Essential Geopolitics: Political and Economic Risks in Europe — Transcript

Full transcript

1. 0:00hello i'm roger baker director of the
2. 0:03stratfor center for applied geopolitics
3. 0:05at rain
4. 0:07this podcast is brought to you by rain
5. 0:09worldview the premier digital
6. 0:11publication for objective geopolitical
7. 0:14intelligence and analysis subscribe
8. 0:16today at
9. 0:20[Music]
10. 0:29essential rainworldview.com
11. 0:30podcast from rain our discussions focus
12. 0:33on current geopolitical headlines
13. 0:35emphasizing future trends and their
14. 0:37effects welcome i'm emily donahue today
15. 0:40we're discussing how political risk will
16. 0:42worsen economic risk in europe this year
17. 0:45most economies in europe have seen a
18. 0:47slowdown in economic growth recession
19. 0:50cannot be ruled out in the coming months
20. 0:52political developments in some of the
21. 0:54major economies in europe could further
22. 0:57complicate their economic outlooks
23. 1:00agiana bisoni joins me now he's reigns
24. 1:02director of analysis welcome adriano
25. 1:05hey emily nice talking with you again
26. 1:07let's start with a brief discussion of
27. 1:09where we are adriana why is economic
28. 1:13growth slowing down in europe
29. 1:16yeah in in recent months most economies
30. 1:20in europe have
31. 1:22slowed down
32. 1:24because as
33. 1:25in other parts of the world
34. 1:28europe is facing significant headwinds
35. 1:31and energy prices are high and will
36. 1:34remain high for many more months
37. 1:37food prices are also high and will
38. 1:40remain high there are still supply chain
39. 1:44bottlenecks
40. 1:46and of course there is significant
41. 1:48geopolitical uncertainty about the
42. 1:51evolution of the war in ukraine against
43. 1:54this backdrop we will see
44. 1:56two main reactions in europe in the
45. 1:58coming weeks and months
46. 2:00the first is that governments will keep
47. 2:03high levels of fiscal spending to
48. 2:05stimulate consumption and to mitigate
49. 2:07the impact of the cost of living crisis
50. 2:10across the continent
51. 2:11the european commission which is the
52. 2:13european union's executive arm is
53. 2:15actually encouraging countries to keep
54. 2:18spending high the european commission
55. 2:21only a few weeks ago delayed the
56. 2:23enforcement of eu debt and deficit
57. 2:26limits by another year which means that
58. 2:29countries will be able to spend without
59. 2:32worrying too much about the european
60. 2:34commission telling them to stop
61. 2:36but at the same time the european
62. 2:38central bank is very concerned about
63. 2:41inflation inflation is very high in
64. 2:43europe these days and will significantly
65. 2:47tighten its monetary policy in the
66. 2:49coming weeks and months the european
67. 2:52central bank is actually raising
68. 2:54interest rates for the first time in
69. 2:57over a decade while also phasing out its
70. 3:00purchases of sovereign debts from
71. 3:02eurozone countries this means that
72. 3:05governments will find it more expensive
73. 3:07to borrow on that markets while they are
74. 3:10also keeping fiscal spending high it
75. 3:13also means that private companies and
76. 3:15households will find it more expensive
77. 3:17to access credits which will slow down
78. 3:20economic activity in europe and other
79. 3:23parts of the world so
80. 3:25this combination of high fiscal spending
81. 3:29but a tighter monetary policy and more
82. 3:32expensive credits and slowing down
83. 3:34economies means that there is a certain
84. 3:37risk of a recession in many european
85. 3:40countries
86. 3:42adriano a risk of recession
87. 3:44would probably have political
88. 3:47repercussions what could be the role of
89. 3:50political risk in this economic slowdown
90. 3:53yeah that's a very interesting question
91. 3:55because political risk is as important
92. 3:59or maybe even more important than
93. 4:02economic risk because political risk
94. 4:04influences perceptions about the
95. 4:07sustainability of certain economies if
96. 4:10you have strong stable governments that
97. 4:13are able to pass reforms and adopt
98. 4:15policies to prevent or mitigate economic
99. 4:17crisis then it means political risk is
100. 4:20low
101. 4:21which more often than not also means
102. 4:24that economic risk is low in the sense
103. 4:26that there is a reliable government that
104. 4:29is in a position to send strong signals
105. 4:32to markets and investors that it is
106. 4:35actually in charge and that it that it
107. 4:37can get things done the thing is if you
