Just a few months after the election of Emmanuel Macron as French President seemed to have stabilized the euro zone's political landscape, fresh turbulence threatens to cloud the economic horizon and undermine the outlook for growth and profit in the bloc.
Spanish Prime Minister Mariano Rajoy is threatening to seize control of the Catalan regional government. The Italian parliament votes this week on constitutional changes that could become a focal point for populist disaffection ahead of next year's elections. German Chancellor Angela Merkel has had to concede to a cap on migration as she struggles to form a ruling coalition. And in Austria, an election this weekend could see the euro-critical Freedom Party winning a role in government.
Renewed political disorder comes at a particularly unwelcome juncture. For the first time in years, the euro region's major economies are displaying a harmonious polyphony.
Spain's current turmoil, after Catalonia held what the central government insists was an illegal referendum to claim independence, is the biggest current political challenge. The European Union insists it’s a domestic matter; with the region contributing almost a fifth of Spain's output, the threat by big companies to abandon Barcelona as their headquarters is an unwelcome distraction just as the economy is performing better than expected.
The main political worry hanging over the EU continues to be the upcoming Italian election. It has to be held before May, though a plebiscite is most likely in March. Its structure is being determined this week.
The ruling Democratic Party, at the behest of the non-partisan president, is forcing through confidence votes to reform how both the upper and lower houses are elected. The real reason is to prevent the populist anti-euro Five Star Movement from breaking the grip of the traditional parties.
While the nation is accustomed to messy coalition governments, the last thing it needs is another round of constitutional wrangling, especially as the economy finally appears to have achieved escape velocity.
Political discord has already arguably undermined investor enthusiasm for euro zone stocks versus their U.S. counterparts in recent months.
There's a lot to like in the euro zone growth outlook. So provided Italy can push through electoral reform and Spain can make sufficient concessions to the Catalan separatists to peacefully resolve that conflict, investors may well extend the rally that's doubled the total return on Europe's benchmark index since the start of September.
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