February 2018
European share prices generally fell in February, undermined by speculation that major central banks may be poised to tighten monetary policy more quickly than previously anticipated. Policymakers at the European Central Bank expressed concerns about developments in exchange rates during the month, warning that recent volatility in the euro was “a source of uncertainty which required monitoring”.
- Germany finally reached a coalition agreement
- The EU warned that Northern Ireland might have to remain in the customs union post-Brexit
- Eastern European economies grew especially strongly in 2017
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European share prices generally fell in February, undermined by speculation that major central banks may be poised to tighten monetary policy more quickly than previously anticipated. Policymakers at the European Central Bank (ECB) expressed concerns about developments in exchange rates during the month, warning that recent volatility in the euro was “a source of uncertainty which required monitoring”.
“The eurozone’s economy grew at an annualised rate of 2.5% during 2017”
In Germany, Angela Merkel’s CDU/CSU party reached agreement on a coalition with the Social Democrats (SPD) after months of discussion. Although the deal still has to be ratified by the parties involved, Germany’s Dax Index rose on the news. Over February as a whole, however, the Dax Index fell by 5.7% while the CAC 40 Index dropped by 2.9%.
The eurozone’s economy grew at an annualised rate of 2.5% during 2017 and a quarterly rate of 0.6% during the last three months of the year. The economies of France and Germany also expanded by 0.6% over the fourth quarter; Italy grew by 0.3%, while Spain achieved growth of 0.7%. Economic expansion in Eastern Europe proved especially strong in 2017; the economies of Latvia and Hungary both posted annual expansion of 4.8%, while Romania and Poland grew by 7% and 4.3% respectively.
The European Commission published a draft Brexit agreement stating that the UK should accept the possibility that Northern Ireland might remain in the EU customs union in order to ensure the free movement of goods. The European Court of Justice would have jurisdiction in a “common regulatory area” and this would affect issues such as VAT, excise duties, agriculture and the environment.
Credit ratings agency Fitch reaffirmed the EU’s “AAA” credit rating with a “stable” outlook, citing its belief that member states are in a position to honour their EU budget commitments. Nevertheless, Fitch believes the EU faces “significant” credit risk because it loans money to countries that face economic difficulties; moreover; its loans are “highly concentrated” amongst a few countries, including Portugal and Ireland. Despite this, the overall credit quality of EU constituents remains high; almost 30% of its 2018 budget contributions come from “AAA”-rated member states, including Germany, the Netherlands, Sweden and Denmark. With regard to Brexit, Fitch does not believe that the Brexit vote has any “immediate implications” for the EU’s creditworthiness, although it has increased the possibility of political risk and could undermine cohesion within the EU.
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