Strong EU leadership required to manage uncertain times ahead

23 Mar, 2015

It has been suggested that a difficult period for both Europe and the UK within Europe could be set to follow the elections that will be taking place over the coming months. A lively debate, hosted by SuMi TRUST and moderated by Charles Bathurst, adviser to the Board of SuMi TRUST Global Asset Services, took place to mark the relaunch of the Hedge Fund Association (HFA) in the UK, and the points raised have painted a worrying post-elections picture. 

Michael Saunders, Chief Economist for Western Europe at Citi, predicts a political change in the UK, with most likely outcome of the UK General Election being a left leaning “rainbow coalition” involving at least Labour, the Liberal Democrats and the Scottish National Party. “I think it’s fair to say that no single party is going to get a majority in a world of multi-party coalitions or minority governments. This is the first time ever that the UK has gone into an election with a consensus across [the main] three parties as to what the fiscal policy target should be post-election,” he states, suggesting that post-election fiscal risks will be small with any Government maintaining a tight fiscal policy.

However, policy risks are significant due to the possibility of a referendum on EU membership, an idea being pressed with considerable vigour by members of the Conservative party. A strong demand from many quarters within the UK for an 'In - Out'  referendum means the issue is unlikely to disappear any time soon, resulting in a substantial amount of uncertainty. “Important policy differences will dominate and with the Conservatives ‘Brexit’ is the biggest issue and with Labour it’s really to do with business tax and regulation,” says Saunders, who believes that Britain’s influence in Europe is now lower than it has ever been anyway. “You go and talk to people in the European Commission [and] they have almost given up on the UK.  You can see this in a whole range of issues: you can see it in the debate over Ukraine as well as in individual policy areas and in financial services."

Its location on the west side of the continent sees the UK a reasonable distance away geographically, but politically the scenes of chaos surrounding Europe at the present time - unrest in Northern Africa, the Middle East, ISIS and Ukraine - are right on the doorstep of all European nations. Then there are the internal concerns within many European countries, including separatism, nationalism and terrorism. “Externally you have these pressures which effectively resemble the pre-World War I type of spheres of influence, and then, internally, you have these tectonic plates that tend to collide and therefore create earthquakes along the various borders,” says Brunello Rosa, Senior Director at Roubini Global Economics.

Many consider Europe to be suffering from a lack of leadership and Germany best equipped to step up and assume a leading role, though such a move would not prove popular in all circles and would likely meet plenty of opposition, particularly from Athens. However, Rosa believes that the current pattern of powerful countries leading from behind rather than driving from the front is a partial cause of the problems, and a reason why so many issues are not rectified. "I’m more worried about the EU than the Eurozone," says Rosa. “The Eurozone is starting to find some rules, the EU hasn’t [found its rules] yet. The EU will need another crisis, a very big crisis, in order for the leaders of Europe to decide 'do we make it or do we break it?'" It has been suggested that the only way forward for a united Europe is through a transfer union, an idea upon which Rosa agrees. “Europe will have to become transfer Union or it will never work. Union’s only work if they are transfer unions – it doesn’t need to be forever.”

However, amidst all the difficulties the predictions are not all bad. The UK, Eurozone and US will each experience growth in 2015 fuelled by a combination of low interest rates and the drop in oil prices, according to Saunders.  “Government bonds in Europe and the UK are terrible value, but equities will do pretty well” he concludes.