Conference Presentation, Panel
A Continental Wake up Call: Challenges and Opportunities for a Post Brexit Europe
- Eurozone growth is projected to reach or exceed 3% in the current year, breaking a previous cycle of economic and political stagnation, though observers warn against mistaking this cyclical recovery for a permanent fundamental shift.
- Inflation is expected to rise next year, potentially prompting the European Central Bank to adjust its quantitative easing program, a move that could reintroduce political risks from the eurozone periphery.
- Future recessions in Europe are not anticipated to be severe or led by the region, given that consumers and corporates currently operate with low leverage, though risks remain regarding the cost of government debt servicing in Italy.
- The Eurozone aims to transition from phase one to phase two of Brexit negotiations at the upcoming European Council meeting, contingent upon the UK making sufficient progress, while the UK may struggle to define a clear trade strategy for autumn without a significant shift in government stance.
- If the UK fails to secure a meaningful trade deal, the default position risks reverting to WTO rules excluding services, which could severely damage the economy, whereas remaining in EU economic structures while leaving the political apparatus is viewed as the optimal outcome.
- Political volatility is forecasted to primarily manifest in foreign exchange markets, impacting the pound, the Swedish krona, and Eastern European currencies, rather than causing immediate significant disruption to equity markets.
- Populist governments in Central and Eastern Europe, along with rising centrifugal forces, threaten European integration, while small states may form their own alliances to compete with the EU, potentially shifting toward a "community of sovereign states" if protectionism increases.
- Germany is expected to spend the next three months negotiating a new coalition, effectively operating as a caretaker government during critical Brexit talks, while Prime Minister Theresa May faces the possibility of stepping down or being forced out within a few months.
- Italy's 2018 elections are anticipated to be significant with the Five Star Movement likely polling first, yet growth may remain too slow to reverse low trust in institutions or improve living standards, and a debt crisis is not currently imminent despite nominal growth lagging debt service costs.
- Poland and parts of Central and Eastern Europe are expected to experience unprecedented growth and corporate profit boosts, though concerns exist regarding the impact of structural funds and trade risks stemming from the fact that 6.3% of Polish exports go to the UK.
- The US administration is reducing its engagement with Europe, creating a need for European states to organize differently and increase resources for defense and security in response to rising threats from Russia, the Middle East, and China.
- The interplay between monetary and fiscal policy across Eurozone countries is identified as the primary determinant of success over the next four to five years, with a noted appetite for a leadership change among younger politicians to address issues like labor automation.
- Emmanuel Macron is viewed as having a once-in-a-generation opportunity to lead serious reforms in France and guide Europe alongside Germany, requiring his political movement to evolve into a permanent structural change rather than a fleeting event.
- Small European states face potential disadvantages from the unification of corporate tax rates and regulations, which could remove their current tax advantages and regulatory arbitrage opportunities.
- Migration remains a primary driver of tension between Central and Eastern Europe and the rest of the continent, with Eastern countries resenting refugee acceptance, while public opinion volatility driven by low trust in government continues to influence polls more than marginal growth increases.
- The risk of political instability is noted in Spain regarding Catalan developments, and some member states are moving away from core European values and freedoms, presenting a fundamental issue that is difficult to resolve.