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Europe’s recovery is for real, political uncertainties remain a challenge

It will be premature to assume that the economic union will disintegrate because of a hard Brexit or other political challenges

Gulf News

Dubai: European economies are on recovery path and growth across the Eurozone is expected to gain traction in the year ahead, despite the lingering political uncertainty around Brexit, upcoming elections and some secessionist movements, Andy Baldwin, EY Area Managing Partner – Europe, Middle East, India and Africa told Gulf News in an interview

“For the first time since 2008, I’m delighted to say the economic recovery is real in Europe [see latest OECD and Eurostat numbers] and it seems solid,” said Baldwin.

Last month, the International Monetary Fund (IMF) said Europe’s recovery was so strong it’s spilled out into the rest of the world, making the region an “engine of global trade” and economic growth. The Eurozone is forecast to have grown 2.2 per cent in 2017, the fastest pace in a decade, according to the European Commission.

Political developments within the EU and the neighbourhood are expected to impact the economic growth of the bloc. Despite the easing of some of the political uncertainty around the recent elections in Netherlands, France and Germany, the regions still has a comparatively high level of political risk that is being assessed by investors. For example with Catalonia, Poland, Hungary. Meanwhile the impact of Brexit is still somewhat unclear.

Another risk area is the emerging political and domestic agenda around the ‘G8 superpowers’ of China, the US and Russia. All three have shifted focus on to domestic consumption and more national economic interest. This will ultimately have an impact on global trade and overall global growth. This in turn will impact Europe given its trade relationships with these markets.

For European economies, Brexit could be a defining moment. Currently, much of the focus and energy has been placed on the UK, especially around the financial services industry. “My expectation is that once the shape of the future trade deal emerges, we will likely see a broader re-adjustment of supply chains across Europe. Hopefully, we will see that future shape emerge sooner rather than later. Let’s not forget that the British economy is one of the main economic engines of Europe,” said Baldwin.

The political events can have a destabilising impact on the economy, because Europe needs more stability and it needs open and dynamic trading partners. However, it will be premature to assume that the economic union will disintegrate because of a hard Brexit or other political challenges. “Europe is resilient, it grows and attracts investors, as indicated by our own Capital Confidence Barometer and European Attractiveness Survey, for instance. Measuring against other regions of the world, where uncertainty has increased, we see that businesses still find Europe relatively attractive,” Baldwin said.

Secessionist movements

Many governments are responding to a rise of greater nationalism and populism, fuelled by the belief that the benefits arising from globalisation and the current model of capitalism have been asymmetrical and contributed to rising social and economic imbalances and inequality. “I think this backdrop partly explains what happened in the June 2016 referendum in the UK or in the November 2016 elections in the U,” said Baldwin.

The secessionist movements in Spain, the UK and other parts of Europe have a complex historical backstory, but the divisions they represent are being also stirred. What Europe can do is to focus on promoting jobs and growth and ensure that its policies at the EU level and national politics are mindful of regional imbalances and take steps to ensure greater balance through regional investment funds and special area status.

Europe’s political instability and Brexit negotiations are creating volatility and uncertainty in Europe. But paradoxically these factors can have a catalytic effect on companies, prompting thinking and discussion over future business models, market strategies and operational priorities. Companies need to think through all the implications of Brexit strategically and avoid falling into the trap of addressing this disruptive shockwave department by department.