Assessing the European Elections
Neuberger Berman
May 22, 2012
In the two years since the onset of the European sovereign debt crisis, policymakers have struggled with the issue of fiscal integration and the tradeoff between growth and austerity. Although many observers hoped that some clarity would emerge from the recent elections in Greece, France and Germany, political paralysis continues throughout Europe. In this edition of Strategic Spotlight, we discuss the fiscal and growth outlooks for key eurozone countries and the region overall.
EUROPE’S ECONOMIC OUTLOOK HAS WEAKENED
| European Commission Real GDP Forecasts | |||||
|---|---|---|---|---|---|
| Spring 2012 Forecast | Change from Fall 2011 | ||||
| 2012 | 2013 | 2012 | 2013 | ||
| Germany | 0.7 | 1.7 | -0.1 | 0.2 | |
| France | 0.5 | 1.3 | -0.1 | -0.1 | |
| Greece | -4.7 | 0.0 | -1.9 | -0.7 | |
| Spain | -1.8 | -0.3 | -2.5 | -1.7 | |
| Italy | -1.4 | 0.4 | -1.5 | -0.3 | |
| Euro area | -0.3 | 1.0 | -0.8 | -0.3 | |
| Source: European Commission. Spring 2012 forecasts released May 11, 2012. | |||||
Countries in the Spotlight
Greece: Following several private debt exchanges and a downgrade by Standard & Poor’s to selective default (currently rated CCC), the poster child for the sovereign debt crisis continues to make waves and put investors on edge. Most recently, Greece’s political elections failed to yield a coalition government, which set the stage for another round of elections on June 17. Given the political uncertainty in Greece, we think it is less likely that the country will comply with its anti-growth International Monetary Fund (IMF) austerity program, which includes a variety of tax increases and a decrease in the minimum wage. While European Union (EU) finance ministers have dismissed a Greek exit from the EU as nonsense, the country will be at odds with Germany should they decide against implementing the program, which was agreed to in exchange for financial aid. Under this scenario, the possibility of a Greek exit remains on the table.
France: The win by Francois Hollande over incumbent Nicolas Sarkozy in France’s presidential election was widely anticipated but could potentially alter Europe’s political direction. President Hollande has criticized austerity in the past and we believe he will advocate a growth compact to go along with the fiscal pact the EU is working to ratify. Should France develop a disdain for outright austerity, this may impact how more indebted countries like Greece, Portugal and Spain are evaluated with respect to their structural reforms by both investors and the monetary troika (IMF, European Central Bank and EU).
Germany: As with most macro issues in the eurozone, Germany will largely dictate the course of the sovereign debt crisis. Ideally, Germany would like to reconstruct a stronger eurozone that consists of more fiscally conservative members. Given the developments in Greece and France, this may be difficult to achieve in the near term; indeed, German Chancellor Angela Merkel may need to tolerate fiscal imbalances for the time being. Longer term, Germany is likely to remain acutely focused on controlling inflation, even if it comes at the expense of growth in the broader region or prompts weaker countries to exit the euro bloc.
ECB’s Central Role
As opposition to austerity measures spreads across Europe at a time when the growth prospects for the region are weak, the ECB will have to play an important role for the European economy in the months to come. The central bank has been hesitant to do more after cutting rates twice late last year to the all-time low of 1.0% and implementing two non-standard LTRO (long-term refinancing operation) programs; still, ECB President Mario Draghi has stepped up as needed, playing the role of lender-of-last-resort to the banking system. Draghi will need to continue to do so as Europe works through the next stage in its sovereign debt crisis. We would not be surprised to see further rate cuts and another LTRO-type program to combat economic andfinancial market strains.
What to Expect
We strongly believe that European policymakers would like to keep the 17-member eurozone intact as the fallout and contagion from a euro breakup would severely impact growth in the region. That being said, investors and policymakers alike know full well that one mutual monetary policy and 17 separate fiscal policies is a recipe for failure. The most important question in the near term following the recent elections is whether Europe’s new political direction will weaken the resolve to reach fiscal solidarity within the 17-member monetary union. Achieving fiscal union, while at the same time engendering an environment of growth (and thereby reducing deficits), is a delicate balancing act that the ECB and heads of state continue to engage in. To keep the eurozone intact, we think greater emphasis needs to be placed on near-term growth; we believe French President Hollande and German Chancellor Merkel are slowly coming to terms with this realization, which should benefit the broader region in 2013 and beyond.
This material is presented solely for informational purposes and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman’s Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of five investment professionals who consult regularly with portfolio managers and investment officers across the firm. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Third-party economic or market estimates discussed herein may or may not be realized and no opinion or representation is being given regarding such estimates. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.
This document is issued for use in Europe and the Middle East by Neuberger Berman Europe Limited which is authorised and regulated by the UK Financial Services Authority ("FSA") and is registered in England and Wales, Lansdowne House, 57 Berkeley Square, London, W1J 6ER. Neuberger Berman is a registered trademark.
This document is being made available in Asia by Neuberger Berman Asia Limited ("NBAL"), a Hong Kong incorporated investment firm licensed and regulated by the Hong Kong Securities and Futures Commission ("SFC") to carry on Types 1, 4 and 9 regulated activities, as defined under the Securities and Futures Ordinance of Hong Kong (Cap.571) (the "SFO").
This document, and the information contained in it, is being made available in Australia by Neuberger Berman Australia Pty Ltd (CAN 146 033 801), holder of Australian Financial Services Licence No. 391401 ("NB Australia"), to a person defined as a "wholesale client" under section 761G of the Corporations Act 2001 (Cth) and applicable regulations, and other such persons to whom disclosure would not be required under chapter 6D and Part 7.9 of the Corporations Act 2001 (Cth) ("Wholesale Investor"), for informational and discussion purposes only. This document is intended only for the Wholesale Investor to which it has been provided, is strictly confidential and may not be reproduced or redistributed in whole or in part nor may its contents be disclosed to any other person (other than such Wholesale Investor's agents or advisers) under any circumstances without the prior written consent of NB Australia.
This document, and the information contained herein, is not, and does not constitute, directly or indirectly, a public or retail offer to buy or sell, or a public or retail solicitation of an offer to buy or sell, any fund, units or shares of any fund, security or other instrument ("Securities"), or to participate in any investment strategy.
The Wholesale Investor who receives this document should not consider it as a recommendation to purchase any Securities mentioned in it. To the extent that information in this document constitutes financial product advice, it is general financial product advice only, and provided only by NB Australia to Wholesale Investors. This document does not take into account the Wholesale Investor's investment objectives, financial situation and particular needs (including financial and tax issues) as an investor. Any Securities mentioned in this document will only be available to a Wholesale Investor to whom the provision of a disclosure document prepared in accordance with Australian law is not required. The Wholesale Investor to which this document is provided should not rely on the information contained in this document in making any future investment decision.
This document has been issued for use in Japan and Korea by Neuberger Berman East Asia Limited, which is authorized and regulated by the Financial Services Agency of Japan and the Financial Services Commission of Republic of Korea, respectively. Please visit https://www.nb.com/Japan/risk.html for additional disclosure items required under the Financial Instruments and Exchange Act of Japan.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. Neuberger Berman LLC is a Registered Investment Advisor and Broker-Dealer. Member FINRA/SIPC.
(c) Neuberger Berman
