Potential anti-establishment upsets in national elections in France, the Netherlands and Germany, alongside a global rise in protectionism pose the biggest threats to the euro zone economy, according to a majority of economists polled by Reuters.
These risks come ahead of the threat of impending divorce negotiations between the European Union and Britain becoming fractious, which was the number one concern for Britain in a similar Reuters poll published this week.
The findings, released on Wednesday, contrast with financial markets around the globe, particularly stock markets, being priced for a lot of positive news.
“With populist parties still gaining support and opinion polls consistently proving unreliable, there are plenty of events that could unsettle markets,” Simon Wells, chief European economist at HSBC, said.
The euro zone economy is forecast to grow 0.4 percent in coming quarters, a respectable pace by recent historical standards, the latest survey taken Feb 9-15 showed.
Few economists strayed far from the median view, and those decent-yet-uninspiring growth predictions have barely budged over the last two years in Reuters polls.
Still, most economists who answered an additional question said the recent revival in the euro zone economy is sustainable.
But with the European Central Bank already purchasing tens of billions of euros a month in bonds and its key interest rates at zero or negative, there is little more it can feasibly do to revive the economy should it stumble.
That leaves the pace of economic growth, much like that of the United States and Britain, vulnerable to political forces at a time when global trade is at risk.
Inflation expectations remain well below the ECB’s target of just under 2 percent until at least 2019. Inflation is predicted to average 1.5 percent this year and 1.4 percent next, similar to a poll in January.
“With growth set to maintain a slow but steady pace, underlying price pressures are likely to stay muted. Although headline inflation is set to rise due to the drag from lower energy prices ending, core inflation remains stubbornly low,” noted HSBC’s Wells.
The recent optimism on the region’s economic outlook has coincided with a weak euro, making the currency bloc’s exports relatively cheap on world markets. The euro is predicted to weaken 3 percent against the dollar over the coming year, a separate Reuters poll of FX analysts showed.
POLITICAL RISK RISING
In recent weeks, the euro has come under pressure in the run up to the French presidential election.
The latest opinion polls show far-right National Front leader Marine Le Pen winning the first round of the election, but the losing heavily to independent candidate Emmanuel Macron or slightly less heavily to conservative Francois Fillon in the second round.
Despite this, few are discounting an upset give the failure of polls in recent British and U.S. votes.
“A victory for Ms Le Pen is well within the bounds of possibility,” said Florian Baier, senior economist at Fathom. “Latest polls show that Ms. Le Pen will make it to the second round, which she will then lose…(but) polls have got it wrong before. Mr Trump won, and Brexit happened.”
Over 90 percent of the 42 economists who answered an extra question in the latest survey said a win for the National Front party was unlikely.
Economists also gave a very low probability of any country leaving the currency union over the next few years.
That suggests the outlook for the euro zone economy, which is widely believed to lack the momentum to withstand a major political change, is based on the assumption that the political status quo across the region is maintained.
“It is not our central scenario that she (Le Pen) wins, but the risk scenario is that she wins as the chances of that happening is higher than what is priced into the markets,” Fathom’s Baier said. “If Le Pen wins the French election then it is the end of the euro area as we know it.”
If the National Front wins the election, it pledges to hold a European Union referendum within six months, abandon the euro and reintroduce the franc as the country’s primary currency.
Far-right and anti-establishment parties in the Netherlands and Italy also want to leave the euro zone.
Source: Reuters (Analysis and polling by Purnita Deb and Kailash Bathija Editing by Jeremy Gaunt)