Cazenove's Janet Mui: The Biggest Risk Facing European Elections

In the long term, eurozone trend growth is set to slow due to diminishing labour supply. 

Given a lack of progress in structural reforms and lower capital investment, eurozone productivity is unlikely to pick up enough to offset the negative demographic effect. 

Lower long-term growth leaves the eurozone more prone to economic shocks, which in turn feeds investor anxiety.

Lower growth also underscores the bloc's debt problems, raising the scale of debt relative to GDP and resulting in lower tax revenues.

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Overall, the eurozone has a positive primary budget surplus and a modest ongoing reduction in debt-to-GDP ratio.

The ultra-accommodative monetary policy from the European Central Bank is helpful in keeping borrowing costs low. However, there are pockets of weakness: Italy's public debt trajectory is particularly worrying, for example.

France

With the ongoing 'yellow vest' protest in France, Brexit disarray in the UK and the European Parliament elections in May, populism and political risk remain significant concerns.

French protests have already been highly disruptive to activity, especially in the services sector, and President Emmanuel Macron's approval rating plunged to a low of 23% in December.

More positively, we have started to see some recovery in his rating following increases to public spending. The violent nature of protests has dented the support of the yellow vest movement.

We expect to see the negative impact from the protests to fade in 2019 and consumer confidence to recover.

However, the chapter highlights the difficulty France faces in implementing structural reforms, which relates back to the problem of lower trend growth across the bloc.

Italy

In Italy, 2019 has seen the radical and populist Five Star Movement suffering heavy losses at recent regional elections. Lega, with its more responsible fiscal stance, has gained support.

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Political uncertainty prevails as Lega's leader Matteo Salvini may want to consolidate power by calling a snap election this year.

For the European Parliamentary elections from 23-26 May, the risk is that anti-establishment parties gain seats, risking disruption to future legislation and budgets.

While this is an important political event to watch in 2019, the risks of the European Parliament going from mainstream to radical is limited.

Political risk is always going to dominate, but we think the overall backdrop is less negative now than in 2018. 

Janet Mui is a global economist at Cazenove Capital Management