Navigating Europe’s new volatility

April 27, 2015

An infusion of cheap money, a weak euro and the plunge in oil prices are emboldening investors and entrepreneurs across the European Union, which may have been the draw for the overflow audience at the “Navigating Europe’s New Volatility” session during the Milken Institute Global Conference.

The strength of the British and German economies has also created a strong updraft for their neighbors, which are benefiting from the demand for manufacturing components, low-wage labor and specialized services such as those provided by Estonia’s talented software developers. 

However, the panel’s enthusiasm was quickly overshadowed by worries about the “wild cards” on Europe’s political scene, including the collapse of Ukraine’s economy and Russia’s geographic belligerence, the rise of nationalism, Greek’s continuing fiscal disarray and the possibility that next month’s election could lead to a more populist leadership in the United Kingdom.

“I would be much more optimistic about the performance of the euro zone in the short term,” said Howard Shore, executive chairman of Shore Capital, one of London’s leading independent investment groups. But if Tory Prime Minister David Cameron is booted out by the Labour Party in the coming election, he warned, the UK will enter an “anti-business” and fiscally constrained period that would threaten the political and economic health of the entire region.

Ukraine’s worsening economic situation and the possibility of further Russian aggressiveness toward its neighbors are heightening concern among German voters, who are just one country – Poland – away from the conflict, said Peter Beyer, a member of the German Bundestag, or legislature.

“People are feeling the threat very seriously, and they are expecting an answer from the government,” said Beyer, who represents a region in the north. He said immigration pressures from the south are also adding to the unease, emboldening forces opposed to reforms that would strengthen the euro zone, such as greater labor mobility.

Greece continues to keep some members of the panel awake at night.  Mohamed El-Erian, chief economic advisor at Allianz and chair of the President’s Global Development Council, said he was less concerned than before about a Greek  decision to leave the EU but was increasingly worried about the disconnect between “those who are willing to spend and not having the wallet” and “those having the wallet but not wanting to spend.”

That puts Europe “an accident” away from forcing Greece to exit and send the entire region into recession, he warned.

Those tensions took center stage during an exchange between Beyer and Shore.  Beyer, the German lawmaker, said that unless Greek’s government showed greater fiscal discipline, he and many German leaders would find it difficult to approve another bailout. 

Shore’s frustrated response: The Greeks “can’t stay [in the EU] without more money.”