HSBC: Europe has reached a fork in the road
In the bank's quarterly report on the state of the European economy, Karen Ward and Fabio Balboni at HSBC argue that the continent's leaders, particularly those in Brussels, have two options.
They can continue to "muddle through" with current economic policies that are providing steady but unspectacular growth and possibly helping to fuel political discontent, or they can "rethink the current direction and consider changes" and fundamentally alter the continent's direction.
Here is the key extract from HSBC's research (emphasis ours):
"The problems run deep. Growth is still anaemic, unemployment in parts of the periphery still painfully high. Part of society is not doing well out of globalisation, while ageing populations fear they will not get the pensions and healthcare they were promised. Many EU voters can't accept sending payments to other parts of the EU, or being given bad news about their retirement expectations by Brussels.
"Economists are starting to realise that our solution to the problem - investing in skills and productivity to maximise both employment and potential national income to meet pension promises - may not be politically deliverable. It's too long term. The populist alternative - bigger hand-outs, protectionism, nationalism - is more enticing."
Essentially, HSBC argues that the current predominant economic thinking within Europe, particularly with regards to the sustained quantitative easing being carried out by the European Central Bank, means that governments are able to provide growth, but not enough to appease the people who are not seeing direct benefits from that growth. That, in turn is helping to fuel the increasing populist tide behind things like the UK's Brexit vote, the rise of France's Front National, and Austrian far-right politician Norbert Hofer's march towards the country's presidency.
Here is HSBC again (emphasis ours):
"And so the EU now appears at a fork in the road. It can continue to do more of what it's doing today. QE helps governments continue to muddle through. Meanwhile, officials at the European Commission and the ECB continue to make plans for closer union - capital markets, banking, political and fiscal, all of which are encountering more and more opposition at the national level.
"Or it can take this as an opportunity to rethink the current direction and consider changes needed to improve sentiment towards the EU and help fix some of the underlying economic problems. Just as capital controls are sometimes needed to control the flow of money across borders, it might be worth reconsidering whether the complete free flow of labour is politically possible in a world in which globalisation is being rejected by parts of society."
The domino effect
HSBC cites evidence of referendums in Hungary and non-EU member state Switzerland, which showed that many people are fearful about having limited control over immigration in their countries, as evidence that, as it notes "globalisation is being rejected by parts of society." Capping free movement in some way could be a way of appeasing those who oppose globalisation, and potentially stemming the tide of populism.
While the bank is keen to argue that the EU should use Britain's vote to leave as a catalyst for change to the way Europe's political and economic systems functions, it is not hopeful that Brussels will do so any time soon. Here's the bank's conclusion (emphasis ours):
"Essentially, we are assuming that the EU continues to muddle through on the back of more QE and bigger deficits. But this may not be sustainable. We hope instead that the Brexit vote becomes a catalyst for positive change. The EU might be wise to do this for its own sake. Resisting it may mean the UK is not the only domino to fall in the years ahead."