The same forces that have delivered a Trump presidency and Brexit are very much in evidence in the euro Area but with additional tensions caused by one-size-fits-all monetary policy, a lack of necessary fiscal transfers between sovereign states and high levels of net migration from the Middle East.
The difficulty in Europe is that a populist leader cannot ease fiscal policy meaningfully while subject to the fiscal rules imposed by the Maastricht Treaty and this may lead to calls to leave the euro. Neither the latest change of government in the US nor Brexit poses anything like the degree of systemic risk we would see should a country seriously attempt to leave the euro.
While this risk hangs over markets investors are unlikely to bid up European equity valuations. We moved underweight the region in our multi asset funds immediately after the Brexit vote. Italy’s constitutional referendum was the first of several political tests with general elections in Holland, Germany and France coming in 2017. Will President Trump invite Madame President Le Pen to the White House? It doesn’t seem likely but neither did any of this year’s political shocks.
