Western Europe will likely grow by 1.6% YOY in 2017 from 1.7% YOY in 2016, and Germany and Spain will continue to lead the region’s outlook for 2017. Despite a lack of acceleration, 1.6% YOY growth is quite substantial as Western Europe is the third largest market globally offering attractive opportunities for both B2C and B2B firms this year. Consumer demand will continue to contribute the most to Western European growth – as inflation remains moderate – followed by robust exports on a weaker euro that will lead to stronger industrial and manufacturing production. Besides opportunities at a regional or country level, MNCs will make gains focusing on the retail sector, e-commerce, and export-oriented manufacturing, while offering technology solutions to drive increased interest from businesses in 2017.
Contrary to the headlines, major disruptions from political risks in the region are low likelihood. Geert Wilders could come close to winning in Dutch elections, but not close to governing, as candidate parties have rejected any possible coalition with his party. Likewise, German elections will unlikely produce a downside for the region, despite the strong anti-migrant sentiment, which fuels support for the populist far-right Alternative for Germany (Afd). AfD will enter the Bundestag for a first time, but it would very unlikely find coalition partners, and thus fail to affect policy making. Therefore, re-election of Chancellor Angela Merkel in September, and formation of a similar coalition with Christian Democratic Union of Germany, Christian Social Union in Bavaria, and Social Democratic party (and potentially the Greens) will ensure policy continuity and a healthy economic path for Germany, and the rest of the region.
Regarding French elections, MNCs should have a clear sense of their business exposure to Marine Le Pen’s victory, as this political event is of relatively higher likelihood (30-35%) compared to the rest. Even if Le Pen’s victory in May, along with support from the French parliament, allowed her to call for a referendum on EU membership, a referendum would likely be rejected due to low Euroscepticism – below 30% – in France. Support for Le Pen has declined since Brexit and Trump’s election, and the anti-establishment protest vote seen in Brexit and US elections is unlikely in France as economic inequality isn’t nearly as severe. Even if a protest vote occurred, Le Pen would be an unlikely figure to inspire it as she isn’t considered a new face in politics and her National Front (FN) party has been severely stigmatized by her father’s extreme far-right views.
Fundamentally, 2017 is the year of high political risk due to several key Western Europe elections, but this risk is unlikely to lead to the EU’s disintegration this year or in the medium-term. Apart from political risk, a eurozone banking crisis is a low likelihood event in 2017, as banks are making steps towards healthier portfolios and regional market conditions gradually improve, raising mid-term expectations for banking profitability.
Nevertheless, the Western Europe portfolio isn’t risk-free. Numerous high-impact disruptions for the region could derail the expected pace of growth in a downside scenario, and therefore MNCs need to allocate extra resources for planning their strategy in the region. An FN victory in France and/or extremely high support for AfD in Germany would result in unprecedented euro-to-dollar depreciation, hurting consumer and business demand across the region while threatening to bring down weak banks.
MNCs should hedge to create buffers ahead of these highly disruptive events to mitigate negative effects on their business. Though unlikely, these downside risks could completely change how MNCs do business in the region, and consumer purchasing power and business demand would considerably weaken in Western Europe as well as in Central Europe, North Africa, and West Africa. MNCs that carefully segment opportunities in a sub-regional, sectoral and country level, and estimate their level of risk exposure in their portfolio will manage to win in 2017.