(Bloomberg) — Euro-zone leaders looking to keep populist parties at bay are unlikely to get much help from the economy this year — even if the European Central Bank cuts interest rates.
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With European Parliament elections due in June, 2024 stands out for much of the continent’s established political class as fraught with the danger that movements from France’s National Rally to Germany’s AfD will gain ground. German state elections in September are another cause for concern.
That timetable coincides with a projected pickup in global and euro-zone growth, subsiding inflation and a let-up in constriction with the prospect of cuts in high borrowing costs. But any such potential ingredients for a feel-good factor aren’t likely to amount to much for now.
“In the longer term we’ll have full employment, stronger wage growth — probably lower inequality,” said Holger Schmieding, an economist at Berenberg in London. “But I think we won’t see any effect in time for the European elections or the German state elections in the fall. That’s too short-term.”
Germany is a particular hotspot this year, with Chancellor Olaf Scholz’s coalition beset by budget wrangling and support for the AfD surging.
Elections will take place in three eastern states where that party is currently well ahead in polls — and where the government is throwing money at subsidies to stoke job creation.
Further darkening the political backdrop have been several strikes — first by train drivers, then at airports and in local transportation.
Farmers have also protested in Germany and elsewhere including France, where President Emmanuel Macron’s party has been trailing Marine Le Pen’s National Rally for almost a year.
The good news is that there’s little sign of labor-market weakening, and the region’s economies are set to improve from last year. Even so, prospects are limited — as ECB President Christine Lagarde acknowledged last month.
“Incoming data continue to signal weakness in the near term” even if surveys “point to a pickup in growth further ahead,” she said on Jan. 25.
That chimes with last week’s International Monetary Fund outlook showing euro-area expansion quickening moderately to 0.9% this year, from 0.5% in 2023.
Of the biggest four economies, its officials see an improved performance in only France and Germany, though that country’s budget impasse continues to pose a question mark over its prospects.
And if the ECB cuts rates, that might not make much of an immediate difference to growth either.
Using the SHOK model created by Bloomberg Economics, we consider two scenarios: one where policymakers start cutting borrowing costs by a quarter point in March and at every decision after that and one starting rate cuts in June — the later timetable that policymakers have tended to signal.
The former would lift gross domestic product by about 0.22% by the end of the year relative to the latter — adding just over 0.1 percentage point to growth in 2024. This implies only a marginal impact for when voters go to the polls. Moreover, officials have reason for caution as they focus on keeping prices under control.
“If the ECB wanted to boost the economy in time for the EU elections, it would have had to cut rates already,” said Guntram Wolff, head of the German Council on Foreign Relations in Berlin. “The ECB is rightly more concerned about reputational risk, because inflation was above the 2% goal for a long time, and that’s what people remember.”
One thing that might cheer voters is an easing in the cost-of-living crisis. While growth in real incomes — pay that’s adjusted for inflation — has been negative for years, it’s now likely to pick up.
Improving living standards through rising wages and more stable prices can change perceptions, said Schmieding at Berenberg. But he cautioned that consumers are likely to be more focused on recent experience.
“People are still angry about high prices,” he said. “I expect the political climate to calm down in the longer term, because the economic situation of lower-income households, who’ve suffered strongly from higher energy prices, will improve.”
The delay in any cheer there chimes with the European Commission’s Eurobarometer surveys from December. In 22 countries, a majority of respondents said their standard of living has been reduced, with no improvement in sight over the next year.
Germany meanwhile has the ongoing challenge that consumer-price growth there will take more time to reach the ECB’s 2% goal than in other major euro-zone peers, according to Bundesbank forecasts.
Moreover, it’s not just inflation and the cost of living that is pushing voters to extremes. While those issues are their top national concerns according to Eurobarometer, immigration and the war in Ukraine were the biggest worries for the region as a whole.
That speaks to the deeper sentiments that are fueling the shift toward populist parties.
“What does matter is economic anxiety: the fear to lose a job, to not be in a well-recognized sector or profession and to be less well off relative to others,” Cornelia Woll, president of the Berlin-based Hertie School and a professor of international political economy. “The far right uses economic anxiety and kindles worries about the future.”
EU-skeptic parties could claim more than 25% of the vote in the June elections and top polls in nine out the EU’s 27 member states, according to the Eurasia group.
Whatever the outcome, governments don’t have much scope to woo voters financially as they focus on debt consolidation to cut euro-zone borrowings totaling around 90% of economic output. Europe’s citizens face little choice but to swallow the bitter pill of having less money to hand.
“Governments need to cut spending even as consumers are still grappling with higher mortgage costs and shop prices,” said Lena Komileva, chief economist G Plus Economics. “The cumulative rise in wages will be smaller than the rise in costs that consumers face.”
–With assistance from Mark Schroers, Kamil Kowalcze, Sonja Wind and Maeva Cousin (Economist).
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