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Has the Populist Wave Crested in Europe?

Chris Kuehl, Ph.D.

Analysts will be frantic for the next few weeks. What does the Dutch vote mean? Right up to the day of the election, it was predicted that the ruling party of Mark Rutte would be in a virtual tie with the insurgent populists of the Party for Freedom led by Geert Wilders.

The VVD (Volkspartij voor Vrijheid en Democratie) was expected to take perhaps 27 seats, and Wilders would take 22. In the end, this is not the scenario that Dutch voters created. Rutte’s party won at least 33 seats, and Wilders took just 20.

That still makes the Party for Freedom the second largest in the Netherlands, but all of the other parties had already indicated that they had no desire to ally with it to form a coalition. Now that Wilders’ party is 13 seats behind, there is even less reason to associate with him. Just like that, the populist wave in the Netherlands has peaked and dissipated.

This does not mean that the issues that Wilders campaigned on have lost their importance. The stance that Rutte took during the race edged closer and closer to the positions stated by Wilders—anti-immigrant and anti-Islam, distrust of the EU and opposition to the decisions that have been made to bail out nations such as Greece, Spain and Italy.

The question now is whether Rutte will shift back toward the center. That will depend on what the next coalition looks like. The real games now begin as there are many paths to holding control of parliament.

Rutte has declared there will be no coalition with Wilders, although in the previous government there had been tacit support for Rutte by the PVV (Partij Voor de Vrijheid). The third-place party is the center-right CDA (Christian Democratic Appeal), which gained 19 seats. It enjoyed a surge in popularity as it adopted some of the populist positions taken by Wilders, such as demanding that school kids sing the national anthem every day. If it joins the VVD, they will have 52 seats and a slim majority.

Almost more important is the shift in the support for the left. The Labour Party was once the ruling party in the country, but it has all but collapsed with just 9 seats (a loss of 29). The smaller leftist parties won those seats with the Greens taking 14 seats—a gain of 10.

The European reaction has been generally exuberant as this has been interpreted as a defeat of the populist and perhaps a signal that Marine Le Pen will start to lose support in France. More significant perhaps is the fact that populist demands forced many of the mainstream parties to adopt these positions—once deemed radical.

The coalition that forms in the Netherlands will be hostile to immigrants and especially those from the Islamic community. There will be far less desire to cooperate with Europe. although there is no chance now of a “Nexit.” The Dutch have seen a rise in nationalism and xenophobia, and all the major parties have been forced to take note. That same process continues in Europe as a whole.


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Brazil Continues Its Economic Battle

Brazil continues to battle its worst recession on record. The country has experienced eight consecutive quarters of contraction, beginning in 2014. Prior to that time, Brazil was viewed as one of the world’s fastest-growing economies.

Prime Minister Henrique Meirelles shared in a March 16 CNBC interview his belief that a free economy is better for everyone. He blames Brazil’s closed economy for bringing down the country’s productivity rate and long-term growth, and increasing inflation.

“In 2013, the country ranked as one of the world's most-closed economies, with international imports and exports accounting for 27.6% of GDP, well below the 85% expected for an economy of its size,” CNBC reported.

Overall, actual GDP growth for 2016 aligned with Wells Fargo’s expectations, the firm states in an economic analysis of Brazil. Analysts, however, “were surprised by the weakness observed in the fourth quarter of 2016 as there are still no signs that a meaningful recovery is ahead for the Brazilian economy. … Personal consumption expenditures and gross fixed investment will have to be the sectors to show improvement during 2017 for growth to return. To date, Wells Fargo has forecasted 0.6% growth for this year.

The center right continues to push for reforms that it says will revive the “ailing” economy. “The implementation of measures that promise to create a solid foundation for long-term fiscal stability have provoked a declaration of war from Brazil’s powerful labor unions,” according to a PRS Group highlight in its new report on the country released last month. New budget rules state increases in spending each year for the next 20 years cannot exceed the previous year’s inflation rate. The government’s next challenge is to reform its pension system, which accounts for about 40% of primary spending. (To learn more about how to access a country report through the PRS Group click here.)

