Daily Insight
Group Economics Macro & Financial Markets Research
3 February 2016
European political risk is here to stay
European political risk is likely to continue to linger…
Head of Macro and Financial Markets
…given political fragmentation across the continent
Research
Portugal might be particularly vulnerable to fiscal slippage
Tel: +31 20 343 5616
Meanwhile, there is a significant risk of UK exit from the EU
Nick Kounis
nick.kounis @nl.abnamro.com Aline Schuiling Senior Economist Tel: +31 20 343 5606 aline.schuiling @nl.abnamro.com
The rise in political risk is not a coincidence European political risk will likely continue to linger in 2016. A cocktail of poor economic performance, high unemployment, austerity and concerns about immigration have led to political fragmentation in Europe. The popularity of radical parties on all sides of the political spectrum has risen. This is making it more difficult to form effective governments, while also increasing the chances that a radical party has a strong influence on government policy. An alternative manifestation of these political tides is the UK’s decision to hold a referendum on whether to stay in the EU, most likely this year. There may be unscheduled elections There is only one major election scheduled in the eurozone in 2016 (Ireland) but that does not mean there will not be more. For instance, Spain’s political parties still have not managed to form a government following elections in December, which did not give any party an overall majority. Portugal does have a government after elections in October last year, but it is a rather unstable left-wing coalition. Meanwhile, in Greece, elections do not seem likely but there is a risk that the agreement with its creditors will be difficult or even break down. Our base scenario makes the judgement that the fall-out for the economy and financial markets will be limited. This reflects that new governments – even fragmented or radical ones – have generally ultimately shown as willingness to co-operate with Europe and broadly stick to European rules. In addition, Europe’s financial safety nets – especially the ECB’s OMT programme – have proved effective in limiting financial stress when political risk has escalated over the last few years. Portugal might be particularly vulnerable to fiscal slippage However, there is a risk that there will be fiscal slippage under new governments, which will lead to a significant deterioration in the debt outlook and therefore the credit quality of the sovereign. Portugal is a risk in this respect, as its high structural deficit
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Daily Insight – European political risk is here to stay – 3 February 2016
and debt ratio make it particularly vulnerable to fiscal slippage. Alternatively there is a risk that some countries could see a reigning back of structural reforms or fresh economic policies might be introduced that adversely affect the growth outlook. A lower probability but higher impact risk is that the government of vulnerable eurozone economy takes positions that lead to a complete breakdown of its relations with other member states. Greece is a recent example of this. This could raise worries of a eurozone break-up leading to an escalation of financial stress. Polls suggest Brexit is a significant risk Our base case is that the British public will vote to stay in the EU though this is a close call given that opinion polls suggest that opinion is divided. There is therefore a significant risk the UK public will vote to leave the EU. The potential economic damage depends on the post Brexit agreements that the UK reaches with the rest of the EU. It is quite possible that the EU takes a very tough approach in its negotiations with the UK to make sure that EU exit is not seen as an ‘easy option’ in the future. In this case the UK’s access to the EU market could be impaired, potentially damaging its exporters, foreign direct investment and financial sector. Though the UK would suffer most damage, the rest of the EU would also be hurt as the single market would shrink (the UK is the EU’s second largest economy and one of the fastest growing big economies). There are also second round political risks. The UK may split as there could be a new Scottish in-out referendum (Scotland is more pro-EU than the rest of the UK). In addition, anti-EU movements in other member states may rise putting pressure on other governments to hold votes on the issue. Polls of UK public opinion on Brexit Poll of polls
55 50 45 40 35 30 May
Jun
Jul
Aug Remain
Sep
Oct
Nov
Dec
Jan
Leave
Source: Various polling organisations, ABN AMRO Group Economics
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Daily Insight – European political risk is here to stay – 3 February 2016
Day
Date
Time
Country
Monday Monday Monday Monday Monday Monday Monday Monday Monday Monday Monday
01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016 01/02/2016
02:00:00 02:00:00 02:45:00 09:00:00 10:30:00 14:30:00 14:30:00 15:45:00 16:00:00 19:00:00
CN CN CN NL EC GB US US US US US
Tuesday Tuesday Tuesday Tuesday
02/02/2016 02/02/2016 02/02/2016 02/02/2016
06:30:00 09:55:00 09:55:00 11:00:00
Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday Wednesday
03/02/2016 03/02/2016 03/02/2016 03/02/2016 03/02/2016 03/02/2016 03/02/2016 03/02/2016 03/02/2016
02:45:00 02:45:00 10:00:00
Period
Latest outcome
Consensus
PMI manufacturing - index (official) PMI non-manufacturing - index (official) PMI manufacturing - index (Caixin) PMI manufacturing - index PMI manufacturing - index PMI manufacturing - index PCE deflator core - % mom PCE deflator core - % yoy Markit - Flash PMI ISM manufacturing - index Fed's Vice-Chair Fischer speaks on economy and policy
Jan Jan Jan Jan Jan F Jan Dec Dec Jan F Jan
49.4 53.5 48.4 52.4 52.3 52.9 0.00 1.4 52.4 48.2
49.6
IN DE DE EC
Repo rate - % Unemployment - % Unemployment change - thousands Unemployment - %
Feb 2 Jan Jan Dec
6.75 6.2 -20.0 10.40
CN CN EC EC GB EC US US PL
PMI services - index (Caixin) PMI composite - index (Caixin) PMI services - index Composite PMI output PMI services - index Retail sales - % mom ADP nat. employment report - thousands ISM non-manufacturing, index Reference rate - %
Dec Dec Jan F Jan F Jan Dec Jan Jan Feb 3
50.2 49.4 53.6 53.5 55.5 -0.3 256.9 55.3 1.5
Thursday Thursday Thursday Thursday Thursday
04/02/2016 04/02/2016 04/02/2016 04/02/2016 04/02/2016
13:00:00 13:00:00 13:00:00 14:30:00 20:00:00
GB GB CZ US MX
Policy rate - % BoE size of asset purchase programme - GBP bn Repo rate - % Output per hour nonfarm business sector - % qoq Policy rate - %
Feb 4 Feb Feb 4 4Q P Feb 4
0.5 375.0 0.1 2.2 3.3
0.5 375.0
Friday Friday Friday Friday Friday Friday Friday
05/02/2016 05/02/2016 05/02/2016 05/02/2016 05/02/2016 05/02/2016 05/02/2016
08:00:00 09:00:00 14:30:00 14:30:00 14:30:00 14:30:00 21:00:00
DE CH US US US US US
Manufacturing orders - % mom Foreign currency reserves - CHF mln Change in employment private employment - thousands Change in employment total - thousands Unemployment - % Trade balance - USD bn Fed Reserve consumer credit - USD bn
Dec Jan Jan Jan Jan Dec Dec
1.5 559682 275 292 5.0 -42.4 14.0
-0.2
-1.0
199 204 5.0 -42.5 14.8
180 190 5.0
10:30:00 11:00:00 14:15:00 16:00:00
Key Economic Indicators and Events
ABN AMRO
48.1 53.2 52.3 51.8 0.11 1.4 48.4
48.0
6.75 6.3 -7.3 10.50
6.75
53.6 53.5 55.4 0.3 199.9 55.2
0.5 180 55.0
-1.4
Source: Bloomberg, Reuters, ABN AMRO Group Economics (we provide own forecasts only for selected k ey variables and events)
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