Needless to say
2015 has not been a particularly good year for Europe and in particular for the
EU and the Eurozone. It began with the election of the radical Syriza party in
Greece, an event which helped to push Greece to the very brink of becoming the
first country to exit the Eurozone.
If this crisis dominated the first half of
the year, the second half was dominated by the possibly even more devastating
migration crisis which has threatened the very fabric of the EU. As such, it’s
unlikely many will be sad to see the back of 2015, but what will 2016 hold for
Europe? Below I look at some of the potential key events in the coming year, as
the list suggests there is no shortage of things to keep an eye on.
Possible re-run
elections in Spain
I start with this
because it actually straddles 2015 and 2016. The recent Spanish elections
failed to yield any obvious stable government. Talks are just beginning and a
minority government looks possible.
However, it is unclear how far such a
government would get given the continued need for economic reform and tricky
constitutional issues, such as potential Catalonian independence, which need to
be addressed. As such re-run elections in Spain are entirely possible, if not
in the first couple of months of the year, then later on if any government
proves unable to govern. But would re-run elections produce a clearer cut
result?
It’s hard to say but the rapid rise of new parties, in particular the
far-left Podemos, means that the result is incredibly uncertain and could still
lead to an entirely different approach to governing in one of the Eurozone’s
largest economies.
No long term
solution to the migration crisis in sight
Europe’s leaders
as well as the EU architecture have proven to be entirely unable to manage this
huge challenge. Policies so far focus on processing and relocating refugees but
have barely been implemented (only a couple of hundred out of 160,000 refugees
have been relocated).
Meanwhile, fences and borders have been springing up
across Europe and populist parties have been benefitting. It’s not clear 2016
will be much different. The approach has begun to focus more on dealing with
the source of the problem and managing the flow of migrants through Turkey.
However, without any clear solution to the war in Syria it’s hard to see a
significant slowdown in flows of migrants, meaning 2016 could face a similar
set of challenges on this front as 2015 has.
UK’s EU referendum
– Brexit far from impossible
It looks
increasingly likely that the UK will hold its referendum on EU membership in
2016 – I’d expect in June or September (though this could well change).
Currently polls show it will be a close race, with a number of undecided voters
in the middle likely to decide the outcome.
They could be influenced by a
number of factors including but not limited to: the success or failure of the
UK’s EU reform push, the migration crisis, the economic climate in the UK and
Europe and the position of leading politicians in the campaign. Brexit would be
a challenge for the UK, but the outcome would likely depend on policy
decisions, for example whether it remained an open and liberal economy.
Similarly, it would be a big challenge for the EU which would suffer an existential
blow to its political project and see it lose a sixth of its revenue, half its
military, its second largest economy, its financial centre and a vital
proponent of free trade. At the moment investors and markets are in wait and
see mode, this will likely change once we have a date.
Greek debt relief
negotiations
Eternally delayed
but likely to take place early in 2016. As I discussed here, the outcome is
likely to be some mixture of extended maturities, further grace periods on
interest payments and possibly linking some payments to growth.
There will also
likely be a flare up about the future involvement of the IMF in the Greek
bailout, which Greece is now opposed to and the IMF is not keen on but which
some northern Eurozone states see as a prerequisite.
In the end the big
question will be if the likely underwhelming result in terms of debt relief
will further reduce the already wafer-thin majority of the governing coalition
(2 seats in parliament).
Will there be any
progress in Eurozone structural changes?
As I’ve noted before, there is growing pressure from the ECB for wider changes to the structure
of the Eurozone to address the root causes of the Eurozone crisis. Progress has
been painfully slow. Focus is now on the first stage of the Five President’s
report (which laid out a path for future integration) in particular the
creation of a unified deposit guarantee scheme for the Eurozone.
However, the
plan put forward by the Commission is strongly opposed by Germany and looks very
unlikely to be workable in its current form. Another year with little progress
on the underlying Eurozone problems would not only disappoint the ECB (and
possibly sour its willingness to act) but also underwhelm investors who are in
some cases wondering what the long term vision for the Eurozone is.
Dutch referendum
on the EU-Ukraine association agreement
The Netherlands
will hold a (non-binding) referendum on the EU-Ukraine association agreement on
6 April 2016. As explained here, this is not
really about the agreement or even about engagement with Ukraine more broadly
but more about a proxy vote for venting wider frustration with the EU.
As such,
the debate in the run up will likely extend beyond the details of the agreement
and could bring anti-EU and anti-Euro concerns to the fore of the political
discussion in the Netherlands. Add to this the fact that the government is
struggling to hold its coalition together and that the far-right PVV party
leads in most polls, 2016 in the Netherlands could throw up some surprises.
Can progress be
made on the EU-US free trade agreement?
2016 may see a
renewed push on this front, though there are a number of obstacles from
continued grass-roots opposition in Europe to the looming US Presidential
election. This remains an important agreement, not just from an economic
perspective, but because it could set the tone for the next round of global
trade agreements. It could also play a role in the UK’s EU referendum.
Could the Irish
elections hold a surprise?
Ireland will hold
an election early in 2016. While at the start of 2015 there seemed to be a
significant risk of the rise of another populist party, in the form of Sinn
Fein, this seems to have dissipated somewhat (though not entirely). The
governing Fine Gael seems to be reaping the rewards of the economic recovery
but as the recent Spanish elections have shown, this should not be taken for
granted.
Political
instability in Portugal?
As 2015 draws to a
close cracks are already beginning to emerge in the leftist coalition
government. Divisions over taxpayer contribution to the resolution of Banif
bank mean that two of the three parties in the government voted against the
plans. The proposal only passed thanks to the abstention of opposition parties.
This could well be the first of many disputes given the disparate nature of the
coalition.
No further easing
from the ECB as the Fed drives divergence
As I predicted the ECB fell short of market expectations with its latest round of
easing, presenting a potentially longer term credibility problem which will be
interesting to watch in 2016. In any case, it seems that the ECB is now back in
wait and see mode and it would take a clear and serious deterioration in
economic data to drive it to any further significant easing.
With the Fed set
to tighten policy in 2016 (obviously still data and events dependent) there
will still likely be clear divergence between the US and Eurozone on monetary
policy, but driven more from the US side.
This should keep downward pressure on
the Euro (especially against the dollar) but with the Eurozone running a huge
current account surplus, the talk of a steady trend towards parity with the Dollar
should not be overdone.
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