The latest FCIB Internal Credit & Collections Survey allows credit professionals who do business in Brazil to share their real-time credit and collection experiences there, as well as in Argentina, Chile, Colombia and Peru. Although FCIB members automatically have access to survey results, nonmembers can gain access to the surveys in which they participate.


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Greece: Still on the Edge

Dr. Hans Belcsák

Greece is still far from overcoming its backbreaking economic problems. In fact, it has disappointed those who had hoped that it was at long last headed for sustained growth as real GDP declined by 0.4% in the final three months of last year, after a 0.9% gain in the third quarter. Unemployment remains painfully high at 23% of the labor force, a state of affairs made worse by its impact on the people. Three of four of the jobless have been out of work for more than a year and are therefore receiving no benefits.

Brussels seems to believe that the economy will bounce back strongly this year to advance by 2.7%, following a meager gain of 0.3% overall in 2016. Chances are this will turn out to have been too rosy an expectation. The latest round of debt talks has been hobbled by disagreements on a number of important points among the government in Athens, EU creditors and the International Monetary Fund (IMF). It would not be surprising if the resulting uncertainties leave their mark on the nation’s performance.

Greece is still burdened with an unbearable debt load of EUR 323 billion. After Japan, it has the most punishing ratio of IOUs to gross domestic product in the world. Almost half of all bank loans are nonperforming, and preciously little credit is being extended these days to small companies, which form the backbone of the economy. So it is little wonder that investment is extremely weak, obstructed, as it additionally is, by regulation and tax codes that are inimical to business and unreliable to boot.

This is not the kind of economy that can easily digest measures to ensure that the country runs a primary fiscal surplus (before accounting for debt interest payments) of 3.5% of GDP, as the EU creditors want. The hard-left Syriza government of Prime Minister Alexis Tsipras has no illusions about the struggle it would face trying to get such a belt-tightening through parliament. Thousands of farmers have already taken to the streets in Athens to protest the prospect of more austerity, and labor unions are whipping up their members as well.

An alternative for Syriza would be to call elections, but the party knows it would probably lose them. The IMF also believes that the fiscal surplus demanded by EU creditors is something that will be self-defeating by stalling the already stuttering economic recovery. What the IMF wants to see is a considerably lower fiscal surplus target, but with eurozone countries making up the difference by offering substantial debt relief. This, however, is anathema to EU leaders, who have already granted Athens three bailouts and who think that the loans involved at one point become so concessionary that they really are grants.

With elections still pending in France and Germany, leaders in these countries are extremely hesitant to give their voters the appearance that they are letting Greece off the hook. So there are profound disagreements between the three camps concerned. Under the IMF’s rules, it cannot participate in bailout No. 4 unless it has reason to believe it will leave a debt load that is decreasing and easily financed.

EU creditors want IMF participation in the next bailout, not only because they want the Fund to come on board as a lender, but also because they do not trust the commission to oversee the Greeks. The Germans and the Dutch have indicated that they will not approve further disbursements without the Fund. And Tsipras, of course, has severe political resistance at home to consider.

Fortunately, Greece has enough cash to make it to next July without more aid. I also firmly believe that the commitment European partners have to Greece is strong enough to make the necessary compromises possible. The Greek government has already pledged to tighten the austerity regimen by bringing in pension cuts and broadening the tax base after its current program ends in 2018. It has also promised more reforms of the labor market, admittedly hoping that it can sweeten the bitter pill for the people with a bunch of tax cuts.

Between them, the European Financial Stability Facility and the European Stability Mechanism have disbursed EUR 174 billion to Athens, surely not in the expectation that the Hellenic nation will be allowed to go belly-up and this money will never be paid back. Certainly, Brussels does not want to see Athens leave the eurozone, and it appears that now a majority of Greeks have come around to the view that losing the euro would be a disaster.

All this leads me to believe that the necessary compromises will be forged and a new agreement will be reached before the July deadline. On the other hand, there is no indication that Greece’s debt problems will be resolved for good, meaning that bailout talks, off and on, will keep making headlines against the backdrop of crisis meetings of EU finance ministers and attendant jitters in the financial markets. So, it is comforting to know that Greece is one country the eurozone could lose without fatal damage being done to the common currency.

