Eurozone businesses optimistic about future of region

30 August 2017 Consultancy.uk

With the Euro reaching an 8 year high against the Pound, Eurozone businesses are increasingly optimistic about the future of the region, as growth picks up and the threat of reactionary nationalism seems to have receded following defeats for populists in most of the general elections held across the continent in 2017. Growth remains the principal concern now, even though recent figures have reduced concern on last year. Meanwhile migration has taken a back seat as the primary concern in the region, and further economic integration is generally favoured.

Concern among UK businesses regarding the effect of Brexit on their operations continues to be voiced, with migration, export tariffs and financial services passporting areas of noted concern. To better understand how businesses on the other side of the British/French Channel are facing up to the challenges posed by Brexit, as well as other macroeconomic factors in the region, Grant Thornton interviewed 2,500 businesses across 36 countries as part of its International Business Report (IBR).

Levels of optimism had been hit hard following the referendum to leave the European Union, falling from around 75% optimistic, to less than 50% in Q2 2016. Q3 2016 saw another low-point, before falling to the lowest point recorded in Q1 2017. Eurozone respondents were somewhat more gloomy prior to the decision to leave, with optimism at around 30% from Q3 2015 to the referendum result. However, sentiment has since improved, with net optimism increasing to almost 50% by Q1 2017.

Net optimism

Britain's currency tumbled to 1.075 against the Euro on Tuesday morning, as experts said markets appear to think Brexit will turn out to be a "shambles", the lowest the Pound has fallen in 8 years. A number of economists have since forecast that the two currencies could reach parity by the end of 2017, while the Euro’s own momentum has seen it break the 1.20 US dollar mark for the first time since 2015. While most pundits have focused on the drops in confidence in the US regarding the increasing threat of nuclear war with North Korea, and in the UK regarding the third round of tumultuous Brexit talks between Britain's David Davis and Michel Barnier, however it is also a reflection of growing confidence throughout the EU, following an aversion of political turmoil in the French and Dutch general elections, with the same result likely in Germany now too.

Researchers from Grant Thornton noted that businesses across the Eurozone have faced, and will continue to face, various kinds of crisis however – particularly in Italy and Greece. The form continues to have high levels of public debt at around €2.7 trillion or 133 percent1 of the total economy, its banking sector continue to deal with NPLs, while large dependence on small businesses mean that access to capital markets remains out of reach for many. The economy has grown by 0.9% in the most recent quarter, suggesting a possible recovery period. Greece meanwhile, is also in a fragile state of recovery – following years of chronic uncertainty, and crippling debt repayments enforced by the Troika of the World Bank, the IMF and the European Commission.

What is the single beiggest threat to the economic stability of the EU

Concerns understandably remain regarding Greece and Italy, with Italy’s banks still working to sell off bad debt, placing strain on their respective recovery. Respondents were asked to identify the biggest threats to the economic stability of the EU, low growth continued to hold the top spot – although improvements to the region growth saw concern fall from 24.8% last year. The rise of nationalist political parties increased significantly, up from 11.6% last year to 20.3% this year. The increase reflects a period of uncertain elections following strong performances by the far-right in Hungary, Austria and Poland prior to 2017. However in Western states – including France, the Netherlands and even including the UK where the anti-migrant UKIP lost all their Parliamentary seats – nationalists suffered massive setbacks at the polls, with Germany still to vote later in 2017.

The issue of migration, which could still see a hard-right revival across the EU, appears to have become less of a concern, falling from 10.4% last year to 4.3% this year, while migration within the EU has fallen from 3.8% to 1.8% - reflecting the changes in refugee policies. Concerns regarding national debt have meanwhile increased, up from 17,2% to 13.5%, while high unemployment threats have receded slightly on last year, falling from 19.2% of respondents to 16.9%.

The Brexit effect

EU businesses are relatively divided when it comes to the effect of the UK leaving the EU, on the wider EU. In general, respondents believe that some kind of deal will be struck with the UK, and trade will not revert to WTO rules, while the lowering rate of the Pound has offered a growing number of opportunities for investment in Britain. However, a large number (38%), also believe that the exit may lead to a two-tier EU membership model – which could have wider consequences on the European project. A quarter believe the UK leaving will have no impact, with 18% say that the exit will result in a stronger European Union.

Impact of Brexit on Europe

In terms of the continuing separation negotiations, German business leaders are more positive about the emergence of a mutually beneficial deal than UK respondents, at 45% and 39% respectively.

The vast majority of business respondents are positive about the Eurozone project, 92.1% of respondents would like to stay within the Eurozone. The kind of integration differs somewhat between different member states however. Although, across all members, 44% would like to see further political integration, 63% more economic integration and 14% no further integration.

Future European Integration

Italy is the keenest to see further political integration, at 76% of respondents, while Finland is the most opposed at 20%. German respondents are relatively positive, at 55% of respondents. In terms of economic integration, Ireland and Malta are the most optimistic, at 78% and 71% respectively, while Greece and Finland are the least positive, at 46% and 50% respectively.

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