Eurozone growth could be at risk from shifts in political power - warns Fitch Ratings

Rising political risks in the eurozone have the potential to spark renewed financial stress in the currency block, warns Fitch Ratings in its new macroeconomic scenario analysis. Fitch said that renewed financial stress in the eurozone in response to increased investor concerns over political cohesion could have a significant adverse impact on the real economy.

The surge in support for populist and eurosceptic political parties across the continent - in the context of several key elections in 2017 - could rekindle some of the concerns about fragmentation that were evident in 2012, notes Fitch.

According to Fitch, political risks could trigger a composite financial shock which has three components: an increase in bank lending rates to households and the corporate sector; a surge in bond yields; and a stock market stress. The individual components of such a financial shock will affect peripheral eurozone countries, which include Italy, Spain and Portugal, more severely than core countries.

The scenario results show that GDP growth in 2017 would be below 1% in all larger member states and growth would stall in Italy (0%). This would be a sharp deceleration from 2016. It would be followed by a recovery in 2018, but growth rates would still be lower than in 2016.