Europe's Trump Cards
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Europe's Trump Cards

Pivotal elections are coming up in Europe. Their outcomes will have an impact on the economy and financial markets.

Europe's political calendar may prove to be explosive. Germany, the Netherlands, and France will soon be holding elections. They have the potential to disrupt the political landscape of "the old continent", just as Donald Trump intends to do in the US. In particular, the outcome of the election in France could call into question the future of the European Union (EU) as a whole, should Marine Le Pen win. Nevertheless, we believe it is unlikely that the election results in one of the countries will set off a political or economic shock wave. There are solid reasons to believe that the European economy will do well this year and that there is potential for even more growth.

Echoes of Trump in Europe

There has been a dramatic surge in support for radical, populist parties and politicians in Europe. Left-wing populism has caught on, particularly in the south, while right-leaning parties have gained a foothold in the north. As a result, the financial markets will also react strongly to the progress of these political movements. In particular, these trends have one thing in common: the dwindling public support for free trade, globalization, and immigration.

France Poses the Greatest Threat

Does political radicalization pose an existential threat to the eurozone and the EU? Not in the short term. Of all the elections in 2017, none has the potential for radical results. Without a doubt, the outcome of the elections in France poses the greatest threat. A win by the National Front with Marine Le Pen would jeopardize the cohesion of the EU and the eurozone. Although such an outcome cannot be ruled out entirely, we believe it is unlikely, even if the polls were to substantially underestimate support for the National Front.

Le Pen may qualify for the second round, but we anticipate an outcome similar to 2002, when the center-right candidate, Jacques Chirac, beat Jean-Marie Le Pen by a landslide – although it may end up being a closer race this time. There are various reasons why Marine Le Pen is unlikely to unexpectedly gain the backing of the French the way Trump managed to in the US. Unlike Trump, Le Pen is part of the political establishment. Her ability to win over more of the population than the already large share she has now seems limited. The two-round voting system also reduces the risk of a "mistake," since voters have the opportunity to correct the initial results.

This does not imply that we view the surge of populist parties as harmless. On the contrary, there is a very real threat, but it is rather long-term.

Economic Resilience

As a result, we are optimistic about economic growth in the eurozone this year. The general projections for economic growth have consistently been overly pessimistic during the past two years. The annual growth rate has stabilized at 1.5 percent in recent years, despite a series of political and economic disruptions.

Unspectacular but stable growth (eurozone GDP, y/y%)

Unspectacular but stable growth (eurozone GDP, y/y%)

Source: Eurostat, Credit Suisse

Given the traumatic experience during the European debt crisis, it is understandable that investors are skeptical and cautious about the sustainability of this growth. However, there are several reasons why growth may gain momentum. The movement of recent years was based on increasing domestic demand, whereas exports exhibited a sideways trend. This means that the eurozone's economy has taken off almost entirely as a result of domestic consumption and has a solid foundation. It is true that the driving factors are gradually weakening, since the effects of falling energy prices and improved credit access will not be seen again. Less consumer spending could be offset by increasing corporate investment, however.

Demand growth driven by domestic consumption (eurozone total demand, y/y%)

Demand growth driven by domestic consumption (eurozone total demand, y/y%) 

Estimates for Q3 2016

Source: Eurostat, ECB, Credit Suisse

Caution with Faster Growth

Additional momentum is also anticipated in exports. Their performance has been unusually poor over the past two years, but there is a good chance that they will spur growth in the next few months. First, the continued slump in global trade over the past two years may be coming to an end, as suggested by various leading indicators. Second, Russian demand has stabilized since its mid-2015 collapse. Third, the weaker euro will also give products from the eurozone a competitive advantage and will help them gain market share.

We are currently projecting 1.6 percent growth for the eurozone. If exports from the eurozone grow and domestic demand remains stable, economic growth could accelerate. This is important for the European Central Bank (ECB): Continued economic improvement would undermine the ECB's arguments for maintaining quantitative easing. Concerns over the end of the extremely relaxed monetary policy would then hit the market earlier than anticipated.

For the complete 2017 outlook, visit the Investment Outlook 2017 website.