Growing populist movements, some of them already in power, have frayed the ties holding together the European Union’s 28 nations. One of those nations, the United Kingdom, is due to exit at a yet undecided date. A banking crisis
in Italy or another large country could test Europe’s financial system.The geopolitical challenges that Europe faces this year raise the question of whether it would find the political will and ability to react swiftly to an economic shock.
A shock such as Brexit, says Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock, “would hit the EU economy at a time of weakness in economic momentum and sentiment, and this initial impact could be compounded by uncertainty as to the scope for either monetary or fiscal policy to respond swiftly and boldly enough.”
Part of the reason for the uncertainty is that these new challenges come amid a changing of the guard in Europe’s leadership. The politicians and central bankers who saw Europe through the tribulations of the past decade will be retiring within the next few months. And the new generation of leaders is untested.
“I’m not sure we could act together fast when the next big one happens,” said a European treasury official who was one of the key architects of the euro zone’s Greek, Portuguese, and Irish euro-zone bailouts of the past decade.
To begin with, there are questions around the European Central Bank
. Monetary policy was the cement that kept the euro zone together after ECB President Mario Draghi famously pledged in 2012 to do “whatever it takes” to save the euro. The Italian retires at the end of October, and all bets are off as to his successor. The euro-zone leaders’ choice next June will depend on a careful weighing of political and geographical considerations.“Draghi was key; who they will choose and which criteria they will favor is a major source of uncertainty,” noted the head of a major Italian bank, who requested anonymity.
Still, no matter who next leads the ECB, most economists and European officials say that the euro zone—the 19 countries that share the euro currency—is on a stronger footing today than 10 years ago. Instruments and institutions created in the heat of repeated crises would help cushion the blow of another market scare. A 400 billion euro emergency bailout fund, the European Stability Mechanism, has built a strong record of helping countries in need. And one single supervisor now oversees the region’s largest banks to make sure they have enough capital buffers to withstand major shocks.
Yet the political landscape that made those initiatives possible is changing...
- Source, Barrons, read more here
