Sunday

19th Jan 2020

ECB: Populist surge is bad for business 

  • The European Central Bank said political risk has increased significantly since the global financial risk started, in 2007. (Photo: Hannelore Foerster)

The European Central Bank warned that the rise of populist parties could threaten growth in the eurozone.

The bank describes a need for fiscal and structural reforms in most of the area’s 19 member states. But those have currently lost momentum because of better short-term economic conditions as well as rising political risk.

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”While deeper structural reforms would bring long-term benefits by boosting growth potential without endangering fiscal solvency, political risks – having increased for almost all euro area countries since the onset of the global financial crisis – appear to be increasingly interfering with reform implementation,” the bank wrote in the latest Financial Stability Review, a bi-annual report that was published on Tuesday.

”Rising political risks at both the national and supranational levels, as well as the increasing support for populist political parties which are seen to be less reform-oriented, may potentially lead to the delay of much needed fiscal and structural reforms and cause renewed pressures on more vulnerable sovereigns.”

The report came a day after far-right candidate Norbert Hofer lost a bid for Austria’s presidency to Green candidate Alexander Van der Bellen by a mere 31,000 votes.

Another risk is the EU membership referendum in the UK in June. The bank admitted that "heightened political uncertainty ... could represent a drag on business and consumer confidence and eventually, economic growth".

ECB vice president Vitor Constancio told journalists that a possible Brexit was “a matter of concern” but that the bank wanted to keep a low profile on the issue.

“It’s a matter for the UK electorate to decide,” he said. ”But we are concerned and we follow and prepare.”

Support for populist and anti-establishment parties has mushroomed in Europe in the wake of years of high unemployment, economic worries and the arrival of refugees.

The European Commission chief spokesman told journalists on Tuesday that the EU executive had nothing to add on the Austrian election outcome, other than congratulating the president-elect Alexander Van der Bellen.

But in a wider context of rising populism in Europe, EU institutions and member states had to work together to manage the multiple crises - the ”polycrises” - that threaten Europe, Margaritis Schinas said.

”Our member states are shareholders in a joint project. We have a common interest to defend the project and military the value of the shares we hold,” he argued.

The ECB report also pointed to slower growth in emerging markets and weak bank profitability as other potential risks of turmoil.

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Alexander Van der Bellen, who won by just 31,000 ballots, will not have an easy task reconciling a divided country wih a far-righ that remains on the rise.

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