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Biggest risk to Europe's economy
Fri, 24 Jan Pre-Open

Economic data out of Europe has been improving, showing that the Eurozone is stabilizing. And concerns of a major European crisis have been fading. However the Eurozone is not completely out of the woods. Political instability arising from rising unemployment is now the biggest threat to Europe's fitful recovery from the three-year-old Eurozone crisis.

Because of rising unemployment many anti-Europe parties are finding favor among voters. European Parliamentary elections in May could see strong gains for anti-Europe parties, making it harder to achieve the reforms needed to secure faster growth and create jobs.

Initiatives, such as a banking union aimed at restoring confidence and boosting investment, are still a work in progress. A new balance of power in the European Parliament could make it harder to complete that project, as well as other reforms aimed at making the Eurozone an easier place to do business.

The political situation in many European countries is fragile. This has implications for the future of monetary union as it both increases the risk of market fears and decreases the ability of European policymakers to restore confidence.

This widespread political weakness does not augur well for the reforms that are still urgently needed to regalvanise the economies in Europe. Tension is likely to be especially acute in countries in full bail-outs - such as Portugal - as they struggle to meet the conditions for further austerity set by their European rescuers.

Europe's youth unemployment crisis is a major threat to its long-term prospects and to social and political unity across the region. Political and social risk may be hard to quantify but if it materialises the impact can be potent. Europe might be heading into a new phase of uncertainty.

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