Looking beyond the political storm clouds .....

Looking beyond the political storm clouds .....

ref :- "Eurozone Growth Bucks Political Unease" , Simon Nixon in the Wall St. Journal .... a version of this article is also in The Times, Business

In Europe, for "glass half empty" types there's no shortage of reasons to be worried and virtually all of them are political in nature. Jitters over the possibility of populist success in upcoming Dutch and French elections reflect a realization that such outcomes in a post-Brexit, post-Trump world are a good deal more feasible than they once were, whatever the polls may say. Moreover, mainstream politicians have appeared unable to offer persuasive counter-arguments to the populist dogma that has become increasingly attractive to those who feel they've missed out on the benefits of globalized, liberal democracy. In France, it even seems as though the mainstream rivals to Marine Le Pen have been lining up to shoot themselves in the foot, or at least do themselves enough damage to make an unlikely win in the second and final ballot a possibility worth considering. That's what widening yield spreads between German and French debt is telling us, at any rate.

Given the angst over various elections within Europe, a revival of deep anxiety over Greece's debt crisis might be considered unfortunate timing  --  if it wasn't for the fact that it's hard to imagine a time when Greece and her debt WON'T be a major issue. This particular bout of wrangling has been notable not just for the heated arguments between Greece and her creditors, but between the creditors themselves. The IMF and the EU have been disagreeing on the desirability of debt relief, a reasonable level to expect of Greek economic growth, the depth of austerity measures that need to be adopted and probably the brand of mineral water to be served at their occasionally fractious meetings.

Beyond all that, political pressures from outside Europe aren't helpful either. Donald Trump has left nobody in any doubt about his hostility to the principle of European Union, and to the ability of member nations, particularly Germany, to export into the US with the benefit of an unsuitably weak Euro. The threat of sweeping protectionist policies hangs over Europe as much as it does in the rest of the world. There has even been speculation that Mr Trump might encourage Greece to leave the Eurozone, thus undermining the whole project. Even for Mr Trump, that does not seem credible ...... probably not, anyway.

Wow ..... Europe must be basket-case then, right ? Er ..... actually no.

Despite the well-founded fears on the political front, economically things are looking up. To quote Mr Nixon : "The eurozone economy is growing at an annualized rate of more than 2%, its fastest in more than 6 years and faster even than the US. Every country in the eurozone is growing, and the growth is across all sectors. The latest surveys show sharp increases in manufacturing and services activity, order books and business optimism, with French output stronger than German for the first time since 2012. Meanwhile, job creation is running at its strongest in almost a decade and unemployment has been falling rapidly across the bloc to 9.6%, down a full percentage point in a year and the lowest since 2009."

Just as you could argue that the brief political round-up above paints an overly dark picture, so you also say that this economic resume skips over some of the more difficult issues facing the EU, particularly in the so-called peripheral nations. Still, the point is well made ..... there's a curious "disconnect" between the worrisome political picture and the more upbeat economic evidence.

It's this more optimistic position that Mr Nixon sides with. Only quite late last year the biggest threat to the Eurozone's economy was seen as Deflation, and whether the European Central Bank had enough ammunition in its arsenal to combat the threat after years of ever-easier monetary policy. Now, finally, with broad-based growth and domestic consumer spending reasserting themselves, the talk is more about how the ECB will taper its bond-buying programme and reverse its lower rates policy without giving some nasty shocks to the peripheral nations in particular. Not to worry, we're told, headline inflation may be picking up sharply but that's got a lot to do with the price of energy. Core inflation is rising on a much shallower trajectory and remains some way below the ECB's optimum target. Increases in rates will be very gradual and borrowing costs for both governments and business, not to mention individuals, will remain at historically very low levels for a long time yet.

In essence, the argument goes that things are improving but not so fast that the struggling nations like Portugal and even Italy will be hamstrung by any tightening in monetary policy. Sounds like the perfect happy medium ..... well, we did say it was optimistic.

And what about the political risks ? The anxiety is understandable, but we have to remember that the probability of a shock in either French or Dutch elections is very low. Even speculation that an election might be called in Italy that could play into the hands of the populist 5 star movement has been tempered by the knowledge that a split in the ruling Democratic Party makes a vote this year unlikely. As for Greece, the signs are that a meeting this week between Greece, the Eurozone and the IMF went much better. One official said that he was now confident that a deal could be reached in time  (yes, we know ....but temper that cynicism for a moment).

Which leaves the US, and Mr Trump. For Europe, things could go either way ..... lower taxes, deregulation and a generally stimulative agenda from the new administration would certainly boost growth outside of the US as well as within it. On the other hand, protectionist measures and/or disagreements on regulating the global financial system would be damaging, to say the least. The jury's out on what Mr Trump will do .... some would say that the jury's out on whether Mr Trump KNOWS what he will do. That would probably be unfair. For Europe's sake, let's hope that his more combative rhetoric proves to be just that.