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Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

2017 is set to be one of the most volatile years for politics in decades. Elections in France, Germany and the Netherlands threaten to bring populists to power at the core of the euro zone. The European Union isn't functioning, says George Soros.

Read All About It
Baker Bloom & Davis' Europe Economic Policy Uncertainty index tracks media references to uncertainty
Source: Bloomberg

But not all political risk is bad. There's the opportunity for positive change -- especially in France. A recovery in euro-zone company earnings and economic growth is within reach, and that could filter through to the ballot box. Investors are starting to ask what could go right in Europe this year, with Nordea and Groupama among the optimists.

It's not as naive or complacent a case as you might think.

We know Greece, Portugal and Italy are still hobbled by high debt loads and fragile banks. But, in aggregate, the euro zone is growing robustly. Confidence is at its highest in six years and PMI indicators suggest positive momentum going into the current quarter. Bank lending surveys point to loan growth of about 2 percent and an easing of credit standards in the first quarter; the jobless rate is at a seven-year low.

EU Doing O.K.
Markit Eurozone Composite PMI
Source: Bloomberg

None of this means populist political movements won't gain traction -- the U.K. and the U.S. economies are also in fine fettle -- but it starts to make it harder for them to do so. Against this kind of backdrop, political risk could actually be positive, reckons Markus Schomer, chief economist at PineBridge Investments LLC.

Likewise, Europe may be nearing the end of its lost decade of growth in corporate profits, even if much rides on the coat tails of the U.S. economic recovery. Analysts are sticking to their estimates for higher earnings this year, rather than cutting them. Consensus forecasts of 11 to 12 percent annual earnings-per-share growth in Europe is one reason why markets are becoming more sanguine about political risk, according to Laurent Jacquier-Laforge, equities chief investment officer at La Francaise, an asset manager.

Catch Up
Euro area stocks are catching up to U.S. and U.K. stocks as hopes grow for an earnings recovery
Source: Bloomberg

And what if it turns out to be third time unlucky for populist politics in 2017? Set aside the Netherlands and Germany for a moment: It's France, the euro zone's second-biggest economy, that seems most vulnerable to a victory for the Euroskeptic far right.

The euphoria around Francois Fillon has turned to nervousness as his lead shrivels, while the nomination of leftist Socialist candidate Benoit Hamon would seem to throw the race wide open. But this is by no means a shoo-in for the National Front. Polls suggest Fillon and reformist Emmanuel Macron are still the two likeliest contenders in a run-off against the Marine Le Pen -- and she would lose to either, according to Barclays.

Both Fillon and Macron want to reform France and Europe without tearing apart the bloc. That leaves some upside for investors, according to RBC Wealth Management's Frederique Carrier.

There's always a danger investors risk being overly optimistic. U.S. investors have put so much faith in a Trump-led recovery that their attitude suggests "there can never be another downturn," according to Morgan Stanley. That optimism may very well have spread to forecasts for European equities: Goldman Sachs reckons returns from those will be twice those of U.S. stocks this year.

And remember the downside risk of a Le Pen victory would include a painful and expensive break-up of the euro-zone. The devaluation of the newly-minted French franc could make the pound's recent fall look like a picnic.

Still, for all the agonizing over Europe, there is room for positive change too. That's worth remembering, whatever Trump does.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net