Mark Lister, 23 February 2018

It’s been a quiet several months in European politics, since the anti-climax of the French election in May last year. However, with two key events looming over the coming days, we could see political risk re-emerge as a concern for investors.

Almost half a million members of Germany’s Social Democrats (SPD) party began voting this week in a postal ballot to decide whether to enter a new coalition with the Conservatives, led by Angela Merkel.

Germany held their election on the same weekend as we did here in New Zealand, so the country has been without a formal government for five months now.

Merkel is aiming for a fourth term in office, although if SPD members reject the deal the country might be headed for a minority government or a new election. Neither of these outcomes are ideal, and would be a first for post-war Germany.

The German vote closes next Friday (March 2), with the results to be announced two days later on Sunday.

To make things even more interesting, that just happens to be the day Italy goes to the polls for its 2018 parliamentary election. This will be a tight race, and there is every chance results will be inconclusive.

Of the countries that look shaky in the region, Italy is by far the biggest. Germany is the largest economy in the 19-member Eurozone at 29 per cent of GDP, France is second at 21 per cent while Italy is third, representing 16 per cent of the bloc.

The main concerns for most European nations are immigration and terrorism, with these issues top of the list for Italy as well. Waves of migrants have entered the country and added to the already mounting pressures from a long period of austerity.

Italians also rank unemployment high on the list of worries. Overall unemployment in Europe is 8.7 per cent, but in Italy it’s higher at 10.8 per cent. Only Greece, Spain and Cyprus are ahead of them at the undesirable end of the scale. Germany, on the other hand, is sitting pretty with unemployment of just 3.6 per cent.

On a brighter note, the European economy has been strong over the past couple of years, defying many of the doubters and proving to be resilient.

Business activity has been very strong, with one indicator hitting a 12-year high in recent months and optimism improving. Germany has been a key beneficiary of this, with the IFO gauge of business sentiment (which began in 1991) hitting a record in January.

This has propelled the euro currency to its strongest levels in more than three years against the US dollar, and seen European sharemarkets perform strongly.

Local companies exporting to Europe will have benefitted, with the NZ dollar down almost 13 per cent against the euro over the past 12 months, compared with a gain of two per cent against the greenback.

Europe is our fourth biggest export market (behind China, Australia and the US) taking 7.5 per cent of our goods and services. The region is also key for our tourism sector, so its economic strength, buoyant currency and stable political backdrop are important for New Zealand.

We should know the result of these two events a week from Monday, so let’s hope the outcome doesn’t take us back to the political uncertainty of a few years ago.