For the last four to five months, European businesses have been on hold as they wait for the results of the German election. That result is now in… and it means no change! While Chancellor Merkel and her party have seen good results in the polls, these results were not strong enough for them to gain a full majority. Additionally, within the results, some interesting subplots emerge: the Chancellor’s main coalition partner, the FDP¹, failed to gain a place in the Bundestag for the first time since the Second World War, while the anti- Europe AFD² party also failed to gain sufficient votes. So, where does this leave Germany? In all probability, with a Grand Coalition with similar policies towards Europe, there will be more budgetary discipline and more policy towards centralizing the institutions that are crucial to expand the European Union; there certainly will not be more consumption or lower taxes. Up to this point, European markets and economies have experienced a good summer: Industrial production has picked up, while the lessening of austerity has seen the recession diminish. However, much fundamental and structural work still needs to be undertaken, especially in Italy and France where political consensus remains fraught and weak. Nevertheless, progress is being made, enabling the European Central Bank (ECB) to watch from the sidelines as a fragile healing takes place. However, actual economies remain starved of credit as banks in the European Union (EU) continue to prefer to lend money to sovereigns, leaving investment for both capital expenditure and employment at low levels, frustrating politicians.
Amid fears that the Federal Open Market Committee would start to taper its quantitative easing measures, Europe has suffered over the summer from rising longer term rates as European Union bonds mirrored the movement in US bond yields. This has frustrated the ECB’s forward guidance, and higher rates and a stronger euro may threaten the current recovery. Also, over the summer, concerns have grown about the regulatory supervision of banks within the euro zone, while the ECB’s Asset Quality Review in the first quarter of 2014 may yet reveal more unpleasant details of the health, or otherwise, of the euro-zone banking system.
Other concerns have also been brewing over the summer and these may come into the focus of European politicians. Will Greece require another bail-out, and will that be its third or fourth? Will Italian politics lead to another election in the first half of 2014? Will we see further deficit spending slippage from Portugal, Spain and France? And, of course, there is the German Constitutional Court decision that may inhibit any significant changes, or increases, in German support for any new EU bail-outs or policies. We expect economic growth in Europe to remain lacklustre and reliant on a global recovery for any significant momentum. Within the region, local policy is expected to focus on addressing the tragedy of youth unemployment and the repair, or perhaps cure, of the troubled European banking system. Further muddling through, political dithering and difficulty are to be expected into 2014.