Quarterly Investment Strategy
Europe - Euroscepticism losing ground
The obstacles to an economic return-to-normal are being gradually removed in Europe, most notably the threat of political disruption.
Tempering the appeal of anti-establishment parties have been the electoral systems (proportional or two-round voting) but also the social welfare states – however onerous, inefficient and clearly in need of reform. Indeed, unlike the US and the UK, continental European countries have redistributed some of the proceeds from globalisation. As such, their voters have not proved angry enough to demand a dramatic rethinking of their societies, and in particular to abandon support for European institutions.
Following the French elections, some anti-establishment factions are dropping Euroscepticism in order to remain “competitive”. The best examples of this trend are Spain’s Podemos and Greece’s SYRIZA, which have evolved over a short period of time into mainstream left-wing parties. In Italy, the Five Star Movement bears close watching over the next months. There is evidence that it is currently riven by internal conflict over how far to take its Eurosceptic stance. And several moves by party leadership – including attempting to exit the legislative alliance with the UK Independence Party at the European Parliament level – appear designed to pursue a more centrist approach. The problem, however, is that the median Italian voter shows little commitment to European integration. This makes Italy the key risk for the European construction going forward, with elections planned for May 2018.
Politics aside, the European growth recovery is spreading. A revival of external demand is occurring in a context of more robust domestic demand than at any time since 2007. And, like in the US, labour market improvements have so far not fuelled overly strong wage growth – implying that a sharp normalisation of monetary policy is not warranted. From the ECB’s perspective, the Eurozone economy is effectively four years behind US trends. So, just as the Fed did in 2013, the ECB is likely to simply respond to the improvement in economic conditions recorded over the last three years by progressively adjusting its policy.
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