This is the first in a 7-part update series on FSG’s 2017 Events to Watch. Additional updates can be found below:
In December 2016, FSG released the report Events to Watch for 2017, which profiled the major disruptors that multinational companies should evaluate to ensure the resiliency of their strategic plans. As part of a series of blogposts, we seek to review and update FSG’s view on the likelihood, impact, and signposts to monitor for each of the seven disruptors we profiled in the report. This post will evaluate the disruptor “Populists Crash the Euro.”
Events to Watch for 2017: Populists Crash the Euro
In this downside event, FSG expected that a victory for the National Front in France and electoral gains for anti-establishment parties in other major Western European markets would cast a cloud of uncertainty over the future of the European project. Although referenda would likely not be held before 2018 and negotiating a euro exit could take years, the collapse of confidence in the European monetary union would weaken the euro to historic lows, pressure fragile banks, and tighten consumer and business spending across the region.
Event’s Impact on Market Potential and Operating Environment
- Depreciated euro in the short-term: Populist victories are likely to drive currency depreciation to historical lows, with the potential victory of governments willing to exit the eurozone
- Weakened banking sector: Though action by eurozone leaders and the European Central Bank (ECB) would likely forestall outright bank failures, tighter credit conditions would prevail and bailouts would likely bring losses to some deposit holders and investors
- Limited government spending lift – Populist parties are likely to test the boundaries of fiscal stimulus allowed by the eurozone fiscal compact; although some exceptions could be granted, government borrowing would remain constrained pending more extensive negotiation over the terms of European monetary union
Signposts to Monitor Revisions
In our “Events to Watch for 2017” report FSG singled out the following set of signposts for the “Populist Crash the Euro” event:
- European elections: Victories for mainstream candidates in the Netherlands and France have reduced fears over a populist tide overwhelming Western Europe. Emmanuel Macron’s landslide victory over Marine Le-Pen was particularly significant to increase confidence in the short-term stability for the euro and the Eurozone. The far-right Alternative for Germany’s prospects in this year’s German parliamentary elections have weakened significantly over the last few months, further supporting a bullish case for the Eurozone this year. However, the growing popularity of the anti-establishment M5S in Italy and the potential calling of a snap election this year (the parliamentary elections need to occur before the end of Q1 2018) could create depreciation pressures
- Bank lending levels: Business and consumer credit had been growing for over a year, growth is slow. Several recapitalizations of large European banks, gradual banking sector reforms and the creditors deal with Greece have improved bank lending potential for the region, somewhat reducing fears over European banking sector fragility
- The value of the Euro: Instead of the euro falling to historical lows so far this year, the euro has appreciated since the beginning of the year, with no materialization of any downside electoral scenario or banking sector stress so far, market expectations have improved markedly for the euro
FSG had placed the likelihood of an election-driven crash of the euro at 30% during 2017, largely driven by FSG’s expectation that Marine Le-Pen had a 30% chance of becoming the next president of France. With Macron’s landslide victory, FSG is reducing the likelihood of the “Populists Crash the Euro” event down to 10%, based on the unlikely event that a snap election in Italy will be called before the end of the year and that occurrence would result in the victory of the anti-establishment M5S, which would likely lead to severe depreciation pressure on the euro.
Actions to Take
Despite a reduction in the likelihood of the “Populist Crash the Euro” event, multinationals should be prepared to deal with a potential populist shock to the euro by ensuring that contingency plans are in place ahead of forthcoming elections. FSG’ s Events to Watch for 2017 report provides in-depth scenarios, expected impact on business performance and operations, as well as recommended frameworks for contingency planning and effective market monitoring.
FSG clients can access the full report here.
Not an FSG client? Learn more about the report here.