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Digital Subscriptions > The Hedge Fund Journal > Issue 118 - Nov | Dec 2016 > Europe Reworked

Europe Reworked

The impact of political change

MICHAEL BROWNE, PORTFOLIO MANAGER, EUROPEAN LONG/SHORT, MARTIN CURRIE INVESTMENT MANAGEMENT

*Source: Federal Statistical Office of Germany, Federal Ministry for Economic Affairs and Energy

Politics will undoubtedly remain one of the key macro themes for Europe over the next 12 months. A packed list of elections, rising antiestablishment sentiment and the re-emergence of Greek debt will all play a crucial role in determining the future direction of the European Union (EU). In this article I assess the opportunities for investors as Europe’s political landscape is redrawn.

TAKING EUROPE’S TEMPERATURE

Germany: Europe’s strongest economy, but Merkel faces challenges

It is impossible to discuss Europe without first looking at Germany. There is a clear gap in economic terms between the country and its counterparts, yet there is surely a limit to how long the miracle of success can continue. Germany is the world’s third largest exporter with a trade surplus of 189 billion euros*. Given the importance of foreign trade, the country is very much in the firing line from overseas factors, particularly from China and the US (its two largest export destinations outside the EU). Slowing Chinese growth, coupled with a potential adverse economic reaction to the US presidential election, could mean a risk of slippage in foreign orders. With this in mind, federal elections in the second half of next year could have a profound effect on the country’s economy. Angela Merkel (who would be looking for her fourth term as chancellor) and her Christian Democratic Union (CDU) party are in a far from comfortable position. Staunchly antiimmigration Alternative für Deutschland (AfD) has made gains at Merkel’s expense (as her response to the European refugee crisis comes under scrutiny) and looks certain to enter the Bundestag for the first time. However, sharp growth in support for the left since the 2013 election, alongside the CDU’s slump, is likely to leave the door open to more influence for centre-left parties. This implies more support for introducing green taxes, charges on financial transactions and higher corporation tax – all of which would not be favoured by financial markets.

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