The recent elections in the Eurozone have shown that the risks to the European project remain. In Germany, an insufficient victory from Merkel, the collapse of the social democrats and the rise of the alternative right and extreme left have surprised many.
However, it was predictable. The relief rally in the Euro versus its trading currencies and the bullish tone of equity and bond markets after the French elections and the victory of Macron were, in many ways, based on a very optimistic view of strengthening of the current European model. Markets quickly forgot that almost 40% of the voters in France decided to support radical anti-EU parties at both sides of the political spectrum. The German elections showed that this bullish perception was a mirage. In Germany, almost 30% of the vote went to radicals.
The European Union is ignoring this trend and soldiering on with what Brussels calls “more Europe”, which often means more interventionism and central planning. And citizens are not happy with this. Instead of seeing Brexit as a warning sign and an opportunity to improve the European Union strengthening freedom, openness, and diversity, the separation of the UK has been taken as an opportunity to advance in an incorrect model that mirrors the French “dirigisme”, a central-planned, heavily intervened model.
The European Commission published in September a surprisingly euphoric document declaring the end of the crisis thanks to “the decisive action of the European Union”. However, that positive tone contrasts with a growing discontent among European citizens. There is no denying that the European Union is in recovery mode, and that is a positive. Business confidence is rising, and manufacturing indices are in expansion. However, the pace of said expansion has moderated in the past months, and challenges remain. The European economy is not “in shape”, as the European Commission boosts, and this explains a significant part of the rising populist and radical vote.
According to the Bank of International Settlements and Merrill Lynch, Europe has more zombie companies today than before the crisis, i.e. companies that generate operating profits that do not cover their financial costs, despite all-time low-interest rates and an unprecedented monetary stimulus. European banks, at the end of 2016, had more than 1 trillion in non-performing loans, a figure that represents 5.1% of total loans compared to 1.5% in the US or Japan. Europe has gone from financial crisis to financial crisis, and recently we have had new episodes in Italy, Spain, and Portugal.
