Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

Marcus Ashworth is a Bloomberg Gadfly columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.

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.

Harmonized Growth
The euro zone's major economies are finally growing in lockstep
Source: Bloomberg

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.

Great Expectations
Economists have been steadily raising their forecasts for Spanish growth
Source: Bloomberg

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.

Catching Up
Growth in Italy has outpaced the consensus forecast of economists
Source: Bloomberg

Political discord has already arguably undermined investor enthusiasm for euro zone stocks versus their U.S. counterparts in recent months.

From Leader to Laggard
Europe's benchmark stock index has underperformed its U.S. counterpart since mid-year
Source: Bloomberg
Note; Total returns, including reinvested dividends, calculated in local currency terms

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.

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

To contact the authors of this story:
Mark Gilbert in London at
Marcus Ashworth in London at

To contact the editor responsible for this story:
Jennifer Ryan at