Political contagion a key risk for Europe: Swiss Re

Donald Trump's victory in the US presidential election and the UK's vote to leave the EU has given added weight to upcoming elections in Europe and increased the risk of furtherreferendums on EU membership. This "political contagion" is the biggest risk facing Europe, according to Astrid Frey, senior economist and deputy head of economic research and consulting at Swiss Re. Potential EU exit referendums could spark a financial crisis, she said. At a media briefing in London on Tuesday, the Zurich-based reinsurer said that the Netherlands and Austria are the two countries most likely to hold a referendum on EU membership. France, Italy and Denmark are also countries where EU membership is part of the national political debate.hideItaly faces a key referendum on constitutional reforms in early December. Netherlands will hold parliamentary elections in March 2017 that will be followed by presidential elections in France next May. In Germany, which has parliamentary elections scheduled for September 2017, eurosceptic parties could influence or constrain government policy, Swiss Re said. "The risk of EU exit votes happening is most elevated [in Netherlands and Austria] but even in these economies the risk of an exit is low," said Ms Frey. "So we do not expect the Brexit vote to be the beginning of the end for the EU. But it is a risk, a tail risk, and a high severity risk," she said during the briefing. It would be much harder for a member of the eurozone to leave the EU than for the UK to do so, according to Ms Frey. "Brexit is very different to exiting the euro area, which would almost instantly result in a financial crisis," she said. While there are fears of political contagion in Europe, the much-predicted negative economic impact of the Brexit decision in July has yet to materialise, according to Ms Frey. However, Swiss Re does expect uncertainty over government policy to drive a halving of UK economic growth to around 1% in 2017. "There has not been a drop in UK GDP growth yet, but we do expect it to slow from 2% this year to around 1% in 2017. Longer-term, the impact of Brexit is hard to determine because of uncertainty around the likely outcome of Brexit negotiations," said Ms Frey. Globally, Swiss Re is "cautiously optimistic" about the economy, said Ms Frey. Global GDP growth is expected to be "moderate" in 2017, rising from 2.5% in 2016 to 2.9% in 2017. Growth will continue to be driven by emerging economies, despite an expected "moderate" slowdown in China. Growth in Europe is predicted to fall slightly to 1.4% in 2017 from an estimated 1.6% in 2016. Brazil and Russia are both expected to see an end to their current recessions next year, while growth in emerging Asia is likely to temper reduced growth in China, Swiss Re said. Growth in the Chinese economy is expected to slow from 6.6% in 2016 to 6.5% in 2017 and 6.4% in 2018. Growth is expected to accelerate in the US from 1.6% in 2016 to 2.2% through 2017 and 2018. However, policies proposed by president elect Trump are expected to result in upwards pressure on inflation and interest rates, and carry the risk of increased protectionism, according to Ms Frey. "It goes without saying that the uncertainty around Trump's policies is tremendous at this time," said Ms Frey. "Trump is hard to ignore," she added. A Trump administration is likely to increase fiscal spending and cut taxes, which will boost growth in the short term but likely increase inflation, Ms Frey explained. Trump's stance on trade and immigration, however, are more likely to have a negative effect on growth. This week president elect Trump signalled that he will pull out of the Trans-Pacific Partnership trade deal - agreed in 2015 by the US, Japan, Malaysia, Australia, New Zealand, Canada and others. There is also talk that Mr Trump may seek to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico, and potentially introduce trade tariffs for certain Chinese goods. There now appears to be a trend towards protectionism, which suggests that trade liberalisation will no longer be such a significant driver of economic growth. A "backlash against liberal policies" would probably lead to lower growth in trade, according to Ms Frey. However, Mr Trump may not be in a position to act on all his policy ideas, according to Ms Frey. Mr Trump's fiscal spending and tax cutting policies are likely to get the backing of the Republican-held Congress, but his policies on trade and immigration "diverge" with those of Congress, she said. "It is a reasonable assumption to say that not all of Trump's proposals will be implemented, at least not to the full extent," she concluded.

Political contagion a key risk for Europe: Swiss Re

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