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베어링 인베스트먼트 인스티튜트

The Bright Spot in Europe’s Future

2019년2월20일 - 3 분 읽기

Amid mounting populism and falling growth, the current consensus is that Europe is headed for an unhappy year, possibly an unhappy decade. Despite all its structural woes, there are few reasons why Europe’s economic future is not as bleak as it may seem.

As the Brexit saga turns more intense and Byzantine, what of Europe itself? There are plenty of dragons circling Brussels as its leaders struggle to reinforce their single market and bolster European interests in a world dominated by China and America. Amid mounting populism and falling growth, the current consensus is that Europe is headed for an unhappy year, possibly an unhappy decade.

But it’s important to distinguish between Europe’s structural woes, which may never be fully fixed, and its challenges that cycle between slightly better and slightly worse. Careful investors will note that the current headwinds making this quarter slightly worse are mostly temporary. Summer won’t bring an end to Italian populism or haggling over budgets, but it may bring better growth than current forecasts project.

The bad news is all too obvious. The global economic cycle appears to be turning on Europe while its defenses are down. The European Commission recently downgraded growth expectations across its member states to 1.5% this year from its 1.9% forecast just a few months ago.

The culprits for a darker outlook are mainly in Beijing and Rome. Chinese efforts to rein in credit growth last year have led to a dramatic slowdown in European—especially German—exports. Trade tensions with the United States aren’t helping. Policy uncertainty in Italy is dragging its economy perilously close to recession.

2019 GDP FORECAST CHANGES VS. NOVEMBERSOURCE: EUROPEAN COMISSION, AS OF FEBRUARY 1, 2019

ITALY ANNUAL GDP FORECASTSOURCE: EUROPEAN COMISSION, AS OF FEBRUARY 1, 2019

“For investors, the near-term cyclical currents are far more relevant, and many of these seem likely to improve before summer.”

When European officials are not distracted by Brexit, they still face mounting populist discontent about rules made in Brussels that seem to permit too many immigrants and not enough fiscal spending.

The most colorful and unexpected drama may be found in the recent exchanges between Rome and Paris. Italy’s populists may have backed down from a confrontation over its own budget deficit, but its leaders have reacted gleefully to budget protests in France. French President Emmanuel Macron was forced to relent on his budget targets after violent protests by so-called “Yellow Vests.” But even as France’s own official auditor declared the country’s finances “fragile,” Italian populist leader—and deputy prime minister—Luigi di Maio met with some of the protestors themselves and egged them on. Paris briefly recalled its ambassador to Rome.

(As background, Macron had likened rising populism to “leprosy,” and Italian leaders tried to block the loan of da Vinci paintings to the Louvre in retaliation. There’s a reason Grand Opera originated in Europe.) But these dramatic exchanges are geared to rally support ahead of European parliamentary elections that most voters find unimportant and uninteresting.

Meanwhile, the European Union itself has shown signs of growing political heft. Brexit itself rallied the remaining 27 members around a single negotiating strategy with remarkably little harping or second-guessing from capitals.

A more contentious relationship with the United States has also bolstered European unity, including on global strategic issues. European member states have united in denouncing U.S. tariffs on steel and held together, so far, in exploratory talks around a broader trans-Atlantic trade deal.

Talk of creating a European army amid questions about the U.S. commitment to NATO seems unlikely to advance, but Britain, France and Germany have split dramatically from the United States to establish a mechanism to circumvent sanctions against Iran. All 28 EU members have also backed extensionst o sanctions on Russia and the European Parliament has agreed on legislation to review Chinese investments.

For investors, however, the near-term cyclical currents are far more relevant, and many of these seem likely to improve before summer. China’s fiscal and monetary efforts to bolster growth should reverse recent weakness in European exports. Continuing trade static between Washington and Beijing will not hurt Europe much, and Trump Administration tariffs on European autos are still hard to imagine for now.

Concern for a German recession should pass, too. German industry’s recent struggles with both slower commercial transport on the Rhine (due to low water levels) and new emissions testing protocols won’t stay long.

The costs of Brexit should be clearer as well by then, likely involving a longer transition mechanism that avoids sudden disruption. Meanwhile, European unemployment is near historic lows and wages are rising.

NEGOTIATED WAGES, EXCLUDING BONUSES (Y/Y)SOURCE: BLOOMBERG, AS OF SEPTEMBER 30, 2018

EUROZONE UNEMPLOYMENTSOURCE: BLOOMBERG, AS OF DECEMBER 31, 2018

EU rules make it difficult to expect much fiscal support to counter the weakness, but the European Central Bank will hold off on any rate hikes until there are fresh signs of growth. Meanwhile, a weaker euro and lower oil prices may help, too.

There are plenty of reasons to be gloomy about Europe, especially at the moment it is about to lose its third-largest economy, and there are plenty of additional risks ahead as it scrambles to craft more coherent economic strategy. But it’s also important to stare through the gloom and identify moments when markets are too pessimistic.

This may just be one of those.

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