What next for the European Union?

12 December 2016 | Markets and Economy


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Leo Schulz (senior writer, Vanguard Asset Management): What next for the European Union? Brexit doesn't just impact the UK; it will reshape the EU as well. Alexis, what does the future hold for the European Union?

Alexis Gray (Vanguard economist): I think coming out of Brexit there has been now a raised concern that perhaps the European Union or even the euro currency itself, which obviously Britain is not a part of, that either of those unions could break apart.

And as evidence of this what we have here is some polling data from across the European Union. And effectively what we're seeing here is that these parties – political parties that have a eurosceptic view, meaning that they either want out of the euro if you're the currency union, or out of the European Union if the country's in that union. And across these countries what you can see is from 2013 that polling data has gone up to 2016. So, eurosceptic parties now more popular than ever before. Our concern is more acute in Italy and Austria. You can see here very high polling for those parties, but also France and the Netherlands we're seeing that euroscepticism.

Leo Schulz: So we're seeing the steep rise in many ways of euroscepticism. So what's underlying that Alexis? Why is that happening?

Alexis Gray: Well, I think it's a dissatisfaction with how the economy has behaved. So you can see here that quite a few countries on the left are in regions where they've hit hard economic times, very high unemployment and a general level of dissatisfaction. So many voters saying 'I want out'.

Leo Schulz: Peter, that's the political picture; what about coming into monetary policy? The European Central Bank, how can the bank intervene? How can it act to try and push things forward – get some real improvement into the European economy?

Peter Westaway (chief economist, Vanguard Europe): Unemployment has been elevated; as a result of that inflation has been well below target. So what we've been seeing from the European Central Bank is a policy of trying to stimulate activity, first of all by cutting interest rates to very low levels. More recently by adopting quantitative easing, effectively pumping money into the economy. And these things slowly but surely are having the effect of pushing up activity, pushing up bank lending and so on. But it's a very slow process, and we're not there yet.

Leo Schulz: 'Slowly but surely', Peter, but is there the political patience really to wait for that outcome? Do the European authorities need to do more fiscal policy, which has been tried in the United Kingdom and which Donald Trump is talking about in the United States, is that something which Europe needs to move towards?

Peter Westaway: Yes, certainly a lot of commentators, including ourselves, would argue that there is room for more of the burden to be taken by fiscal policy. The International Monetary Fund, for example, have been arguing this for some time. Part of the problem is that in those countries where fiscal stimulus is needed most, they're probably the countries where debt is highest, and so they've probably got least headroom to provide a fiscal boost.

Leo Schulz: Alexis, is the European Union going to survive?

Alexis Gray: My concern actually is more around the euro currency with – you have upcoming elections next year in France where you have a far right party, the Front Nationale who want out of the euro. So I think if we were to see them getting into power or getting close, we could perhaps see a triggering of the end of the euro.

Leo Schulz: Peter, is the European Union going to survive?

Peter Westaway: I think it will. I think there's one mistake that investors may have made over the last few years during the sovereign debt crisis, and that's to underestimate the political will in European countries to keep the euro and the EU together.

Leo Schulz: Some major elections due in continental Europe in 2017, but change is likely to be less radical than in the UK or the US, at least for now. Alexis Gray, Peter Westaway, thank you both very much.

Peter Westaway: Thank you.

Alexis Gray: Thank you.

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