Eurosceptic votes may harm economy

AFTER months of campaigning the results are in for the European Union and the electorate has sent a clear message, that they can’t decide what they want. The much hyped success of the Eurosceptic parties in the European elections may have wider implications on the economy as investors start to lose faith.

European Central Bank President Mario Draghi warned on Monday that they need to be “particularly watchful for at the moment [there] is the potential for a negative spiral to take hold between low inflation, falling inflation expectations and credit, in particular in stressed countries.”

While Mr Draghi was expressing his views the rest of Europe was watching the results of the elections come in. An overall increase in the number of Eurosceptic parties, on both the right and the left, has led to a lack of confidence in the Euro from external investors as the stability of the bloc is called into question.

Mr Drahgi faces an uphill struggle in his aim to achieve his “goal, which is to return inflation towards 2% in the medium-term, in line with our mandate.” With investors watching an increasing number of parties in the EU wanting to see the bloc have less power over the internal affairs of the individual countries than it makes the future of the eurozone look tenuous.

As ‘animal spirits’ diminishes then no amount of monetary policy initiatives will help to increase investment to the levels necessary to raise aggregate demand, and therefore the level of output needed to increase prices.

Mr Drahgi summed up the issues facing the ECB in its struggle: Essentially, we are confronting three issues that might warrant a response. “First, the common effect of exogenous factors, including the exchange rate, on euro area inflation. Second, the asymmetric effect of endogenous developments, such as tight access to credit for parts and sectors of the euro area. And third, the risk that those effects combine to generate a more persistent regime of excessively low inflation.”

The outgoing European Parliament President Martin Schulz gave a voice to the concerns of investors when he said: “"It is a bad day for the European Union when a party with such a racist, xenophobic and anti-Semite program gets 24-25 percent of the vote in France. "But these voters aren't extremists, they have lost trust, they have lost hope." If the rise in euro-scepticism demonstrates the loss of faith from voters then a drop in investment will surely prove the same for foreign investors. 
It is perhaps an irony that it has been the state of the economy which many commentators have blamed for the rise of Euro-scepticism as national parties use unemployment levels and free movement between some EU countries as a rallying point for a fearful electorate.

Pro-Europe parties still hold a majority, however, while the mechanism of the EU Parliament will help to keep dissenting voices from causing too much disruption.

In finance though it is not always about the reality of the situation as much as it is about the perception. With candidates across Europe echoing the words of United Kingdom Independence Party Leader Nigel Farage: "The whole European project has been a lie. I don't just want Britain to leave the European Union, I want Europe to leave the European Union," the future of a strong trading alliance looks risky. With stronger markets emerging elsewhere investors may just decide to hedge their bets on a more stable opportunity. If this happens then Mr Draghi’s concerns about the potential for deflation may become a dangerous reality.

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