Eurozone politics are becoming boring again

Richard spells out what a steadier political environment in Europe means for investors.

Eurozone politics have entered a period of calm after sparking market turbulence with a series of high-risk events since mid-2016. Long-term challenges including slow growth, integration of immigrants and decreased competitiveness remain. Yet we see a steadier political environment supporting sustained, above-trend economic growth and some reform, and helping make the case for investing in the region’s equities.

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Europeans are feeling more confident about the future. Popular support for the euro single currency has risen to the highest since 2004, as the blue line in the chart indicates. Our BlackRock GPS (green line) shows consensus forecasts for economic growth in Germany, France, Italy and Spain—the four largest eurozone economies—are near their 2015 peak.

Anti-Europe threat fades

The potential for extremist politics to become mainstream has faded in recent months, we believe, and prospects for reforms look brighter than they have in years. In Italy, the likelihood of an anti-euro government has dwindled, as no major party is pushing to exit the eurozone. In France, President Emmanuel Macron is expected to implement his largely pro-growth agenda with the help of a solid majority in parliament. His labor market reforms are off to a good start, with a batch of reforms expected to be enacted shortly without major protests. Angela Merkel was widely expected to win a fourth term as German Chancellor on Sunday. The key unknown is whether her coalition partner will be the pro-European Social Democrats (SPD) or the pro-business Free Democratic Party (FDP), which has a more reluctant stance on European integration. Overall, there is a pro-reform wind blowing in Brussels and key European capitals.

The risks? Economic growth dampens the urgency to reform, and differing views on which reforms are needed are too large to overcome. Italian elections in the spring are likely to cause political and financial turbulence along the way, and eventually produce a hung parliament. We see this limiting the scope for the reforms and fiscal adjustment that Italy needs to keep its large debt sustainable.

Bottom line: A largely benign European political backdrop looks to be setting the stage for a favorable investment environment in the near term. This adds to sustained above-trend growth and ongoing monetary accommodation. A much stronger euro is another risk. This would be a threat to corporate earnings and export growth, and could complicate the European Central Bank’s efforts to reach its inflation target. We prefer European equities to credit in this environment.

Read more market insights in my Weekly Commentary.

Richard Turnill is BlackRock’s global chief investment strategist. He is a regular contributor to The Blog.

 

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of September 2017 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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