What a difference a few months make. As 2017 opened, eurozone politicians still raw from the shock of the Brexit vote and Donald Trump’s presidential triumph were nervously awaiting elections in the Netherlands and France. They feared that discontent would propel the populist wave into the heart of Europe and usher in far-right, anti-euro leaders. In the event, the predicted surge for Dutch populist Geert Wilders failed to materialise and in France, Front National candidate Marine Le Pen was decisively beaten by pro-EU centrist Emmanuel Macron.
Now, the economic picture for the currency union is looking brighter. Unemployment in the bloc is at its lowest for almost eight years and economic growth was 0.5% in the first quarter, well ahead of the UK’s 0.2%. Business surveys suggest the new year momentum within the eurozone carried on in the second quarter. Based on one report, the flash eurozone PMI (purchasing managers’ index) survey from IHS Markit, growth was at a six-year high in May. The EU recently nudged up its forecast for eurozone growth this year to 1.7%, almost matching the 1.8% of 2016. It also expects unemployment to keep falling as the economic recovery finally spreads to all corners of the region.
Experts say it is no coincidence that the approval ratings of populists are fading as the economy strengthens. “Support levels for anti-establishment or populist parties have declined quite sharply over the past few months,” says Andy Cates at Nomura. He sees a number of causes of the recent strength, including a revival in global growth; improved domestic demand; signs that capital spending is making a comeback; and sharp declines in youth unemployment. In the longer term there will be further support from member nations’ public finances being in better shape, giving governments more space to shore up the recovery, he adds.
Economists point out that the relationship between brighter economic news and diminishing popularity for anti-establishment parties works both ways. The decline of populism has in turn helped the economy. “It looks like confidence in the European economy is returning rather quickly,” says Bert Colijn of ING bank in Amsterdam. He says the brighter mood is down to the economic strength seen in official figures and surveys, and a change in the political atmosphere since the Dutch and French elections.
“There is a sense that we’ve turned a corner in terms of political risk. After Trump and Brexit there was a worry we would see more of this sentiment and this could be the big thing that topples the euro,” said Colijn. But he cautions against getting carried away with what he describes as “europhoria”. He see risks from Greece’s debt problems and from Italy, where unemployment remains high, particularly among young people. “It would be silly to think all problems are out of the way.”
Reinhard Cluse at UBS is also wary, pointing out that business surveys have tended to come in stronger than official growth figures: “We are cruising at a high altitude. But this optimism is not fully reflected in the hard data.” Cluse expects the pace of growth in the eurozone to ease off in the second half of this year as higher inflation erodes household spending power and the European Central Bank starts to hint at taking away some of the stimulus of its massive electronic money printing programme. But that was no reason to be downbeat: “Although we cannot perhaps maintain the growth rates of the first half, a slowdown from that does not mean bad news. In relative terms, Europe looks good.”
· Source http://tiny.cc/494mly