Arguably since the formation of the Euro Monetary Zone, there has never been such a high threat to its survival as exists today. As the world has seen with the election of President Trump and Brexit, populism is gaining wider political support amongst Western democracies. In 2017 and beyond, this populist movement could have wide ramifications for European Union residents and also for the Farnam International Opportunities Portfolio.
From an economic perspective we can understand why there is an anti-European Union sentiment flooding the continent. We can also comprehend why there are limited reports of this distaste within Germany. The Unemployment table below may help to explain some of this anti-EU sentiment – and lack thereof – in Germany on a comparative basis. (Green are non-Euro currency & red are Euro currency countries)
The graph shows Germany and Ireland are the only ones that have reduced their unemployment rates convincingly since the global financial crisis within the Euro Monetary Zone. While this may have nothing to do with the actual underlying problems of each economy or the political environment, we can see how populist figures could easily spin it to seem so, especially when coupling it with other information.
Moving forward, in our eyes there will be three key political events – and the potential for a fourth – in the Euro Zone within the next 12 months that could reshape the future of the continent. Firstly, the French Election’s first round begins in late April, where Marine Le Pen (the anti-EU candidate) is expected to advance to the second round. Le Pen has vowed to have a vote on EU membership within six months of taking office. Currently, we believe this would be the end of the Euro currency as we know it if this referendum were to succeed.
The second event is the ongoing negotiations between the United Kingdom and the European Union on the terms of their exit from the zone. This will no doubt be watched by other governments within the Union as well as their citizens. The outcome of these talks will not only set a precedent but will give the world a glimpse of life and economic conditions after leaving the European Union.
The third event is the German election where a populist candidate isn’t currently expected to win but the Alternative for Germany party could take significant seats from the other more established parties. If either ruling party has to negotiate with the Alternative party then this could cause a push to the right and upset the current balance within the German political system. In this scenario ramifications could be wide.
The fourth potential event is if the Italian election is called within 12 months. In our view this has the most current potential to lead to a full European Union exit, if the Five Star candidate is elected to office. Again, we fear this would lead to the end of the Euro currency because of the size of the Italian economy.
With these interesting times ahead, the Farnam International team will be reviewing and adjusting positions accordingly over the coming weeks to ensure that we protect the International Opportunities Portfolio from a drop in the value of the Euro should one of these events described result in an anti-European Union victory.
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