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America’s loss could be Europe’s gain when it comes to investment

by / 0 Comments / 17/03/2017

Lately, our undivided attention has been placed on President Donald Trump. Specifically, on his overhaul of the US tax code; his attempt to ignore and amend antitrust laws; his lack of respect for women and immigrants; and his amazing hairdo. But the ubiquity of the US economy is overshadowing what is taking place in Europe.

It has been uncertain times for Europe, with unprecedented circumstances following the Brexit result and the constant struggles of the Eurozone. The Eurozone’s economy has not been fast to recover from the 2008 financial crisis, with the US’ economy consistently outperforming it. It has been a vicious cycle for the Eurozone. Decreased economic growth is a result of low investment but, investment is low because the demand for companies’ products is low. Stocks in the US have reached record highs recently due to Trump’s focus on the investor.

Meanwhile, in Europe many risks and uncertainties lie for investors, making them reluctant to part with their money. The aftermath of the Brexit result leaves investors sceptical about the impact on the economy when Article 50 is triggered. Some major UK cities are highly dependent on EU labour and this will be greatly affected by their exit from the EU.

Ultimately, it is all down to politics as investors’ decisions are sensitive to the political climate. Currently there is much election uncertainty. With a populist rhetoric looming, this could lead to more countries leaving the Eurozone and the EU. The main uncertainty right now is France. Marine Le Pen wishes to negotiate the country’s membership conditions, possibly changing their currency and immigration laws. An exit referendum would likely follow if negotiations fell through.

Again, the omnipresence of Trump rears its ugly head. Instead of seeing the US’ economy through a vacuum, we should be looking at its effect on Europe. Speculation on the consequences of Trump’s presidency has noted the possibility of a more isolationist America, with Trump threatening higher tariffs on foreign imports. The impact of this on many European manufacturers could be detrimental.

It is possible that European investments may become more attractive than American ones. Inflation has picked up due to the rising costs of fuel, meaning that the price of commodities has increased. This may lead to greater activity in the economy and higher prices. Additionally, improvements in the labour markets have resulted in increased employment. This has led to an increase in consumer spending which has been one of the main factors for the Eurozone’s recent economic growth.

The European Central Bank (ECB) has been very supportive with their negative interest rate policy. These cheaper borrowing costs were intended to persuade investments. Last year, EU countries were battling with deflation so the negative interest rates were intended to try to circulate the banks’ excess money back out into the economy.

Will the European economy show resilience to these uncertainties? Despite investors being notoriously risk averse, so far 2017 has been a positive one for the Eurozone’s economic growth. As always, it remains imperative to use all available policy tools to boost employment and economic growth. As long as political shocks are kept to a minimum and the economy continues to grow in line with forecasts, 2017 is set to be a positive year for global investors in Europe.

Caitlin is a third year Law student at the University of Glasgow currently on an exchange year at the University of Oslo.