10.03 Weekly Viewpoint : On 15 March, the Netherlands will open the European electoral cycle

On 15 March, the Netherlands will open the European electoral cycle. The xenophobic and eurosceptic party PVV seems to have lost ground in the polls in the past month. This reinforces our view that the country is unlikely to emerge as a source of instability for the euro area……

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ECB: no changes to monetary policy measures. However, growth and inflation forecasts for 2017 and 2018 have been stepped up; furthermore, Draghi is starting to place less emphasis on the availability to adopt new stimulus measures, although for now forward guidance remains almost unchanged.

The European electoral cycle will kick off on Wednesday, 15 March, with the political elections in the Netherlands. The risks tied to this event are buffered by the proportional electoral mechanism, that will make it almost impossible for a single party to win an absolute majority of the vote. In effect, the markets have never shown particular concern for the strength of the xenophobic nationalist party PVV, led by Wilders. This lack of tension is even more justified by the fact that the PVV is seen on the retreat by all survey institutions: once again, in the run-up to the elections, the undecideds are proving relatively more prone to vote for one of the moderate parties. The PVV is currently forecast to win between 20 and 25 seats, against 30-35 awarded by the polls carried out at the beginning of February. Therefore, a relative majority could again be won by Mark Rutte’s VVD, despite the strong loss of consensus it will incur compared to the elections of September 2012. The other government party, the PvdA, is also expected to weaken considerably, and may be reduced to one third of the seats available in Parliament; by contrast, progress should be achieved by liberal formations such as D66, and leftist ones such as GroenLinks. The formation of a government majority will require the participation of several political forces, and may take many weeks of negotiations to be successfully achieved. However, the PVV seems very unlikely to enter such a coalition. Although it is impossible to say what kind of attitude the new coalition may express on European issues, it is in any case likely to guarantee a certain degree of continuity with the past, and to show openness to debate reforms to EU governance.

According to the introductory statement, the ECB still expects rates to “remain at present or lower levels”, and “well past the horizon of our net asset purchases”. During the press conference, however, Draghi specified that “the probability of this expectations has decreased” with the economic recovery gaining momentum and the risk of deflation virtually reduced to zero. Changes to the guidance on rates were discussed, but have been considered premature for now. However, the Council has acknowledged that there is less urgency to act to support a return of inflation towards 2% in the medium term, and therefore the reference to “using all the instruments available within the ECB’s mandate, if warranted” has been lifted from the statement. The progress signalled by data in the past two months has been incorporated into the new staff estimates, which have revised up growth in 2017 (from 1.7% to 1,8%) and 2018 (from 1.6% to 1,7%). The inflation estimate for 2017 has been revised up significantly, from 1.3% to 1.7%; the projection for 2018 has been raised more modestly (from 1.5% to 1.6%), whereas the estimate for 2019 is stable at 1.7%. Despite the marginal upward revision of underlying inflation in 2018 and 2019, the Council believes that for the time being uncertainty weighing on estimates, while lower than before, is still high; therefore, it has deemed it appropriate to keep monetary policy unchanged. The perplexity still concerns the extent to which the rise in underlying inflation will be sustainable on removal of the ECB stimulus, which according to staff estimates should add 1.7% to growth and inflation in 2016-18. We believe that the ECB’s caution in the face of stronger GDP growth is explained by the high level of uncertainty associated with the forthcoming elections in the Netherlands and, above all, in France. Should data confirm the acceleration of the recovery, and if the risk of Le Pen winning the French presidential elections does not materialise, in June the ECB could adopt a more symmetrical communication on rates and purchases, and start a discussion on the timing and modalities of the exit from non-standard measures (negative rates and QE).

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