The revival is European*

European citizens are now optimistic on the future of Europe and they feel European. A survey published in a report this month by the Pew Research Center testifies to this, with favorable views of Europe increasing everywhere in 2017, even in the UK. The only country that saw a deterioration was Greece, but this is understandable given the austerity measures imposed on its citizens by the hefty economic adjustment process from Brussels. We can also read the French presidential election result as a referendum primarily fought and won on Europe.

The old continent is regaining greater political strength at a time when growth is also picking up speed. The planets are finally aligning and the outcome is positive. The region’s political environment is more stable and the risk of populism has dwindled.

In a complex, tough and unpredictable world, Europe is now a safe haven of stability, and this haven looks more assertive, particularly with Germany’s impetus.
We all heard Angela Merkel indicate that Europe should take its fate into its own hands as yesterday’s allies look less reliable and yesterday’s enemies are still there, and talking about the need to reform Europe, even if that means setting up a finance ministry and having a joint budget. Continue reading

France: General elections – Second round – Employment and Europe in line of sight

The President-elect has won an overall majority after the general elections. His party will have 306 seats and 348 when the Modem, a close political party, is included (on 577 seats). Nevertheless, the new majority will not depend on ally (Modem).
It’s far from the tsunami that was expected after the first round. The new President majority will represent 60% of the seats (versus almost 80% expected after the first round) it is close to the average seen since 1981.
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Continue reading

Soft Brexit …or how to do a swift about-turn

In the wake of the UK elections, the ensuing confusion suggests an increasing likelihood of a soft Brexit, as Theresa May does not have a majority and will have to deal with the situation as it stands. However, it cannot, and will not, be quite that simple as this would mean going back on the result of the Brexit referendum.

One source of confusion derives from the fact that British citizens’ image of Europe has changed considerably in the space of a year, and according to a survey by PEW Research Center in Spring 2017, a majority of the population in the UK has a positive view of Europe i.e. 54%, or 10 points higher than this time last year at the time of the referendum.

The idea of a soft Brexit has emerged as a result of Theresa May’s losses at the recent general election. Continue reading

The Bank of England dilemma

Interesting time in the UK as the Bank of England is facing an important arbitrage. There are potentially two types of shocks in the UK.
One is associated with the consequence of the Brexit on the growth momentum. And the other reflects higher inflation rate (above the 2% target).
The BoE meeting this morning has shown that MPC members may have very different views on monetary policy drivers. At this meeting the vote was 5 for rate stability and 3 for higher rates.
Just a reminder: the BoE has reduced its main rate to 0.25% last July just after the referendum on Brexit in order to accommodate the possible negative risk associated with the referendum result.

Two graphs on recent data can illustrate the MPC dilemma.  Continue reading

Fed: The announced normalization

The Fed main interest rate was increased by 25bp at the June meeting of the FOMC. It will now be in the corridor [1; 1.25%]. This is the fourth hike since December 2015 (start of the tightening cycle).
The impact of this monetary policy change has been very limited. The Fed’s communication strategy is to clearly say in advance what it will do. The Fed doesn’t want to create surprises to investors. Therefore investors can adapt their expectations and their portfolios to the new monetary policy stance. The impact of the measure when it is announced is null.
This is interesting notably on emerging markets. In the past, the Fed’s tightening cycle had a strong impact on them as capital flows were back to the US at the expense of emerging countries. Investors were surprised by the Fed’s move. That’s what economists call a sudden stop. Here, no one is surprised so there are no reversal in flows and emerging markets remain strong.

The Fed considers that the economy is now close to full employment (employment rate is 4.3%) and the inflation is close to its 2% target. Therefore it can be rational to increase rates. But as mentioned earlier, the Fed doesn’t want to create too much volatility and to create a persistent shock on the economy. That’s why its measures are announced loudly in advance.  Continue reading