Election Calendar

March 20 – Democratic Republic of Timor-Leste, President

April 2 – Ecuador, President

April 9 – Serbia, President

April 23 – France, President

May 9 – South Korea, President

May 19 – Iran, President

Global Roundup

Brexit talks OK’d as Scotland threatens independence vote. New battle lines were drawn over Britain’s future, when the government secured unrestricted authority on March 13 to negotiate withdrawal from the European Union (EU), while also confronting the possibility of an independent Scotland. As Prime Minister Theresa May finally won her parliamentary battle to start talks on Britain’s exit from the EU, the first minister of Scotland, Nicola Sturgeon, raised the stakes by demanding a new referendum on Scottish independence. (Business Mirror)

Crucial loans to Venezuela are held up by dispute with Congress. The bitter political standoff between Venezuela’s government and opposition may have cost the crisis-torn country nearly half a billion dollars in loans from one of its last active multilateral lenders as a fourth year of recession grips the economy. The Development Bank of Latin America, or CAF, is said to be reconsidering whether to issue fresh loans to Venezuela due to a legal dispute between the National Assembly and the Supreme Court. (Bloomberg)

Merkel meets Trump as G20 bids for consensus. President Donald Trump welcomed German Chancellor Angela Merkel on March 17 for a White House meeting to discuss the global economy, funding for NATO and relations with Russia in their first meeting since Trump took office in January. That comes as G20 finance chiefs start meetings in the German resort of Baden Baden to discuss how much consensus the German hosts can muster against protectionism in the presence of a new U.S. administration that is unabashedly protectionist, with policies such as the border tax on imports. (Reuters)

Fitch: Political uncertainty likely to hold back economic activity in Korea until new president takes office. Political uncertainty is likely to hold back economic activity until a new president is elected. Uncertainty will delay investment and weigh on consumer confidence. In December 2016, consumer confidence fell to levels not seen since 2009. Furthermore, the bank lending survey has pointed to a marked deterioration in banks’ willingness to lend, which should weigh on credit growth in the months ahead. (EconoTimes)

Real tests to come as Egypt’s economy revamp posts gains. Egypt’s efforts to ease a crippling economic crisis, including floating the pound and cutting subsidies, are showing signs of success. Foreigners are investing again in stocks and local-currency debt, and dollars are becoming more available. But in many areas, the benefits of policies that helped to secure an International Monetary Fund loan are not yet apparent. There are early signs of unrest on the streets as prices surge, while tourists, still put off by political upheaval and terrorist attacks are yet to return in their previous numbers. (Daily Star)

The world economy is picking up. It looks likely that this year, for the first time since 2010, rich-world and developing economies will put on synchronized growth spurts. There are still plenty of reasons to fret: China’s debt mountain; the flaws in the foundations of the euro; Donald Trump’s protectionist tendencies; and so on. But amid these anxieties are real green shoots. For six months or so, there has been growing evidence of increased activity. It has been clearest in the export-oriented economies of Asia. But it is visible in Europe, in America and even, just, in hard-hit emerging markets like Russia and Brazil. (The Economist)

Trump, China, and Section 301. With the advent of the Trump administration, the long standing rhetoric surrounding U.S.-China trade disputes has not only become more ominous but also, threateningly, real. One of the available legal instruments in Trump’s tool kit that is being frequently discussed in this discourse is the dreaded Section 301 action. This article explains the investigation and enforcement mechanism contained in Sections 301-310 of the U.S. Trade Act of 1974, which should, to a large extent, help allay the fears of Chinese exporters. (Global Trade Magazine)

Global factoring market slows down. The global factoring market has slowed down for the first time in several years, from $2.55 billion in 2015 to $2.54 billion in 2016. The annual survey by Factors Chain International (FCI) states that while many regions showed increases, total numbers were offset by a continued reduction of volume from China and U.K. currency volatility. (Global Trade Review)

Avoiding the edge of the FX risk cliff. While the principles and concepts of FX risk management remain constant, the environment in which treasurers operate has changed dramatically over the past decade. During the past year alone, we have seen the rise of populism driving major shifts in political direction, emphasized through the results of the Brexit referendum and U.S. presidential election. Now, as FX markets are being shaped by immediate political events rather than longer-term economic trends, how should treasurers equip themselves for the challenges ahead? (TMI)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations