Likely successes for populist parties in next month’s parliament elections and the growing prospect of Germany falling into recession make this year and 2020 crucial for Europe’s evolution, says Saxo Bank.

In its latest quarterly outlook, covering the second quarter of 2019, the Denmark-based online trading and investment specialist publishes likely developments for equities, FX, currencies, commodities and bonds. It is particularly downbeat on prospects for both Europe and its single currency.

“The euro could struggle to rally until a path towards economic and monetary union (EMU) deepening opens up”, says Steen Jakobsen, chief economist and chief information officer (CIO), Saxo Bank.

“The gulf between European valuations and their US counterparts remains high with Europe trading at a massive discount. Part of this lies with the composition of business – Europe has less technology firms and more privately-owned companies. In fact, the most truly successful companies in Europe remain in private hands, and for good reason as they refuse to cave to short-term, quarterly earnings report-centred strategies.

“The view from the outside is that Europe is a perennial basket case. This is an easy conclusion to reach if you don’t understand Europe’s history, its vested interests, the peace dividend and the need for government to sell the naive illusion of fiscal self-rule.”

Recession in Germany

Jakobsen says that Saxo firmly believes that any macro change has to come from a breakdown or a crisis, and it regards 2019 and 2020 as key years for Europe’s evolution. The bank’s analysts foresee populist parties getting 20% or even 25% of the popular vote in May’s European parliament elections.

“The most important, factor, though is the collapse of German growth,” adds Jakobsen. “We see a risk of recession there by Q4 even without a trade spat with the US.

“Germany, with its very successful “industry 3.0” model, is being left behind. Underinvestment in the technology sector leaves it unprepared as “industry 4.0” rolls in, and its internet speed ranking is just one of many symptoms.

“Germany needs to catch up in terms of digitalisation, in terms of programmes for working women, with new airports and more overall infrastructure spending.”

Déjà vu

A faltering Germany will reopen the Franco-German “hotline” as well as making the debt issue a pan-European issue, and not one of Germany versus the so-called PIIGS – the five European economies of Portugal, Italy, Ireland, Greece and Spain that need a financial bail-out post-2008 – or austerity versus free spending, says Jakobsen.

However, on a more positive note he comments: “Investors long convinced by talk of basket cases would be unwise to count out Europe. It is, after all, perfectly positioned to benefit from automation, artificial intelligence (AI), digitalisation and a capital market that is cheap by any standard.

“Q2 will see the noise increase; the “basket case” narrative will be spread far and wide and the euro, led by the European Central Bank (ECB), will probably test 1.05 if not 1.03 versus the dollar. The next 12 months, however, will be 2000 all over again.“

Saxo’s main trading ideas and themes for Q2 on equities, bonds, FX, commodities and the macro environment can be accessed here.