‘Protectionism, populism threaten euro zone’

LONDON: 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 EU and Britain becoming fractious, which was the main 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 (ECB) 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 US 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.
In recent weeks, the euro has come under pressure in the run up to the French presidential election.
Economists 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.