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Decision time in Europe

Michael Kodari
February 16, 2017

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By Michael Kodari

Great investing involves a blend of insights across price action, business fundamentals and macroeconomic analysis. 2017 looks to be one of the most interesting years on a geopolitical level in quite some time. A lot of attention will be directed towards Washington and the evolving experiment that is Donald Trump as a statesman. Likewise, Sino-American relations will be of intrigue. But perhaps the most fraught international dialogue will be found in the Old World.

If you look across Europe, you see quite disparate performances and challenges, from Germany’s recent record trade surplus of 252.9bn euros, to chronic youth unemployment in Portugal and Spain. One might argue that it is this inherent heterogeneity of outcomes that makes the Eurozone project so intriguing. How do you regulate inflation, unemployment and levels of debt in structurally diverse economies under one currency and one monetary policy? One argument from a leading proponent of this – Emanuel Macron – is to forge closer links that logically culminate in fiscal harmony. The opposite approach, or the British answer, was to firstly not join the Euro and then decide it no longer wants to be a part of the EU at all. The middle path, that of a reformed EU which is more responsive to distinct national concerns, falls within the ideology of Francois Fillon. One way or another, we will see the European nations answering this riddle during a series of general elections.

Decision One: Netherlands

The first election off the blocks this year will be held on March 16 in the Kingdom of the Netherlands. Here, the Dutch electorate will choose between 31 different parties that will proportionately represent the single constituency that is the Netherlands. Such choice creates a diverse spread of results, which traditionally negates any one party holding a natural majority. So, by default, Holland tends to be governed by a series of coalitions which oscillate in their constituent members and shelf life. The current Coalition is led by Mark Rutte of the VVD, an approximate equivalent of Malcolm Turnbull’s Liberal Coalition here in Australia. The most popular party in the Netherlands, based on current polls, is the PVV: an anti-immigration, anti-Islam, anti-EU organisation led by Geert Wilders, who some might say is the Dutch Donald Trump. At present, Rutte has said he will not form a coalition with the PVV (he has tried that before and found Wilder’s views unpalatable) but there is the possibility that elements of the VVD will try to manoeuvre a new leader so they can form a government alongside the PVV. The hot themes within each campaign appear to be ‘identity’: what it means to be Dutch, and what the Dutch want from the EU, with the most popular party at present proposing that the Netherlands should leave the Union.

Decisions Two and Three: France and Germany

The biggest two nations in the EU by population and GDP are France and Germany and both nations also have elections this year. France will be first, and their electoral system tends towards an initial vote and then a subsequent runoff between the two most popular candidates. Macron, a young, dashing and inexperienced exile from the French Socialists represents his own En Marche! Party that wants greater powers for the EU. Francois Fillon, embroiled in a nepotism scandal, represents the Republicans and a reformed EU. The most controversial candidate is the National Front’s Le Pen, an anti-EU, anti-immigration populist. As with the Netherlands, the future of the EU and the Euro is likely to be the key issue, and as with Trump in the States and Brexit in the UK, it is interesting to wonder if there are silent Le Pen supporters not declaring their true intentions.

Once the populist sentiment has been gauged across the Netherlands and France, there will be the elections in Germany this September. Germany benefits a great deal from the current EU framework, not least of all the captive market for its exports, and the lower currency value the Euro represents over what a distinct German unit of currency would likely trade at.

Peter Navarro, Trump’s hawkish advisor, has already made this point, and how long it can continue will be interesting. The benefit of the Euro is manifest. The downside of the arrangement is that Germany needs to encourage other nations to stay with the Euro when they might otherwise logically want to leave, the most obvious form of influence being substantial loans. Nations such as Portugal, Italy, Greece and Spain all hold heavy debt, inclement unemployment and limited wage growth. Greek debt has reached substantial levels, 179% of GDP, and there is a real concern that they cannot make their next repayment due mid-year. The IMF are split over what annual budget surplus is possible, and might even want to leave the EU to resolve it among themselves (an outcome the Germans are treating as a political hot potato ahead of their own general election). With German unemployment at 3.8%, trade at record levels, and inflation travelling nicely at 1.9%, the only cloud on the horizon is how long the EU can limp on in its current form. 

As the member states wrestle with existential questions about the destiny and composition of the EU, across the English Channel lies the ongoing experiment with what it means to leave the EU. The UK has seen the GBP tumble, which is helping exports, making the FTSE increasingly attractive, and now sees unemployment at a palatable 4.8%. Current growth is only 0.6%, but if the UK seeks to reduce corporate tax in order to make it a hospitable environment for big firms to do business, it could lead to an increasingly bright future for the first ever country to leave the EU. 

Disclaimer: This is a sponsored article by KOSEC. This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

Published: Friday, February 17, 2017

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