Where in the world would you expect economic growth to accelerate most this year? In my view, the region set to enjoy the most positive economic and financial surprises this year will be the European Union, and specifically the much-maligned eurozone.
Growth in Europe has languished since the 2008 crash for a number of reasons, including delays in agreeing on aggressive monetary and fiscal expansion, similar to America’s.
But a change began, little noticed, two years ago when the European Central Bank launched an even bigger bond-buying program than the US Federal Reserve’s.
And by last summer, most of Europe was already enjoying a stronger than expected recovery, when fears of political disintegration overwhelmed the nascent improvement in economic news. The votes for Brexit and Donald Trump seemed to threaten mayhem from populist insurgencies in this year’s national elections in the Netherlands, France, and Germany.
But the populist tide now seems to be turning. A month ago, Geert Wilders’ Freedom Party was expected to lead the field in the Dutch parliament, but no longer.
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The key is what happens in France. There, Marine Le Pen seems also to be losing support. Meanwhile, the challenge from a very different kind of “new politician,” Emmanuel Macron, is gaining momentum.
If Macron wins, France could embark on a reform process similar to Germany’s in 2003 under Gerhard Schröder. That would create a much more cooperative relationship between France and a newly elected German government, which in turn would relieve the excessive austerity in the eurozone and erode support for Italy’s Five Star Movement.
If this all sounds like flimsy political speculation, there’s evidence already emerging in economic figures. The monthly Purchasing Managers’ Index, for example, is a trusted survey of business activity – and it has just reached a 70-month high in the eurozone. And with the European economic recovery only just starting, there is no reason for European interest rates to rise. The only real caveat is that politics does not shift again, and Le Pen does not become the next president of France.
Copyright: Project Syndicate 2017 The Great Eurozone Bounceback
Anatole Kaletsky is Chief Economist and Co-Chairman of Gavekal Dragonomics and Chairman of the Institute for New Economic Thinking. A former columnist at the Times of London, the International New York Times and the Financial Times, he is the author of Capitalism 4.0, The Birth of a New Economy, which anticipated many of the post-crisis transformations of the global economy.