pol­i­tics and poli­cies in Europe, and we get a grad­ual fur­ther dis­in­te­gra­tion. ““And then it would be more than noise.” —AP

BER­LIN: Ger­man Chan­cel­lor An­gela Merkel is re­flected in a win­dow as she speaks dur­ing a bud­get de­bate as part of a meet­ing of the Ger­man Fed­eral Par­lia­ment, Bun­destag, at the Re­ich­stag build­ing in Ber­lin. —AP

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