If 2016 was annus horribilus for the EU, is 2017 looking like it might be any better? The prudent pundit would not touch that question with a barge poll. The saying goes “a week is a long time in politics”. These days a week is an eon.
Yet is there any possibility that investors around the world will face less uncertainty over their investments in the EU after the Dutch election? Mark Rutte claimed the Dutch people have said no to “the wrong sort of populism”. So is this the turning point that stops the dominos from toppling, one upon the other, as the incumbent Prime Minister suggested it might be?
The Dutch election was one of several major tests the EU faces in 2017 after the UK referendum. With Wilders having done worse than expected, many in Brussels are breathing a sigh of relief. Rutte still has to form a coalition, and that might be challenging, but the prospect of a “Nexit” has been averted, at least for now. The next major challenge is France. If Le Pen wins the Presidency, some say the EU will face an existential meltdown that will be far more significant than the upset posed by the Brexit referendum. And then we have the German elections in the Autumn, although with Angela Merkel running for the CDU, and former EP President Martin Schulz for the SPD, there is less concern that the populist, anti-immigration, anti-EU Alternative für Deutschland (AfD) will be able to significantly disrupt the political landscape of the largest economy in Europe.
But not all the shocks that Europe might undergo in the near future are exclusively political. We are still waiting to hear whether Italy’s recapitalisation of the World’s oldest bank, Monte dei Paschi di Siena, is in conformity with EU banking and competition rules. If the answer is no, which seems unlikely but cannot be entirely excluded, that could cause another serious wobble in European and global financial and currency markets. An additional strain on global financial stability is a divergence between the monetary policies of the EU and the US. The US has raised rates and is signaling two further increases, whereas the EU is keeping rates low, at least for now. And the Bank of England might have some extra work to do in order to support sterling should Brexit negotiations not pan out as the UK government intends.
Monitoring such developments closely can feel like a game of Whac-a-mole, but recent events demonstrate more than ever how political decisions have a direct and immediate impact on investments. Whether trading Forex, or investing in commodities, equity and property, the decisions that policy-makers execute will very possibly affect your returns. These days especially, where pollsters and betting agents are frequently inaccurate in their prognostications, be wary of advisors with crystal balls. It can be helpful to take into account the advice of two Greek philosophers: Aristotle – “it is likely that something unlikely will happen”, and Heraclitus – “there is nothing permanent except change”. Consequently, one of the best things one can do is to watch those politicians very closely, and be ready to act quickly. That might however only be a second best option. Sometimes, when possible, an even better course of action is to pre-empt policy developments, either by seeking to change them or by mitigating the risks associated with their realisation.
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