Europa: non tutto ciò che è bene finisce bene
A cura di Joachim Fels, Global Economic Advisor di PIMCO
Back in January, I suggested in the Financial Times that President Trump’s promise to make America great again (MAGA, as he puts it in his tweets) could actually help to make Europe great again. Well, MEGA he did! Here’s how the U.S. president helped, but also why Europe’s star may soon loose its sparkle again.
Europe benefitted from Trump in three ways this year. First, the euro’s 5% depreciation against the dollar between the November 8 election and late December 2016 supported exports and business confidence and added further fuel to the euro area’s cyclical growth rebound, which had already been underway due to a sharp acceleration of global trade and an improvement in credit flows in response to the ECB’s quantitative easing. As a consequence, Eurozone GDP grew at an average annual rate of 2.2% during the first half of this year, outstripping the U.S.’s 1.9% growth rate over the same period.
Second, Donald Trump’s election probably served as a wake-up call for voters in the Netherlands and in France, where populist candidates and parties fared worse than expected in this year’s general elections. As always in European politics, things are more complicated than this, but there likely was an element of a ‘backlash against the populist backlash’ in the Dutch and French election outcomes.
Third, the new, more inward-looking and isolationist stance of the U.S. and President Trump’s warnings that other countries should live to their commitments to NATO helped to accelerate a French-German initiative to intensify military cooperation in the European Union, which could eventually lead to a defense union. Last week, Germany’s FAZ newspaper quoted German government sources as saying that the last six months had seen more progress in a move to a common EU defense policy than in the sixty prior years. The EU commission has been tasked to present more concrete proposals by September, and member states will have to respond by December. At least twenty EU member states are currently expected to participate in an ever closer defense union.
However, despite these positive developments Europe’s momentum is unlikely to last: look for an ebbing of the economic and political momentum over the next six to twelve months. Why?
For starters, EUR/USD troughed around the turn of the year and has climbed by fifteen big figures to a high since early 2015. Euro appreciation should start to dampen export and manufacturing output growth in the remainder of this year and next year and is likely to amplify the impact of slower global trade growth that we expect to result from the fading of the Chinese credit impulse.
Moreover, European politics, which was supportive of European assets so far this year, is likely to become less supportive or even a headwind over the cyclical horizon:
- In France, President Macron’s star already appears to be sinking after only three months in office. His approval ratings have been severely hit by several ministers’ forced resignations over scandals and, more so, by rising public opposition against his reform agenda, which had already been watered down significantly compared to Macron’s campaign promises.
- In Germany, recent polls suggest a rising probability the next German government will be a coalition of Chancellor Merkel’s CDU/CSU and the liberal-conservative FDP. This would make further steps towards fiscal risk sharing in the euro area even more difficult than under another grand coalition with the more pro-European SPD.
- Most importantly, Italy will have to go to the polls for a general election by the end of April of next year at the latest while the support for anti-European or euro-skeptical parties is growing. This is likely to come into market focus during the remainder of his year.
Last, but not least, Europe’s secular outlook continues to be hamstrung by slow potential output growth, stubbornly low inflation, fiscal challenges, and the risk of a country deciding to or being forced by markets to leave the euro (see my colleague Andy Bosomworth’s recent piece on the long-term outlook). True, Europe has made some progress towards building institutions such as banking union and the European Stability Mechanism since the crisis. However, Europe remains a half-built house with incomplete risk-sharing, which, in my colleague Gene Frieda’s words, makes it “unsafe at any speed.“
Market implications? First, core European bonds, which have underperformed US Treasuries for much of this year, may start to outperform as a stronger euro dampens European growth and keeps the ECB relatively dovish. Second, peripheral bond yield spreads could start to widen once growth momentum ebbs and the Italian elections come into focus. And third, European equities, which were the darling of global investors and have outperformed U.S. equities year-to-date, look set to underperform in the remainder of the year.