A little more action please
As German voters go to the polls this weekend, Europe is on a roll: its economy grew faster than the U.S. last year, and has maintained a robust 2% pace into 2017. Spain and Germany are leading the charge, but nearly every country is doing well — France and even Italy have picked up pace. Unemployment has declined.
Angela Merkel’s near-certain victory will be saluted as another blow against populism, after Macron’s success in France and earlier elections in the Netherlands. Press headlines will reassure us that the tide of populism has stopped short of Europe’s shores.
Financial markets nod approval: people expected a strong dollar, but the Euro stole the show with a 14% gain against the greenback so far this year.
It is therefore not surprising that some commentators argue all is well: the recovery is in full swing, and will continue as long as policy is not tightened prematurely.
Others however think Europe is dancing on the deck of the Titanic: once monetary stimulus fades, financial markets will panic about high debt levels in low-growth countries, and the euro area will unravel.
The pessimists point to Italy, where support for the common currency has dropped to just over 50% and some politicians talk of introducing a ‘parallel currency’. Italy’s public debt can be sustained even at higher interest rates –two-thirds of it are held by domestic investors, and duration is comfortably long at about seven years; but as the next elections come around, the combination of high debt (over 130% of GDP), near-zero potential growth and irresponsible talk by politicians could make investors jittery and trigger liquidity problems.
I see a tremendous opportunity for Europe: strong growth and rising employment should make it easier for national governments to launch growth-enhancing reforms; and should reinforce pro-Europe sentiment, paving the way for closer Eurozone integration. If France really elected Macron because of his pro-Europe and pro-market platform, it’s game time!
Macron is indeed proposing measures to make the French economy more competitive and dynamic (earning the IMF’s praise); France and Germany have started conversations on Eurozone reforms.
Yet little of substance has been achieved so far.
I fear people have read too much into Macron’s success — I think he won in spite of his pro-market platform, not because of it.
I think populism is far from dead. Immigration can cause bigger political waves across Europe than markets realize. It is driving a wedge between western and central Europe — with Poland and Hungary taking a much tougher and outspoken stance against immigration; even in western Europe, the discomfort runs much hotter on social media than in the press — a worrying sign.
Fears of a new Eurozone crisis are premature. But Europe could easily slide back onto a path of mediocre growth, where immigration and chronically high youth unemployment will fuel rising social tensions.
After this weekend’s elections, European leaders have a great opportunity to reshape the continent’s future; wasting it could prove costly. We need “a little less conversation, a little more action, please”.
