Europe faces economic and electoral instability

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London - The threat to its survival may have passed but the euro zone faces electoral and economic crosswinds this year which could push the region to break policy taboos while challenging its ability to do so.

The threat of deflation is stalking the single currency area and increasing pressure on the European Central bank (ECB) to act.

Anti-euro parties look set to perform well at elections to the European Parliament in May and could hamper the bloc’s ability to enact measures to bind its member states together more closely.

Euro zone leaders are still struggling to generate solid economic growth that can eat away at unemployment rates running at 25 percent and more in the hardest hit countries, and efforts to create a banking union to prevent a future financial crisis are widely viewed as having fallen short.

The bloc will also try to get Portugal and Greece back on their feet after Ireland successfully exited its EU/International Monetary Fund bailout. Athens is likely to need more help to do so.

Italy remains a potential flashpoint. Efforts to reform its electoral law to allow for a more stable government in future, one that can push through much-needed economic reforms, will be critical for it and the euro zone this year.

French President François Hollande’s ability to push through labour and pension reforms in the face of rock-bottom popularity ratings is also a focus.

Then there is the question of Britain’s place in the EU. Prime Minister David Cameron has promised an in-out referendum in 2017 and is seeking to renegotiate Britain’s terms of membership first. There is little sign that his EU partners are willing to play ball.

All this and more will be addressed at the annual Reuters euro zone summit, starting today to Wednesday, which features a host of finance ministers, prime ministers, central bankers and Brussels-based policymakers.

The latest threat to the euro zone is the evaporation of inflation. Japan’s lost decade is a vivid reminder of what could be at stake and that the only cure may be printing money, a difficult pill for the ECB to swallow.

The ECB left rates at a record low 0.25 percent last week but its president, Mario Draghi, signalled that its next meeting next month might be a different matter. By then, it will have fresh forecasts for growth and inflation and if they are lowered, action could follow.

Draghi insists deflation is not in prospect but if the latest bout of emerging market turmoil persists, that could well push the euro higher and exert further downward pressure on prices.

High unemployment, austerity fatigue and paltry growth offer the perfect backdrop for fringe parties to prosper at the EU elections in May. – Reuters


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