Is 2022 in Europe like 2017 all over again? – Stephanie Kelly, Deputy Head of abrdn Research Institute
“Europe has come through the Covid crisis with the European recovery fund and European countries providing fiscal support. Now in recovery mode, how will governments make decisions going forward? Important decisions are to come: first of all, renegotiating the European fiscal rules. Green and digitalisation – these are the two hot words in Brussels and policymakers are likely to find ways to accommodate spending in these areas in the coming years.
“In some ways, 2022 in Europe might seem like 2017 all over again. There’s a French election where once again the far right is likely to make it to the second round. But as we learned in 2017, there is a structural bias in the two-round system towards moderate candidates, which investors tend to underestimate. In 2017, there was also a German election and coalition negotiations; investors go into 2022 with a brand new German coalition that doesn’t involve Merkel or her CDU party. It’s a coalition between three very different parties with different policy priorities, so there will have to be lots of compromise. While it looks like while the liberal FDP was successful in pushing for the debt brake to be reinstated in 2023, 2022 will leave room for spending on green initiatives and infrastructure. The bigger uncertainty is how the new German government deals with tensions between the West and Russia.
“Another flashback to 2017 is that we are still going through Brexit. The EU and the UK are currently discussing renegotiating on the Northern Ireland protocol around British concerns over the trade barriers between GB and Northern Ireland. The UK government has threatened to trigger Article 16 but has not followed through – yet. If it is triggered, the big question is how will the EU react? Could we see the end of the UK’s trade agreement with the EU? EU leaders have been keen to de-escalate tensions in recent weeks so this remains a tail risk for now and even if triggered, there is a twelve month notice period in which both sides would be likely to try to negotiate a solution to avoid the worst outcome.”
