Uncertainty and fear return to stalk the corridors of central banks and parliaments in Europe

The European Union is coming under renewed pressure as the global economy slows

Tough times ahead: President of the European Central Bank Mario Draghi

After a short period of relatively positive economic news, the European Union appears to be about to enter one of its frequent periods of crisis.

What’s interesting, though, is that some of the flashpoints are new. In particular, the Italian electorate, driven increasing frantic by immigration, has mandated a right wing government to eschew the usual European attitude to compromise. Some pundits argue that the latest spat between France and Italy represents the lowest point in relations between the two countries since World War Two.

Be that as it may, the recall of the French ambassador to Rome doesn’t exactly speak of harmonious relations between two of the most populous and economically significant partners in the Eurozone.

But the clash isn’t actually between two nations at all. Rather, the right-wing Italian government has a great deal of sympathy with the gilet jaunes currently causing systematic and ongoing unrest on the streets of Paris and other major French cities.

This is anathema to France’s President Macron, of course, while on the Italian side the incumbent government is doubling down. Elections are coming up, and the Italian government is making no secret of its wish that French voters move the country significantly rightward.

Now, traditionally European governments have tended to stay out of each other’s domestic affairs, at least as far as party politics are concerned. But although that behavioural consensus might be put down to a shared sense of decorum, there is another explanation. Broadly speaking Europe’s governments have, for decades, all come from a centre or centre-left political background, and as such they all shared the same outlook on the European project, both politically and economically.

But the pressures of immigration on a system enjoying significant economic prosperity but skewed significantly to the left can only build up for so long before some kind of release is sought.

In Germany, chancellor Merkel’s policy of admitting Syrian refugees by the million has encouraged the rise of the first electorally significant far right political movement since the war. And that same policy, viewed from across the thin stretch of the English Channel, was a central factor in turning the British against the European project.

So, things are changing. Spain’s government looks as though it’s about to collapse, with a new right wing alternative set to take its place. Germany is teetering on the edge of recession. Italy is in recession. And a palpable shift towards the right is gathering momentum.

How much all of this constitutes a risk from the investment point of view is open to question. There’s the uncertainty, of course, perhaps the most significant factor of all, particularly if one takes the view that the European Union has been central to guaranteeing the post-war peace.

But beyond that, there’s also the danger that if Europe’s largest trading block starts to turn in on itself, then global growth will be severely affected. After all, tariffs and the threat of tariffs, plus the ongoing Brexit threat are what’s leading Germany to the brink of recession. The current European economic order is built on the idea of free trade, albeit that special interest groups like French farmers are still allowed to game the system.

If the contagion released by Donald Trump spreads into Europe then the global economy could be set back decades. We are a long way from that outcome at the moment, but what’s disconcerting is that the fissures along which new divides might occur are already visible.

Italy is arguing with the European powers-that-be about the management of its deficit, about immigration, and about its ability to hold opinions about domestic policies in other countries. The British are about to give up on the whole thing, even at the risk of reigniting a dormant terrorist threat in Ireland. And the Germans, who have been the main beneficiaries of the whole system for so long, are now no longer enjoying any sort of meaningful economic growth.

What’s more, they be looking inward increasingly now, and for a couple of generations at least, as they seek to integrate the huge influx of Syrian refugees into their culture.

Any idea that Europe would ever emerge as a unite force to balance against the two economic powerhouses of China and the USA is surely dead in the water.

And at the economic level policymakers are increasingly looking with nervousness towards Japan, where decades of zero or negative interest rates has failed to generate any real or meaningful growth.




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