Recent rumblings of possible political unrest across Europe have diverted attention from improving economic fundamentals in the region, which would likely become even stronger.
In France, stocks fell and bond yields rose after early elections were announced amid fears the far-right was on the verge of winning a majority in parliament, while Britain is on track to elect its first centre-left government since 2010.
In both cases, politics are overshadowing positive economic news: Growth is recovering after being slower than in the United States since the pandemic ended, and inflation and interest rates are falling.
Indeed, Europe’s economic outlook is brightening even as U.S. growth slows. This is a stark contrast to the past two years, when European growth was significantly weaker and inflation was higher than in the United States.
In Europe, “business surveys are pointing to a recovery,” said George Buckley, chief European economist at Nomura Securities in London. “Inflation is falling, the labor market is strong and wage growth is quite strong. All of this is encouraging for the outlook.”
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The European Central Bank sees growth improving: On June 6, the bank raised its growth forecast for the 20 eurozone countries to 0.9% from 0.6% in 2024, and sees it rising further to 1.4% in 2025.
In contrast, U.S. growth halved in the first quarter of this year from the fourth. While U.S. unemployment is starting to rise, the eurozone’s unemployment rate hit a record low in April, which bodes well for consumer spending. And slowing inflation has allowed the ECB to cut interest rates for the first time since the pandemic. This head start (the Fed has yet to cut rates) could be a big help to growth.
In the UK, the Bank of England left interest rates unchanged this month. Inflation fell to the Bank of England’s 2% target in May, but the central bank expects it to rise again. It also sees growth strengthening over the next two years after a recession at the end of 2023. Meanwhile, the Fed expects US growth to stabilize at a slower pace than in 2023.
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The question is whether a change of government in France or Britain will derail a surging economy. Liz Truss’s brief stint as British prime minister in 2022 is a reminder of the damage politics can do to an economy.
In France, Marine Le Pen’s far-right National Front party (RN) could win a majority in parliament in elections on June 30 and July 7. The RN has proposed lowering energy taxes and reversing changes to the pension system that are expensive and add to the government debt, which is why yields on French government bonds rose after President Emmanuel Macron unexpectedly called elections.
And even if the RN were to form a government, it would have to work with Macron’s executive branch at least until the next presidential election in 2027. That would create gridlock, but if we look at the U.S. example, that tends to be fine for the economy and markets. It could also mean that Le Pen’s party evolves into a more moderate one, like Giorgia Meloni’s Brothers of Italy, which took power in 2022.
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In the UK, the Labour Party has held a large lead in opinion polls for months and is broadly committed to keeping the economy stable. The only unknowns from the July 4 vote are how many seats Labour will win and whether another party will overtake the Conservatives to become the second largest party in Parliament, neither of which are likely to have a significant immediate impact on growth.
To be sure, the rise of right-wing parties in Europe is worrying for a variety of reasons, from immigration to rising welfare costs to tightening budget deficits. But economically, Europe is getting better. It will take a lot to stop that.
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