Page 45 - Linkline Spring 2017

constitution – and France’s EU membership is enshrined by Article 88-1 of that document. So even though a Le Pen win could hurt the single currency in the short term, over time a wider appreciation of the constitutional backstops could limit the selling pressure.
Even if the Eurosceptics’ ambitions are thwarted by French voters, hopes for a quiet summer may be ruined if policy discussions between Greece and its creditors run to the wire, delaying the release of further funds ahead of €6bn of debt repayments in July. Reflecting investor alarm about the prospects of a deal, the yield on a Greek government bond maturing in July surged to 13.2% in early February, before moderating to a still very high 9.5% at the time of writing and after Mr. Dijsselbloem signalled that he was “very happy” with the progress of talks with Greece. If this optimism proves misplaced, it will have negative read-through for the single currency.
Elsewhere, Germany is due to hold elections in September in which Chancellor Merkel faces challenges from both the left and right. With the CDU/CSU bloc and SPD polling in the 60-65% range, it seems another grand coalition is the likeliest outcome, given the lack of alternatives. At least this is one election that is unlikely to provoke jitters.
Then there’s the most pressing issue facing Europe’s politicians this year – Brexit negotiations. And as if that couldn’t get more difficult, Theresa May’s decision to hold a snap election in June has complicated matters further. If she achieves a decisive victory then Britain’s stance at the negotiating table could be far more bullish. Neverthless, the British government is likely
to find the discussions around Brexit more complex than what was presented by those who campaigned for it. Perceptions of whether the ultimate deal is likely to be benign or harsh for the UK will likely lead to heightened volatility in the euro- sterling exchange rate – a key currency pair for Irish businesses.
Given the above, it is no surprise that we have taken a cautious stance with respect to the outlook for Irish exports. National accounts data show exports grew by c. 3.1% y/y in the first nine months of 2016, well below the double-digit growth recorded throughout 2014 and 2015. Given adverse developments in the currency markets (particularly sterling) and policy uncertainty, we project a further moderation in export growth in 2017 (+2.5% y/y).
Stepping back, the big picture for the rest of 2017 is one of political uncertainty that will overshadow economic fundamentals. As firms here discovered after the Brexit referendum, unexpected outcomes can lead to violent market moves. Irish companies must consider strategies that can help to protect against such outcomes – such as hedging or rethinking supply chains and/or target markets.
Philip O’Sullivan is Head of Macro- Financial Research with Investec Ireland.
The Chartered Institute of Logistics & Transport 45
EURO TUNNEL-VISION