The Weekly Update

Media coverage of Euro 2016 and Brexit has somewhat eclipsed the Italian local elections results which were held last Sunday. These look to be yet another example of populist politics gaining ground in a push back against incumbent regimes and the European austerity mantra. As we have said before, creating the euro currency union between creditors and debtors without a European Treasury, unified fiscal policy and fully functioning redistribution mechanisms is problematic. Under the current system, the adjustment process to reduce imbalances has taken the route of austerity which has hit the debtor nations hardest in terms of weak growth and deflationary pressures, exacerbated by the lack of debt write-offs. Greece, Portugal and Spain have already experienced a good deal of political upheaval and the signs are that Italy could be heading this way too.

Even in Italy, no-one is going to focus much on Italian local elections now that Euro 2016 is underway. Unusually, Italy are not amongst the favourites with their odds of winning currently at 16-1, with England only at 8-1. The bookies favourite is France, who won their opening match against Romania. Around 2.5 million football fans are expected to travel to France to soak up the continent’s biggest sporting event’s atmosphere. AirBnB have said it is preparing to welcome around 250k visitors alone, with fans from around the world including roughly 37k Americans and around 10k Aussies. These fans bring with them significant spending power to the host nation; benefits of this competition will be felt right across the country as matches will be hosted across 10 different stadia/cities; the whole country should at least profit from the influx of visitors. This will be a much needed boost for France, whose central bank announced last week that the 2016 second quarter growth shows GDP cooling to 0.2%, having risen 0.5% in Q1’16.

If we use Stratton Street’s Net Foreign Asset Model (NFA) as an indication of how each of the 24 teams will perform, we come up with a surprising winner (in footballing terms anyway). If we select winners according to the higher ‘NFA’ star ratings, Switzerland would be the resounding winner having played Belgium in the final; the bookies put the odds of Switzerland winning at 50/1. These teams would have met Germany (bookie’s 2nd favourite at 4/1) and Sweden (100/1) in the semis, having beaten the likes of Russia, Austria, Italy (which became a republic 70 years ago last week) and France (3/1) in the quarter-finals. The bottom of the table would be taken up by Iceland (last place), Portugal and new entry, Albania (which is the bookies least favourite at 300/1!).

So far the creditor nations are performing well with Germany, France and Switzerland all recording wins and Russia picking up a point against England (unfortunately!). Of the seven games played so far, none of the creditor nations have lost, although for that record to be maintained we need Belgium to beat Italy and Sweden to beat Ireland in the games later on today.