Euro Gripes Threaten Economic Recovery as Populism Advances

Alessandro Speciale
October 25, 2016 — 7:00 AM EEST

Bloomberg

Anti-establishment parties are gaining ground in the heart of the European Union, and they may pose a bigger challenge to the region’s economy than any of those that have drawn support in the periphery over the past years.
While populists in Spain or Italy are revolting against restrictive fiscal policies and a weakening of social safety nets, the backlash in France and Germany focuses on monetary union itself. Parties openly advocating a break from the euro are building momentum ahead of a year of election across the region and politicians skeptical about EU integration are already twisting policy decisions. Belgium’s Wallonia region blocked a trade deal with Canada just last week.



Economists, investors and company executives are concerned that a rise of right-wing nationalists doesn’t only weigh on growth prospects but could even put the EU’s future on the line, after Britons voted to quit the bloc. Populist movements have strained ties between member states, even targeting the European Central Bank, whose policies have shielded the region from the worst consequences of financial uproar.
“In the periphery, populist parties are anti-austerity but they generally are ready to negotiate to stay in the European Union and in the euro,” said Aline Schuiling, senior economist at ABN Amro Bank NV in Amsterdam. “But in the core, the skepticism runs deeper and we shouldn’t underestimate that risk.”

Schuiling herself lives in a country that sees a far-right, anti-euro party running neck-and-neck with the governing Liberals in opinion polls ahead of elections due next March. But the Netherlands isn’t the only nation where populism is on the rise.
Issues such as refugees, rising inequality and terror threats are increasingly dominating Europe’s political debate, and even ECB President Mario Draghi has become involved. He said in a recent speech in Trento, Italy, that it is “essential” that leaders take joint action in areas such as defense and migration if they want to regain the support of EU citizens.
On Tuesday, Draghi may find a mostly German audience, when he speaks on stability and monetary policy in Berlin. Europe’s largest economy is home to some of the ECB president’s fiercest critics, who tried to block some of the central bank’s signature policies in the country’s constitutional court.
Election Year
In France, the National Front under Marine Le Pen, who is a strong favorite to win the most votes on the first presidential ballot, is rallying supporters with the promise of a referendum on whether the country should leave the EU. Austria’s anti-immigration Freedom Party will have a second shot at victory after its candidate narrowly escaped a defeat in July’s presidential vote that will be repeated.
Voters in 75 percent of the euro-area economy are set to cast ballots by late 2017 in presidential or parliamentary elections, as well as a referendum on constitutional reform, and the U.K.’s decision to leave the EU has set a precedent that separatist arguments can win. While the pound has plunged some 18 percent against the U.S. dollar since the June 23 vote, Britain’s economy hasn’t shown major signs of suffering. Third-quarter growth data are due on Thursday.
Incorporating Ideas
Mainstream parties are already curbing some of their policies as they try to shore up their support in the face of public discontent. Chancellor Angela Merkel shifted her stance on refugees after suffering a blacklash in Germany, and Ben May, an economist at Oxford Economics in London, argues her Finance Minister Wolfgang Schaeuble’s promise to cut taxes is another example of this trend.


While Europe’s largest economy, unlike other countries where populists are surging, has the fiscal space to afford such perks, he said that kind of influence is “clearly a potential worry.” The Alternative for Germany, an upstart anti-immigration party, is currently running third in national polls after winning seats in more than half of the country’s state parliaments, with one of its declared goals an orderly resolution of Europe’s currency bloc.
Concerned Investors
Alessio de Longis, a portfolio manager who oversees $8 billion for OppenheimerFunds in New York, said rising populism is one reason why he’s underweight on European equities and the euro.
“Uncertainty linked to the populist increase is already weighing on the euro area’s economic prospects,” he said. “It affects both supply and demand of credit, with weak investment spending amid uncertainty over fiscal and economic policy being one of the drivers.”
Investors surveyed by Bank of America Merrill Lynch identified fears of an EU breakup as one of the most commonly cited economic tail risks. U.S. firms polled by the American Chamber of Commerce in Germany said populism was their second-biggest concern for Europe after economic instability.

“We’ve moved faster into scenarios we never expected to materialize six years ago, so why not believe in the possibility of a backlash against globalization or re-instituting borders?” says David Milleker, chief economist at Union Investment Privatfonds in Frankfurt. “You’re not going to see a sudden break, but rather some protectionist laws here, some capital controls there -- it’s a death by a thousand needles.”