Europe-Outlook

by Giuliano Amato, Judge of the Italian Constitutional Court and Former Prime Minister of the Republic of Italy

The weather does not look so splendid in Europe at the beginning of 2019. The slowdown in our economies is undeniable and is also affecting our best champions, Germany included. Furthermore, political uncertainty is dominant in our main Member States. Brexit is still an unsolved issue with unpredictable outcomes. Italy is regarded with wariness, due to the new transgressive majority that is running the country. France is in trouble with the gilet Jaunes, who have yet to be tamed. Even Germany, with its declining political leadership, is a question mark for the future.

So, this is the situation, but rushing to a conclusive and negative assessment upon the basis of these facts alone would be a mistake. These facts are real, but they only represent one side of the coin. What do we find on the other side?

Firstly, we find the reasons for our poor economic performance, which are mostly external. Our best economies have always relied on a robust export component and it is precisely this component that has been weaker in recent months. The European slowdown is mainly due to the slowdown of others and to political uncertainties that are not within our European borders but are instead in the outside world. Here I could list the waning effects of the fiscal package in the United States, the reduced growth rate in China and the overall consequences of trade conflicts that remain open.

Secondly, we find the assets that Europe can rely on to face both its immediate and medium-term difficulties. As Mario Draghi, the European Central Bank President, said in his press conference on 24 January, financing conditions in Europe are still very favorable, developments in the labor market continue to be positive and the balance sheets of the banks are much stronger than they were before the crisis. In addition, our strongholds have remained untouched: the quality of life, the quality of research, the quality of our personnel (in Europe it is very difficult to find European workers for low-skilled jobs, and non-European workers need to be found), and finally the quality of our services. I cannot deny that there are exceptions, obviously, but on the whole, no investor whose habitat is the 21st century would feel like a foreigner in Europe today.

I am aware of our current political difficulties, but even the harshest of these, namely Brexit, will be neutralized once the uncertainty around it wanes, one way or another. The strength of our internal resources is such that my attention goes primarily to the external factors that have been reducing our growth in recent months. When our exports are finally free of the obstacles they face in the ongoing trade conflicts, you will once again see a sunny Europe.

This might take a little more time, and this is where our expectations, as opposed to real facts, may put this positive prospect at risk. The sad fact is that the horizon of our economic forecasts is quarterly and we tend to make decisions on the basis of quarterly results. Two or even three consecutive quarters with an unchanged slowdown might be more than enough for investors to wipe out their previous buying and to divert their resources elsewhere. Not a lot can be done to prevent short-term players from doing this. However, investors who are also mindful of the future should be aware that Europe is and will continue to be one of the safest harbors in our troubled world.

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