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Populism Again Casts Shadow over Booming Eurozone Economy

October 16, 2017

LONDON (AP) — For months, the outlook for the eurozone economy has brightened thanks to a series of electoral defeats for political parties that were critical of the euro currency. Now, votes in Germany and Austria and uncertainty over the Spanish region of Catalonia are reviving concerns about the unity of the bloc.

In Germany, the anti-immigration and anti-euro Alternative for Germany received almost 13 percent of September’s national vote, putting it in parliament for the first time. Though the center-right Christian Democrats came out on top, the authority of Chancellor Angela Merkel was weakened by AfD’s relative success.

And in Sunday’s Austrian election, the right-wing Freedom Party come second with around 27 percent of the vote — enough to possibly become part of a government.

Should the party, which has sought to downplay the country’s Nazi past, become part of the government, it could hinder efforts to further integrate the economies of the 19 countries that use the euro. Such measures, advocated for particularly by France’s new president, Emmanuel Macron, are considered important to avoid new financial crises, stabilize the banks and sustain growth.

“Even though Austria is highly integrated and depends on the eurozone’s structure and openness, a new Austrian government will make the eurozone’s life harder, trying to push through self-interests,” ING economist Inga Fechner said.

The euro has edged lower in recent weeks as a result despite data showing that the eurozone economy is enjoying one of its strongest periods of growth since the global financial crisis exploded a decade ago. On Monday, it was down 0.2 percent at $1.1795, having been above $1.20 at the end of August for the first time in two years.

Also of potential concern to the eurozone is the uncertainty surrounding Catalonia following its disputed independence referendum earlier this month. On Monday, there was still a lack of clarity as to whether the region’s leader, Carles Puigdemont, has declared independence following the vote that Madrid has deemed illegal.

The Spanish government of Prime Minister Mariano Rajoy has repeatedly said it’s not willing to negotiate with Puigdemont if independence is on the table, or accept any form of international mediation. The government has threatened to activate Article 155 of Spain’s Constitution, which could see Madrid take temporary control of some parts of Catalonia’s self-government.

While the Catalan movement is not explicitly against the euro, unlike the German and Austrian right-wing parties, its success would shake the currency union by breaking up its fourth largest economy.

These political forces come at a time when the European economy is enjoying one of its most sustained upswings for a decade. A run of economic indicators have shown that the recovery, especially among those countries that use the euro currency, has been gaining momentum through 2017. The recovery, which has also seen unemployment come off highs, has prompted speculation that the European Central Bank will start to ease back on some of its emergency stimulus measures in the coming months.

The growth has been driven partly by the ECB’s stimulus drive, which has pushed down borrowing rates to record lows, as well as the export-boosting impact of a relatively low euro in a growing global trade environment. But many economists also credit the defeat of populist politicians earlier this year, notably in France where National Front leader Marine Le Pen lost overwhelmingly in the presidential runoff against Macron. Her defeat come a few weeks after Geert Wilders’ anti-Islam Freedom Party fared worse than anticipated in Dutch elections.

At the start of this year, the rise of populism was considered by many economists as the gravest cloud hanging over Europe’s economic future, especially as worries over Greece had abated. Britain’s vote to leave the European Union in the summer of 2016 showed how vulnerable the region could be to populist movements. The great fear for those overseeing the euro currency is that a party may come into government seeking to get out of the single currency and revert to the country’s original currency.

What’s occurred in the past few weeks is evidence that those populist forces are not done yet.

Simon Derrick, chief currency strategist at BNY Mellon, said “it would make sense for the euro to weaken if concerns about populism in the eurozone re-emerged.”

The next potential worry is Italy, where elections have to be held by May 2018. The country has for years grown more slowly than other developed economies and there are concerns that a party seeking to blame the country’s problems on the euro could make headway in the elections, potentially causing more uncertainty for a currency that’s spent years dodging crises. In August, former premier Silvio Berlusconi floated the idea of a parallel currency being introduced in Italy.

PAN PYLAS, Associated Press

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