(Reuters) — The threat to its survival may have passed but the euro
zone faces electoral and economic crosswinds this year which could
push it to break policy taboos while challenging its ability to do
so.
The threat of deflation is stalking the currency area and increasing
pressure on the European Central bank to act.
Anti-euro parties look set to perform well at elections to the
European parliament in May and could hamper the bloc's ability to
enact measures to bind its member states together more closely.
Euro zone leaders are still struggling to generate solid economic
growth that can eat away at unemployment rates running at 25 percent
and more in the hardest hit countries, and efforts to create a
banking union to prevent a future financial crisis are widely viewed
as having fallen short.
The bloc will also try to get Portugal and Greece back on their feet
after Ireland successfully exited its EU/IMF bailout. Athens is
likely to need more help to do so.
Italy remains a potential flashpoint. Efforts to reform its
electoral law to allow for a more stable government in future, one
that can push through much-needed economic reforms, will be critical
for it and the euro zone this year.
French President Francois Hollande's ability to push through his own
labour and pension reforms in the face of rock-bottom popularity
ratings is also a focus.
Then there is the question of Britain's place in the EU. Prime
Minister David Cameron has promised an in-out referendum in 2017 and
is seeking to renegotiate Britain's terms of membership first. There
is little sign that his EU partners are willing to play ball.
All this and more will be addressed at the annual Reuters euro zone
summit, from February 10-13, which features a host of finance
ministers, prime ministers, central bankers and Brussels-based
policymakers.
The latest threat to the euro zone is the evaporation of inflation.
Japan's lost decade is a vivid reminder of what could be at stake
and that the only cure may be printing money, a difficult pill for
the ECB to swallow.
The ECB left rates at a record low 0.25 percent last week but
President Mario Draghi signalled that its next meeting in March
might be a different matter. By then, it will have fresh forecasts
for growth and inflation and if they are lowered, action could
follow.
Draghi insists deflation is not in prospect but if the latest bout
of emerging market turmoil persists, that could well push the euro
higher and exert further downward pressure on prices.
"More aggressive actions aimed at addressing deflationary risks may
eventually come. But this would entail a shift in the ECB's
macroeconomic outlook," said Huw Pill, chief European economist at
Goldman Sachs. "Such a shift requires time, both to accumulate
evidence and to build consensus around a new view."
High unemployment, austerity fatigue and paltry growth offer the
perfect backdrop for fringe parties to prosper at the EU elections
in May.
Some pundits predict a group of anti-euro parties including the
National Front in France, Britain's UKIP and the Dutch Freedom
Party, along with Greece's anti-austerity party Syriza, could
capture 20 percent or more of the seats.
That could pressure the European Union's main party groups to tack
right and challenge Europe's ability to integrate further, given new
powers the parliament will have to rule on the majority of EU
legislation.
The electoral arithmetic may well turn out to be different and it is
true that these parties disagree on much more than they agree. But
the experience of political gridlock in the United States looms
large.
"Just think of how the Tea Party has made governance difficult in
the U.S.," Axel Weber, UBS chairman and former Bundesbank president,
told the Davos forum late last month.
One of the fringe parties that could benefit is Britain's UKIP which
wants nothing less than EU withdrawal, a view that chimes with some
in Cameron's ruling Conservative party.
The British government is intent on opting out of parts of its EU
obligations and then have a case to stay in. Only with that can
Cameron hope to unite his party behind him — and maybe not even
then.
When the euro debt crisis was raging, there was an acceptance that
the EU Treaty might need to be changed to build in new bulwarks to
keep the bloc together. Within that process, London spied an
opportunity to obtain concessions of its own.
But now the appetite for complex treaty renegotiation has faded.
French President Francois Hollande told Cameron bluntly last month
that it was no longer a priority.
The threat of deflation is stalking the currency area and increasing
pressure on the European Central bank to act.
