European Disunity

The Eurozone has seen a strong recovery over the past two years. At the end of 2017 the ECB raised the projections of 2018 to be around 2.3 percent. This upward trend was seen across almost all Eurozone countries and is some of the strongest performance since the crisis. As a result, markets have rallied, the currency is at its highest point since the last quarter of 2014, and bond spreads between countries have narrowed. In order for the prosperity to continue there needs to be some changes taking place in this time of strength to address the underlying flaws still present with the current state of the union.

The two speed Europe did not entirely disappear. The success of the bloc could open up some of the rifts that prolonged the Euro crisis in 2011. All of the Eurozone countries are benefiting from the massive stimulus program implemented in the second half of 2015. While this program was extended out to September of 2018, the amount purchased per month has been cut in half. With strong economic numbers many are thinking the reduction in purchases and rate increases will have to come sooner than expected. This is where the politics, policy, and unity of Eurozone countries will play a decisive role in the continued success of the European recovery.

In the past the Eurozone countries did the bare minimum to ensure that immediate threats to the bloc were addressed but on a larger scale, did nothing to bring the countries fiscal affairs any closer together. This isn't a pressing concern now because of stimulus narrowing the different costs of borrowing in each country, essentially bringing competitiveness back in line between countries. Now that stimulus is winding down these countries yields will have to remain low on their own merit. Failure for this to occur would out the bloc back into a two speed Europe as competitiveness of the periphery countries hasn't been addressed. On the other side of the spectrum, if these less competitive countries do not keep their growth rates in line with the likes of Germany and France the ECB will delay and rate increases farther out into the future. This will be acceptable so long as Germany participates in the slowdown as well. If not, and inflation in Germany rises, the German government will have to accept this to allow for other countries to catch up in competitiveness, or start to push the ECB to look out for its interests.

This time truly is different in the political spectrum. In the early years of the euros crisis all of the countries would come together at the last minute to ensure a deal, and prevent countries from leaving the Euro or defaulting. Now the European landscape looks much different. Britain, while not in the Euro, has voted to leave the EU and shows how messy that can be in practice. Germany is still trying to hammer down a coalition government after Angela Merkel and her Christian Democratic Union lost their majority, and nationalists have taken a greater piece of the pie in parliament. This is not isolated, nationalistic parties have gained in popularity as the refugee crisis and an unequal economic recovery shifted the balance of power we saw in the last crisis. France was spared a nationalistic government but now needs Germany to form a government in order to press its agenda. Italy will be voting in March and, at best, we will get gridlock. Periphery countries are voting in leaders less willing to take more austerity, and core countries voting in governments less likely to agree to more bailouts. The current balance of improving growth, low inflation, and tight yield spreads will need to remain in an environment with more elections, less stimulus and immigration still a topic on everyone's mind.