Paper 360
DAVID KATSNELSON
The “Brexit” vote in the summer of 2016 and the election of Donald Trump to the presidency of the United States were strong signals of a dramatic change in the direction of the globalization trend, with both of these events confounding the predictions of experts and talking heads. It seems that we are now embarking on a cycle of deglobalization and the rise of populism and nationalism, with significant implications for the world economy as a whole, and Europe in particular.
One key feature of globalization has been increased economic integration through free trade agreements, and in the case of Europe, greater political integration and a common currency. It’s difficult to pinpoint the start of the globalization trend; some put it at the end of World War II, with the growth of multi-lateral institutions; others argue that it started in the 1990s, with the growth of technology that has enabled greater integration of financial markets. In any case, the trend has been a long one, and it is likely that the counter-trend will also be lengthy.
In the short- to medium-term, however, the biggest risks from this new trend of dis-integration are to the euro currency, and the European project as a whole. Over the next 18 months, there will be elections in a number of EU member countries, including the three biggest: Germany, France, and Italy. In December 2016, Italy’s constitutional referendum failed, forcing Prime Minister Renzi to resign and leading to the appointment of a caretaker government and elections no later than mid-2018. Italians are no strangers to elections, having gone through 65 governments since 1946, with only one government serving a full five-year term. (When asked whether it was difficult to govern Italy, Giovanni Giolitti, a statesman from the previous century responded: “Not at all, but it’s useless.”)
The latest polls show the anti-euro 5 Star Movement leading in the polls; together with the far-right Northern League party, they could garner close to 45 percent of the votes. The Netherlands votes in mid-March of this year, and the euro-skeptic PVV party led by Geert Wilders is leading in most polls. France will hold its first round of elections in April, and the National Front under Marine Le Pen will likely advance to the second round. Germany will vote in the early fall, and the recent terrorist acts as well as the migrant crisis have raised the popularity of the nationalist AfD party.
With the wind at their backs following Brexit and the Trump victory, all of these parties have promised to hold referenda on their countries’ relationship with the EU. Polls in individual EU countries show varying levels of support for remaining in the union, but the overall trend (with the exception of the northern European countries) has shown a steady erosion of support. The euro currency fell after the Brexit vote on June 23 of last year, although it regained some ground in the summer. But after the election of Donald Trump, it dropped more dramatically, and has continued to trend lower. Undoubtedly, part of this has to do with the strength of the US dollar—the dollar index has rocketed to a 14-year high. But concern about the rise of populist anti-euro parties has also affected the currency.
A perfect storm is setting up to take the euro below parity versus the US dollar for the first time since early 2000, about a year after the currency was first created. Monetary policy divergence between the US Federal Reserve and the European Central Bank (ECB) will likely increase during 2017, as the Fed has indicated that it will raise interest rates three times, while the ECB will continue its Quantitative Easing program through December of this year. At the same time, elections in Europe loom. If the polls are correct—a big if, given recent results—the Dutch vote in March will bring the anti-EU Wilders to power there, followed in short order by a referendum on remaining in the union. Each of the elections this year and next has a good probability of creating the same issue and will be negative for the currency.
It’s unlikely that 2017 will see the breakup of the euro, but political events are pointing more and more at such an outcome over the longer term.
David Katsnelson was RISI director, macroeconomics, and author of the Monthly Economic Commentary.
The euro currency fell after the Brexit vote on June 23 of last year, although it regained some ground in the summer. But after the election of Donald Trump, it dropped more dramatically, and has continued to trend lower. Undoubtedly, part of this has to do with the strength of the US dollar…