With the UK’s vote to leave the European Union earlier this year and the recent referendum decision in Italy leading to prime minister Matteo Renzi’s resignation, many are concerned for the future (or lack-there-of) of the EU. 
The most uncertainty currently resides in Italy, with the probable outcome is for a general election to be held in 2018 with a new successor announced in the interim. However, early elections are also a small possibility.
Analysts at Kempen Capital Management said: “Although we think there is little chance of this, the consequences would potentially be significant. Early elections could sow doubt again about the survival of the eurozone and/or the European Union.”
However, it is important to remember that the referendum held last weekend was not about Italy’s continued membership of the European Union, but on reforms of its political process.
Still, the concerns over the stability of the European Union remains a key issue heading into 2017, with the rise of populism and the anti-establishment voting pattern seen globally calling the institution’s future into question.
Despite this, the European market has remained robust this year, if slightly underwhelming, with the MSCI Europe ex UK returning 11.44 per cent over in sterling terms.
Performance of indices in 2016
Source: FE Analytics
While this is 36 basis points ahead of the UK, the MSCI Europe ex UK continues to lag the wider international market, producing exactly half the returns from the MSCI World so far this year.
This is because the landscape in Europe has changed, according to Azad Zangana, European economist at Schroders, with economic stability no longer a concern for many on the continent.
“GDP growth and growth in general in Europe is reasonably robust,” he said, adding that leading indicators are pointing to an acceleration in growth toward the back end of this year.
“Growth is running at about 1.5 per cent and it can accelerate up towards 2 per cent in the very near future,” the economist added.
“A lot of the concerns have moved away from the typical concerns around the economy and unemployment, thanks to the pickup in growth and we can see that from the European commission survey on the key issues facing Europe.”
Survey of risks concerning Europe
Source: Schroders
He said: “You’ll remember back in 2011/2012 during the sovereign debt crisis, the economic situation, public finances and unemployment were the key areas of concern for many people.
“Nowadays the main concerns seem to be around immigration and terrorism and this is quite important because we have a number of anti-establishment parties come to the fore and really gather momentum in recent years.
“It started off on an anti-austerity ticket and has now moved on to an anti-immigration ticket and worries about security.”
This is likely to be tested next year, with upcoming elections in France, Germany and the Netherlands all likely to have an impact.
Zangana said: “In the Netherlands the far right party for freedom will probably win that election – there’s a very high chance of that however they’re unlikely to have an overall majority meaning they will have to work with other political parties.”
As a result, this should limit the party’s ability to call a referendum on the Netherlands leaving the European Union. “So it will have less of an impact than you might imagine,” he said.
Meanwhile, the rise of far right winger Marine La Pen in France has been well documented, but Zangana says the electoral system, which requires people to place second choice votes, make her chances of winning less likely.
“In France the National Front, La Pen’s party, is doing very well but because of the two round system – where second preference voting is taken into account – she still has quite a low chance of winning the presidential election outright,” the economist said.
“We put a low probability of her winning that election but of course if she does win then that is quite an extreme event and I would then expect France to vote on whether to vote on the euro and whether to remain in the EU.
“Of course if they decide to leave then that’s pretty much the end of the euro and the EU as we know it,” he added.
“I would say the same thing for Germany if they decided ever to leave then that would be the end of the union.”
However, the chances of the far-right Alternative for Germany group winning is the most remote of all three of the upcoming elections.
Table of elections in Europe
Source: Schroders
“But there I would say it’s an even lower probability that the alternative for Deutschland can break through – they’re only polling around 15 per cent – but then again who can trust polls?” Zangana said.
While these elections have the possibility – coupled with the triggering of Article 50 and the uncertainty in Italy – to be devastating for the European Union, Standish Mellon Asset Management analyst Rowena Geraghty sees the ‘European project’ adapting rather than collapsing.
She said: “It is our base case that we see Angela Merkel re-elected in the German elections next year and we would also expect the next leader of France to come from the centre right rather than the far right.
“In that sense that continuation of the Franco-German relationship really will hold the European project together.”
Her confidence comes from elections held in 2015, when Spain, Portugal and Greece all went to the voting booths, with the latter two countries electing governments that had far left components.
In both those examples you have seen the governments have come into power and in some sense conformed and moved to a message that is more in the centre than the extreme left, Geraghty said.
“In both cases you’ve seen them working with the European institutions whether that be the ECB on financial issues or the European Commission on meeting budget deficit targets set by Brussels.”
However, she does concede that the European Union will look very different in a few years’ time, thanks to the Brexit negotiations and other potential referendums.
“Obviously it will need to adapt. We have seen a rise in populism right across the continent but it has had to adapt in previous years and has managed to deal with problems.”
She says recent examples including the Greek debt crisis as well as migrant and refugee issues last year show the institution’s willingness to change.
“It will need to continue to adapt and recognise the rise of populism and deal with it - but the European Union has a future,” she said.