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Will political risks halt the euro-zone recovery?

Rising euroscepticism and a packed election timetable next year mean that there is a significant risk that the euro-zone breaks up. Even in our central scenario in which the currency union holds together, growth will be held back by political uncertainty, rising credit risk and blocked reforms. As things stand, the euro-zone economy is doing fairly well, at least by its own standards. And the surprise votes for Brexit in the UK and Trump in the US have seemingly had little effect so far. However, even in the absence of euro-zone political risk, we would expect rising inflation to weigh on real consumer spending growth, causing the economic recovery to slow next year. That said, if the exiting country ultimately started to perform well, the clamour for votes on eurozone membership in other countries would presumably grow. And if a country as large as France or Italy left the single currency, this could spell the end of the project.

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