News in Charts: 2019 in Europe through investors’ eyes

2019 saw a number of major political changes in Europe with the European Parliament elections accompanied by a number of domestic elections and ongoing Brexit uncertainty. While investors would probably have treated such developments with apprehension during the crisis years, in 2019 they appeared to embrace the changes.

In Greece, the centre-right New Democracy party won power in July with the country’s new prime minister hoping that a series of tax cuts and pro-market reforms will boost growth without thwarting ambitious budget targets. Although investors bought in to this narrative, with the country’s market-implied probability of default tumbling roughly 25 percentage points over the course of 2019, Fathom cautions that fiscal objectives are unlikely to be met if economic growth falls short of expectations.

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Years of austerity have enabled Greece to transform a double-digit primary budget deficit into a sizeable surplus which should give the government some fiscal space in the near term. However, the country’s long-term fiscal outlook remains bleak with emigration since the start of the crisis reducing the working-age population by 7%, leaving nominal per capita public debt in excess of €30,000, more than double the level it was in 2000.

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There was political change in Italy too with the League-Five Star coalition collapsing less than two years into its first term (as Fathom had long predicted). The decline in investors’ perception of Italian euro exit risk last year, and its decoupling from the default risk indicator, largely reflected the pro-European stance of the Democratic Party who took the League’s place in the coalition.

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In Spain, two general elections — taking the total to four in as many years — failed to produce a clear result, with Prime Minister Pedro Sánchez’s coalition forced to rely on votes from regional politicians in order to form a government. Despite the ongoing political uncertainty and continued tensions in Catalonia, investors remain calm and do not see a risk to either the government’s fiscal stability or the country’s future within the euro. The Spanish economy has outperformed the region for several years, with a recovery in domestic demand spurred on by a rapidly falling unemployment rate; whether this continues in the coming quarters will be key to the country’s outlook.

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Overall, the euro area starts this decade with an outlook distinctly different from that at the start of the last. In the 2010s, the key story in Europe was the debt crisis that saw investors fear for the solvency of many sovereigns in the periphery, and the subsequent policy response. However, by the end of the decade, the market-implied probabilities of both default and exit had fallen below 10% in all countries. Fathom agrees that the odds of these events are lower than in the past but still believes they are some way north of the likelihoods implied by markets, especially if another downturn should occur.