The misunderstood continent
With 7% of the world’s population contributing c.20% of its output, Europe remains one of the most affluent and productive economic blocs (and consumer markets) on the planet. Even accounting for the terrorist atrocities inflicted on the French population in recent months, Western Europe remains one of the world’s most peaceful and civilised landmasses too. Of course, none of this is to argue that the European project is without blemish; however a more balanced assessment of the prospects for Continental Europe may lead investors to see opportunity in some of the more unloved areas.
Recent polls indicate that the immediate reaction to Brexit from many Europeans has been a shuffle back towards the political centre. Support for the EU actually seems to have increased. Furthermore, we should beware of confusing the persistently lukewarm UK political sentiment on the EU with their peers on the continent, who remain much more formidably committed to the project on the evidence of their actions over the last several years.
In any case, there are actually no legal provisions for referenda on international treaties within the constitutions of Germany, Italy, Hungary or the Czech Republic, while popular support for such a move remains low in Poland, Portugal and Spain. It is the current distribution of power within France, Finland and Sweden which suggests that a referendum on the EU, though legally possible, should be treated as a reasonably remote possibility. Within this, the rise of Front Nationale (FN) in France under Marine le Pen clearly presents the most tangible threat, though FN would still have to double their support again to have a plausible shot at the presidency, something that so far seems unlikely though obviously not impossible.
In the Netherlands, Geert Wilders, leader of the far right ‘Freedom Party’, called for a referendum on EU membership immediately after the UK’s referendum. However, the proposal was overwhelmingly rejected in Parliament by a majority of 150 against and 14 for. With elections next year, there is a chance that Geert Wilders could be at the head of a coalition government, which would result in a higher probability of a referendum. However, constitutional change would likely be required, which in turn needs a two-thirds majority in Parliament. Austria has been in the headlines after the constitutional court overturned the results of the closely fought presidential elections, raising the potential for a less EU friendly president in the form of Norbert Hofer. We would note that he has been critical of the EU, but has so far hesitated from putting an EU referendum at the centre of his campaign. In any case, the Austrian presidency is a largely ceremonial role, and with the President having very little power to force through a national referendum, if any at all.
The most plausible problem area in Europe for this year actually seems to be Italy, where an autumnal referendum on vital constitutional reform looms large. Prime Minister Matteo Renzi has said that he will step down if the proposal is popularly rejected, something that polls currently suggest cannot be ruled out. Such an outcome could potentially exacerbate political and economic uncertainty in Europe, especially with the increasingly popular anti-EU Five Star Movement waiting in the wings. Whether Prime Minister Renzi’s gamble pays off may in part hinge upon concerted action on Italy’s banking sector problem – action that shields retail Italian voters from significant asset write-downs.
Last week’s PMIs illustrate that neither European nor UK economies have fallen off a cliff in the aftermath of the UK’s referendum. However, we have always cautioned readers against placing too much weight on a single data point, and this would be no exception. This is a saga that will play out over several years and no doubt involve countless twists and turns. However, we retain our view that the effects are likely unhelpful but digestible for the UK economy and that the European economic recovery will be slowed but not upended.
By Calum Brewster, Managing Director, Barclays, Wealth & Investment Management, North Region