Introduction
The political and economic uncertainty related to Brexit and the US Presidency has been hampering Europe’s business sentiments since mid-2016. This is only expected to increase over the coming months in 2017 on account of the ongoing election cycles across major countries in the European Union (EU). As a result, domestic demand is expected to remain muted in 2017. Moreover, the pace of structural reforms appears to remain sluggish and the unemployment rate is likely to be high.
Netherlands—Maintaining the status quo
The rounds of elections started off with the People’s Party for Freedom and Democracy (VDD) retaining its position as the largest party despite conceding some seats to the far-right Party for Freedom (PVV). The victory of Dutch centre-right Prime Minister Mark Rutte brought a sense of relief among other EU leaders amid the wave of populism activities across Europe. Although the Dutch parliamentary election results are not likely to create a substantial impact, the euro appreciated from 0.94 in February 2017 to 0.93 in March and to 0.90 in May 2017. The Dutch economy is riding high on the back of strong domestic demand and improved business sentiment. Its unemployment rates are also steadily falling and there is a surge in exports. However, Brexit talks might create some worries for the Netherland’s economic prosperity. The Netherlands is the second most economically dependent country on Britain after Ireland, and therefore any limits on free trade will threaten its trade and jobs.
French Presidential Election 2017: Pro-EU and pro-reforms
In the recently held French Presidential elections, pro-EU former investment banker Emmanuel Macron’s victory (with a 66% vote bank) over far-right candidate Marine Le Pen seems to have for now dismissed apprehensions about a “Frexit” from the EU. Nevertheless, the political uncertainty is likely to influence French economic conditions for at least two more quarters until the parliamentary elections in June 2017 and reform measures are in place.
The French economic upturn is expected to continue throughout 2017 backed by steady growth in private consumption. The Purchasing Manager’s Index has also been increasing after it bottomed out at 48 in August 2016, indicating investment influx. In the second half of 2017, the gross domestic product (GDP) is expected to grow at about 1%, while manufacturing production is likely to marginally improve compared to the preceding quarters. However, the high unemployment rate, which was a key voter concern, has stayed inelastic at an average of 10% since 2013 and never dipped below 9% in the post-financial crisis period. Notably, unemployment is a major worry for the overall Euro area, thanks to the credit crunch and the global financial crisis. The unemployment rate here has hovered at about 10% over the last five years, whereas the same for North America, Latin America, and Asia are only 5%, 8% and 4% respectively.
Macron has not only pledged to scale down the unemployment rate to 7% by 2022, but has in fact committed to bring in labor reforms by liberating France from being the most centrally controlled economy in the Organization for Economic Co-operation and Development (OECD). The most important components of his 5-year package of labor reform plans include the elimination of 120,000 civil service jobs and a stimulus plan of $55 billion towards green energy and youth skill development training.
Macron, a pro-austerity patron, is looking to combine spending cut measures by limiting fiscal deficit within the EU norms of 3% of GDP with welfare stimuli as well as flexible business policies in terms of lowering of corporate tax rate by about 8.5 percent points. Whether these goals will actually be met is still debatable, but it clearly shows Macron’s commitment towards a stronger EU. Macron apparently is also more open to free trade as opposed to nationalist aspirant Le Pen. Along with defending the Comprehensive Economic and Trade Agreement (CETA) as well as the Transatlantic Trade and Investment Partnership (TTIP), Macron aspires towards more integrated EU policies. Macron appears not to be anti-immigration and has promised to welcome refugees in need of protection. In the process, it is envisaged that Macron will seek France to weigh more within the council, shaking Germany’s undulated EU leadership.
Macron’s victory, supported by a strong Eurozone recovery, should induce European Central Bank (ECB) to end the era of zero interest rate and its ongoing program of quantitative easing. However, ECB is not likely to instantaneously increase the interest rate, especially before the upcoming elections in Germany, and the same is expected to increase slightly in 2018, leading to a gradual rise to 0.5% by 2020.
Germany’s Parliamentary Elections: Picking up Friction
In Germany, whether the Parliamentary elections due in fall 2017 will bring about a change in power for the head of EU’s largest and world’s fourth largest economy is still not known, but the chances of German Chancellor Angela Merkel winning a fourth term are by no means certain.
The recent poll by the Forsa Institute for Social Research and Statistical Analysis (Forsa) has put the chances of Germany’s Social Democrats (SPD) winning neck to neck with that of Merkel’s Christian Democrats (CDU) and their Bavarian sister party, the Christian Social Union (CSU). The sudden popularity of Merkel’s primary rival Martin Schulz has compelled experts to think that 2017 might turn out to be the end of Merkel’s rule.
Europe is experiencing an influx of migrants and refugees since 2013, driven by the political turmoil and civil wars in Syria, Afghanistan, Iraq, and Iran. Europe received more than 1.26 million asylum claims in 2016, with Germany receiving 59.1% of all claims, while the same in 2015 was only 36%. In the post-Brexit era, there has been a more than 200% rise in the influx of Syrian, Afghani, and Iraqi refugees in Germany in 2016 compared to 2015. So Merkel’s open door refugee policy which, until a couple of years ago, used to be celebrated due to its contribution to higher government revenue in terms of more taxes and young immigrants joining the European aging labor force, is under pressure due to an increasing trend in crime rates in Germany as well as in Europe.
However, Germany otherwise is going strong backed by solid industrial production growth and a buoyed external sector. Domestic demand is also on the rise, driven by an improved construction and real estate market and a well-controlled unemployment rate, the lowest in Eurozone. The results of the elections will determine the country’s relations with the European Union, which can cause political clashes over policy that will have global repercussions.
Talking about currency volatilities, Euro is expected to gain strength in the coming months due to the Federal Reserve’s decision to increase the interest rate to 1% in March 2017. This movement of Euro may be dampened if SPD wins in Germany, threatening EU consolidation.
Conclusion
A win by Social Democrats in Germany could prove to be a bummer for global trade and investment prospects in the short term. While the United Kingdom is currently preparing for an exit, stalling all the possibilities for its trade agreement until 2019, a fragmented EU will cause global trade volumes to fall.
Given France and the Netherlands’ more mainstream win at the elections, it does not seem like the EU has to worry about a fragmentation in the next five years. Moreover, Merkel’s win, albeit her baffled popularity due to immigration rules, still looks strong in the upcoming Germany elections. However, the wave of anti-EU populism will depend on how the migration crisis and all other issues are being handled by the leaders, and might be strengthened with time despite Brexit seemingly being a one-off event.
