Europe not worried over US shutdown for now

European shares continued their slide on Tuesday, as the first US federal government shutdown in 17 years entered its second week.

The shutdown itself, affecting an estimated 8,00,000 federal employees, is expected to have a negligible impact on Europe and its exports.

The most visible casualty so far has been the talks that were due to take place in Brussels on the planned EU-US Transatlantic Trade and Investment Partnership. These have been postponed, though the US has insisted that the temporary setback won’t dent its commitment to pushing forward with the deal, slated to be wrapped up by the end of next year.

“The bottomline is that so long as the shutdown does not extend to something beyond, the impact will be superficial,” says Christopher Potts, head of economics and strategy at Kepler Cheuvreux.

The huge uncertainty over whether the stand off between the Republicans and the Democrats will be resolved before October 17, when the federal government hits its debt ceiling, is perhaps one reason why there has so far been little specific analysis of exactly what its global impact would be.

Little impact

In Europe at least, stock markets aside, its reverberations are yet to be felt.

“There is a threshold behind a pantomime and something much worse, and the market is assuming that is not going to be crossed,” says Potts. “It’s a robust assumption.”

The Germany-based Sentix composite index for October, measuring analyst and investor sentiment in Europe, fell only slightly according to data published at the weekend, a month after it rose to its second highest level ever. (The equivalent figure for confidence in the US nose-dived.)

Europe recovery

Europe’s economic recovery in the second quarter – encompassing even some of its hardest hit regions such as Portugal – has been accompanied by a surge in investor appetite.

According to a survey conducted by Bank of America Merrill Lynch in August, investor confidence has shifted from emerging markets to Europe, with the region recording the strongest confidence on a 12-month view from investors globally.

Heavy investments

Earlier this week, the Financial Times reported that US hedge funds have begun investing heavily in Greece, which is expected to return to growth in 2014.

The question of whether this recovery has enough momentum to withstand the shockwaves of a US fiscal shock divides economists.

Economists divided

“Europe is better positioned than it would have been a year ago, but a prolonged period with the US not raising the debt ceiling could tip it back into recession,” says Carl Astorri, senior economist at Oxford Economics.

“Its recovery is not strong enough to weather that storm.”

ECB warning

Last week, ECB President Mario Draghi warned that a prolonged US shutdown and debt ceiling crisis posed a risk to the global economy.

However, Christian Shultz, senior European economist at Berenberg Bank, argues that the key drivers of Europe’s growth – monetary policy and the stated commitment of the ECB to do “whatever it takes” to preserver the euro, the easing of fiscal austerity across the region, and the broad-based nature of the accelerating recovery across the region – should mitigate that impact.

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