FXStreet (Delhi) – Research Team at Goldman Sachs, suggests that if external shocks pose the greatest economic risk to our Euro area macroeconomic forecast, domestic stresses still represent the greatest political risk to the recovery.
Key Quotes
As events over the past year (for example, in Greece) have demonstrated, the political equilibrium underpinning the stability and integrity of the Euro area remains fragile. And the challenges of the refugee crisis pose threats to that equilibrium, as we have discussed above. To identify a number of vulnerabilities in the political environment:
In Greece, the Tsipras government needs to tackle pension reform before its official creditors will deem it compliant with the new adjustment programme, disburse further financial support and entertain some form of debt relief.
In Spain, the political stalemate that emerged from the recent national elections looks set to continue in 2016, with the issue of whether to permit a referendum on Catalan independence remaining an important sticking point in the formation of a new coalition government.
In France, the recent first round of regional elections saw the far-right Front National (FN) gain 28% of the nationwide vote, reflecting growing disquiet among the public regarding the level of immigration.
In Germany, Chancellor Merkel’s policy of openness to refugees is open to growing criticism both from within her own party and from wider public opinion. For the first time since the onset of the Euro crisis, her personal approval ratings have fallen.
2016 is also likely to see the UK hold a referendum on the question of whether to remain in the European Union. (Such a referendum must be held by end-2017.) The vote will be preceded by a renegotiation of the terms of UK membership between Prime Minister Cameron and other European heads of state. While we view a vote to remain in the EU as the most likely outcome of the referendum, it is likely to be a bumpy ride in the run-up to the vote, especially if the issue of refugee migration to the UK resurfaces in a similar fashion to the summer of 2015.
In short, the potential for political disruption to disturb the relative calm on Euro financial markets and the relative resilience and robustness of the European recovery (compared with experience during the financial and sovereign crises) is varied and substantial. As we argued in our first European Economics Analyst of 2015, it is in this political crucible that much of the outlook for the Euro area this year and beyond will be forged.”
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