Europe agonistes

The European Parliamentary Elections, which start in the UK on Thursday and continue elsewhere through to Sunday are unlikely to affect markets immediately. Here in the UK we face the strange prospect of the largest share of the vote going to a party of protest without practical policies and whose MEPs do not always turn up to parliamentary sessions. UKIP under Nigel Farage has done well to characterise the EU as the source of all ills but, of course, this is more like a lightening-rod for much wider anger and fears over relentless economic and social change and the failure of the Tories and Labour to explain or deliver on their promises. Immigration is proving double-edged as although many voters are clearly worried about it, most also seem unhappy with comments from more excitable UKIP candidates. Globalisation in the widest sense is the real culprit for those who are nationalistic, worried about house prices and/or public services or merely nostalgic.

For the record, as a strong advocate on both economic and political grounds of the UK’s membership of the EU, I intend to vote Lib Dem this week. Protectionist voices are becoming shriller around the world and it would be naïve to believe that countries outside Europe cannot wait to enter into bilateral agreements with the UK. My vote is not a ringing endorsement of the EU as it is now but more in the belief that the UK can only promote necessary reforms from within.  As a secondary issue, it is a pat on the back to the Lib Dems for having the courage to change from being the party of endless protest (with good and bad policies all mixed up) and join a coalition government, which history will probably judge much more kindly than most current commentators.

More important than UKIP’s performance will be how well the anti-EMU parties fare in France and Italy, which is quite likely to signal a new episode in the euro soap opera. The latest batch of economic indicators suggests that the governing parties in most countries are unlikely to receive resounding votes of confidence. The numbers in the table below speak largely for themselves but some additional comments may be helpful:

  • All GDP figures are flattered by disinflation/deflation because the calculation of ‘real GDP’ involves adjusting nominal GDP by the CPI. In the table Italy, Portugal and France are the worst performing but Finland, Greece and Cyprus are in recession while Bulgaria, Denmark, Estonia, Croatia, Austria, and Romania are struggling to varying degrees to generate much growth.
  • The soft Industrial Production numbers point ominously to ‘chill winds’ from Asia reducing exports but also to warm real winds in Europe that reduced demand for energy output.
  • Only Austria gets close to Germany’s Unemployment figure and altogether 12 out of 28 countries are at over 9%.
  • Italy and Portugal are not the only countries experiencing deflation. Hungary, Croatia, Slovakia, Bulgaria and, inevitably, Cyprus and Greece are too.
  • Ireland and Portugal have been restored to favour in the bond market along with Italy and Spain while France continues to be deemed the next best thing to Germany. Nevertheless, they are struggling with their Public Finances as are Belgium, Slovenia and (again) Cyprus and Greece. However, Germany is not alone in being on top of its deficit and debts.
  • The question arises as to whether the German economy is sufficiently locomotive to prop up the rest for long as it is clearly not helping them to grow. Will it want to try if others baulk at implementing overdue structural reforms?
  • The table also shows why the UK offers Germany the most hope for a growth partnership and, of course, vice versa. This is not really ironic as it explains exactly why Mrs Merkel is working hard to keep the UK inside the EU and why also even French will agree to talk after the UK election in May 2015.

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