108. 4:41have fragile or ideologically incoherent
109. 4:44governments that are unable to take the
110. 4:47necessary measures to prevent economic
111. 4:49crises from escalating then it means
112. 4:52that markets investors even savers will
113. 4:55perceive political risk to be high which
114. 4:59means that economic risk will also be
115. 5:01perceived as high if you have
116. 5:03significant uncertainty if you don't
117. 5:06know if a government will be able to get
118. 5:08things done if you don't know if a
119. 5:10government will actually survive in the
120. 5:13in the medium to long term if you don't
121. 5:15know if there could be unexpected
122. 5:17u-turns in policy then it all
123. 5:20contributes to political risk which in
124. 5:24turn
125. 5:25generates questions about the the future
126. 5:28of the economy
127. 5:30so having a deep fiscal deficit
128. 5:34and a massive debt to gdp ratio is not
129. 5:37problematic if people perceive that the
130. 5:40government is in control of the
131. 5:41situation that it will be able to
132. 5:43service its debt to get its fiscal
133. 5:46deficit under control eventually even if
134. 5:48the relative burden of that debt is
135. 5:50growing the problem is that
136. 5:54in the eurozone there are a few
137. 5:56countries that have a problematic
138. 5:58combination of high debt levels deep
139. 6:01fiscal deficits plus
140. 6:04increasingly fragile or ineffective
141. 6:06government so this is the combination of
142. 6:08economic risk plus political risk that i
143. 6:11was describing before which could make
144. 6:14overtime investors and markets believe
145. 6:18that their deficit profiles are not
146. 6:20sustainable i want to stress these
147. 6:22points um to to some extent the debt to
148. 6:26gdp ratio is problematic if there is a
149. 6:29perception that a certain government
150. 6:32will not be able to honor its debt and
151. 6:35to some extent that perception is
152. 6:37connected to the strength and the
153. 6:40stability of the government in question
154. 6:43adriana you mentioned that a few
155. 6:45countries or some countries in europe
156. 6:49are in this position can you
157. 6:52identify some of them for us
158. 6:55sure um there are a few countries in the
159. 6:58eurozone to watch in the coming months
160. 7:01i want to be clear about this i am not
161. 7:03saying that there will necessarily be a
162. 7:06financial crisis in these countries all
163. 7:09i am saying is that there is a decent
164. 7:11chance that political risk increases in
165. 7:15some parts of the eurozone which as i
166. 7:17said a few times already
167. 7:19could result in a rise in economic risk
168. 7:23of course one of the main countries to
169. 7:25watch is italy for more than a year
170. 7:28italy has been stable because there was
171. 7:30a strong confidence in prime minister
172. 7:33mario draghi who is by the way a former
173. 7:35president of the european central bank
174. 7:37and a very respected figure in europe
175. 7:40the thing is draghi is a technocrat
176. 7:42without a political party of his own and
177. 7:45he's backed by a very heterogeneous
178. 7:47coalition of left-wing right-wing and
179. 7:50populist parties that so far have held
180. 7:53together there were a few
181. 7:54problems here and there but the
182. 7:56coalition has survived the thing is
183. 7:58italy must hold a general election by
184. 8:01mid 2023 and as the election date
185. 8:04approaches the parties that back draghi
186. 8:07in parliament will start taking distance
187. 8:10from the government and from each other
188. 8:12to prepare for the election this means
189. 8:14that draghi's government will become
190. 8:16increasingly ineffective it will
191. 8:19struggle to get things done which will
192. 8:21once more put italy's massive debt
193. 8:25burden and very low growth levels in the
194. 8:28spotlight
195. 8:29in fact this is to some extent already
196. 8:32happening italy's borrowing costs are
197. 8:35already going up the spread between
198. 8:38italian bonds and german bonds which are
199. 8:41considered to be the safest in the
200. 8:43eurozone is broadening which suggests
201. 8:46that markets are starting to worry about
202. 8:50italy's massive debt burden at a time
203. 8:53when the government will increasingly
204. 8:55struggle to introduce um economic
205. 8:58reforms to make the country more
206. 9:00productive and to solve many of its
207. 9:03macroeconomic problems
208. 9:06i am not saying that italy will face a
209. 9:09debt crisis in the in the near term but
210. 9:13um there is already
211. 9:15some concern about the the political
