Time to raise our gaze

Tony Ward

February 22, 2017

A report out last week from Bank of America Merrill Lynch (BAML) makes interesting reading. It suggests that investors see European disintegration as a bigger tail risk than any potential trade war triggered by US president Donald Trump.

BAML’s survey said ‘European disintegration’ following a series of elections this year posed a bigger risk to financial markets than the prospect of a trade war. “European politics makes a return as the top tail-risk to global markets,” said BAML strategist Manish Kabra. He continued: “Sentiment towards French equities has dropped to its lowest level in almost two-years and France is now the least-preferred equity index in Europe.”

This doesn’t really surprise me. However, I listen to many of my colleagues in the industry and they insist that things are going well. Now that may currently be true for the UK where economic growth is exceeding expectations. Business and consumer confidence also remain high, despite the looming threat of higher inflation and the knock-on from moderating consumer spending. Yet ‘Brand GB’ remains solid and many economists, including the European Commission, have upped their growth forecasts for the UK.

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All well and good. But we cannot afford the luxury of looking at ourselves in isolation while hoping that what happens internationally will not to affect us. When viewed in full,  all those macro-economic and geo-political shenanigans on the fringes of our vision constitute a world in turmoil with uncertainties piling up.

When we put on our corrective fiscal spectacles, the sorrowful state of the Italian banking system comes into sharp focus. And then, of course, there’s Greece. I have always maintained that the bailout plans were a sticking plaster offering no permanent solution. Things are coming to a head.

This failure to agree on measures to unlock €7 billion for Athens means the issue could become a political hand grenade to be lobbed into the Dutch and French election campaigns. EU officials are at odds with the IMF over whether to grant debt relief to Greece; they feel they have already given the country significant debt relief and are reluctant to go further. This is a worry. Even if a deal is struck, the problem isn’t going away.

And then you have the elections in Europe themselves, which have the potential to throw an almighty spanner into the continent’s political works. Christine Lagarde, managing director of the IMF, warned that political instability threatens the continent, declaring herself ‘worried’ by the elections. Votes this year include the French Presidential election, which is expected to see Front National leader Marine Le Pen reach the second round. Le Pen wants a referendum on taking France out of the euro. The Dutch election could also give more power to eurosceptic Geert Wilders, while Angela Merkel’s plans could be disrupted in September’s German elections. The German vote in particular has consequences for the Greek bailout because direct cash transfers to Greece, rather than loans, are unpopular with Germany’s electorate.

So much to think about, so many uncertainties. It’s no wonder BAML has reached the conclusion it has. Anything can happen. And the UK cannot take comfort by believing itself to be immune to these events. Notwithstanding Brexit, we will continue to be affected by global events and their ramifications. We need to spend more time looking beyond our borders, and less focusing on the minutia of the UK’s current economic data.

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