The euro area is looking like a haven of stability these days. The election of Emmanuel Macron and his strong relationship with Angela Merkel have driven expectations that the economy will get back to more robust growth and that the political arena will take the steps required to embark on reforms that will maintain stability in the long term.
This watershed is remarkable as barely six months ago, the euro area looked like it was on its last legs. The expected surge in populism during the various different elections was set to hamper European integration and set off a downward spiral of lessening cooperative and greater antagonism.
Yet as July gets off to a start, we can observe that this is far from the reality and that European electors did not follow the path chosen by the US and the UK. The presidential election in Austria pushed populist parties into the political wilderness, while in the Netherlands the nationalist party broadly failed. The same can be said of France, where Emmanuel Macron’s victory can be seen as a strong vote for Europe from the French population. The general election in Germany in September is likely to see a victory for Angela Merkel and the AFD is no longer casting a dark shadow over the country, and seems set to win around 8% of the vote based on the latest polls. Even UKIP, which campaigned against EU membership ahead of the June 23 2016 referendum, virtually disappeared at the June 8 general elections.
This political change in the euro area is due to uncertainties triggered by the US elections and the UK referendum. No-one in Europe wanted to follow this path of non-cooperation as it is contrary to the very foundations of Europe, built up over the past 60 years. Populist parties that lost in these various elections looked to our UK and US neighbors as examples to follow, but Europeans have shown that they are wiser than that and did not want to go down that road.
So a wind of hope is blowing through Europe, following this political watershed, and as a result of the idea that populism may have gone out of fashion, that there is no determinism to the dismantling of European construction and in view of hopes on Europe’s ability to stage a revival on the back of the Franco-German partnership. The survey by PEW Research Center from June 15, 2017 (read more here) reveals a much more positive view of Europe in 2017 as compared to 2016. Citizens in all European countries have a positive view and expectations on Europe, with only Greece showing a deterioration in sentiment, but we all know why.
I draw particular attention to these points as they are important in the cyclical turnaround we are witnessing for the euro area economy. They are also vital in the way that the rest of the world sees the Eurozone. These transformations are fundamental and key in understanding the euphoria that is taking over Europe, apart from the UK.
The cyclical turnaround in the economy reflects a number of macroeconomic conditions that are required for this improvement. But it is also the change in economic players’ perception of their future. A number of factors help see the future in a different way: the disappearance of the risk of European disintegration, the ability to create a future in Europe because its leaders are committed to the EU, and ongoing favorable financial conditions. Economic players are taking the full measure of these shifts and are taking them on board… and suddenly the situation takes on a whole new dimension.
This is why Emmanuel Macron’s election is important and it is also why he is bound to succeed.
This change in scenery contrasts sharply with the uncertainties generated by Donald Trump in the US and with Theresa May’s procrastination in the UK. Both are triggering fresh risks.
In the US, tension between some States and the Federal government on the healthcare question and on climate change reveals fresh defiance on the other side of the pond. The United States no longer looks so united and the President’s tweets further heighten this unease as it is no longer just an American question, but a matter of its relationship with the rest of the world.
Meanwhile, in the UK, Theresa May’s position since the June 8 general election is highly uncomfortable and there is a lack of overall strategy in the Brexit negotiations with the EU… and this is the worst possible strategy for the UK.
The euro area is now looking like the region of stability. It has displayed political maturity and its leaders are aware of the historical opportunity they have to renew and consolidate European institutions. It must succeed and everyone wants to see this victory. In addition to the change in perception, this also leads to hefty capital inflows from countries across the world seeking to take advantage of this revival, while avoiding excessive risk related to the UK and US.
Economic activity is set to benefit and if Europe does not disappoint, there could be some pleasant surprises on growth. The ECB may then want to regulate this growth in order to avoid creating fresh imbalances, but it should take its time and give this recovery the space it needs to gather pace.
Political momentum has shifted, economic policy is clearer and the rest of the developed world is in a more shaky position. This is an opportunity for Europe and the euro area. Let’s take advantage of this opening to give Europe every chance for success and rise to the challenge of putting Europe back at the heart of world momentum. This is the undertaking for each and every one of us in Europe.