212. 9:18fragility in the country influencing um
213. 9:20the economy and the financial sector
214. 9:23things are not so bad in france but
215. 9:26political risk is definitely going up
216. 9:29after president emmanuel macron lost
217. 9:32control of the national assembly in the
218. 9:34legislative elections in june macron won
219. 9:37the re-election he will be president for
220. 9:39five more years the thing is he lost
221. 9:42control of the parliament which means
222. 9:44that he will struggle to get things done
223. 9:47at home which will make it super hard
224. 9:50for his government to introduce economic
225. 9:52reforms for instance a reform of the
226. 9:55pension system to make it more
227. 9:57sustainable
228. 9:59macron will be
229. 10:02forced to negotiate and make concessions
230. 10:05to both the right and the left in
231. 10:08parliament and i think most if not all
232. 10:11of these concessions will actually
233. 10:13involve an increase in public spending
234. 10:16which means that paris will struggle to
235. 10:18reduce its fiscal deficit and we need to
236. 10:21keep in mind that france's debt has
237. 10:24crossed the symbolic line of a hundred
238. 10:26percent of gdp during the pandemic which
239. 10:29means that france is no longer in the
240. 10:32safe zone that it was during the
241. 10:34financial crisis in the eurozone a
242. 10:36decade ago so um france is a country
243. 10:39where political risk is definitely on
244. 10:41the rise as the government will really
245. 10:43struggle to get things done at a time
246. 10:46when its economy is slowing down then i
247. 10:49would like to highlight spain
248. 10:52spain is an interesting country because
249. 10:55the general election will only take
250. 10:58place in late 2023
251. 11:02but in many ways the electoral campaign
252. 11:04has already begun
253. 11:06and according to opinion polls the
254. 11:08conservatives which are currently in the
255. 11:11opposition will win the election which
256. 11:13should not be particularly concerning
257. 11:15for markets the thing is polls also
258. 11:18suggest that the conservatives may need
259. 11:21support from the far right to form a
260. 11:23government which could put a far right
261. 11:26party in power in spain for the first
262. 11:29time since the return of democracy this
263. 11:32could lead to internal unrest especially
264. 11:35in regions that are pushing for
265. 11:38independence such as catalonia so in
266. 11:41spain we will see over the next
267. 11:4412 to 18 months a return to
268. 11:47domestic political instability um
269. 11:51uncertainty especially if
270. 11:54the prospect of uh the conservatives
271. 11:57taking over leads to um an increasingly
272. 12:00isolated minority government trying to
273. 12:04spend its way out of trouble and trying
274. 12:06to um
275. 12:08make people happy by putting more money
276. 12:11in their pockets which would worsen
277. 12:14spain's fiscal deficit which would once
278. 12:17again raise concerns about um spain's
279. 12:21ability to service its debts and of
280. 12:23course if the rights and particularly if
281. 12:27the right forms a coalition with the far
282. 12:30rights and forms a government after the
283. 12:32general election next year then the
284. 12:34questions about spain's territorial
285. 12:37integrity will re-emerge
286. 12:40i insist this is still a distant threat
287. 12:43i don't want to sound alarmist and i
288. 12:45don't want to say that
289. 12:46spain will face a financial crisis right
290. 12:49away but since we are talking about
291. 12:51these countries with a combination of
292. 12:53very high debt levels problematic fiscal
293. 12:55deficit a worsening macroeconomic
294. 12:58conditions and potential for um
295. 13:02political uncertainty and political risk
296. 13:05to make economic risks
297. 13:07more complicated then i would say spain
298. 13:09is definitely on that list
299. 13:12wow adriano that is so interesting i
300. 13:14could probably talk about this with you
301. 13:16all day
302. 13:17thanks for that insight
303. 13:19of course emily it's always a pleasure
304. 13:21talking with you
305. 13:22adriana bassoni is reigns director of
306. 13:24analysis you can read more on this topic
307. 13:27in the third quarter forecast in rain
308. 13:29worldview access lets you expect the
309. 13:31news rather than follow it subscribe
310. 13:34today go to
311. 13:35rainworldview.com for details that's
312. 13:38r-a-n-e-worldview.com
313. 13:41i'm emily donahue and thanks for
314. 13:42listening
315. 13:45[Music]
316. 13:52you