How will European events impact on corporate finance in 2017?

Just four months into 2017 the landscape in Europe can at best be described as turbulent. This calendar year alone there will be 21 elections – between general, local, federal and presidential – across the continent.

The recent Dutch elections saw the far-right Party for Freedom, under the stewardship of Geert Wilders, push prime minister Mark Rutte and the People’s Party for Freedom and Democracy close, coming second in terms of seat numbers.

The French presidential election’s first round takes place on Sunday, April 23th, with the National Front’s Marine Le Pen currently leading the polls.

Germany will go to the federal polls on September 24th to elect the members of the Bundestag.

Laid upon that political uncertainty are the security fears exemplified by the recent terror attacks in London and Stockholm. That social landscape has created an atmosphere of fear and uncertainty, which could lead to hesitation and require patience across the continent’s corporate finance world over the coming eight months.

"When we look at mergers and acquisition in a European context, and cross-border M&A, the political environment that we're in has tempered the activity," says John Bowe, Mazars Ireland head of corporate finance. "I would expect that to continue because it creates an uncertain environment. This means that timing on decision-making is likely to be deferred until after say the French election and the other political events that are coming down the track."

The effects of Brexit are already being felt

The inherent changes that article 50 and Brexit might bring have been front row and centre for all those concerned with financial planning this year, and with a scheduled EU leave date for Britain by April 2019, developments will unravel slowly over the course of the next 48 months onwards.

“There are a significant number of companies in Ireland that have had to deal with the 25 per cent correction in the value of their sterling revenue,” says Gerry Gallen, Moneycorp Ireland senior manager.

“In addition, British companies that had decided they were expanding their premises might have gone to an Irish construction supplier, but now Irish companies are unlikely to get that business. These projects often have lead-in times of 24 months, and these Irish companies might have factored in that they had an upcoming project in London or Liverpool or Leeds, but those projects are mostly paused for now, or might not proceed at all. Ireland and the UK have such a close trading relationship and they have been the initial ramifications of Brexit from an Irish perspective.”

Pressures in European banking

Underneath the elections and Brexit, a long-term issue that has faded from column inches in the last six months to a year has been the pressure on the European banking system. Greece remains in chronic debt, while Spain and Italy are also attempting to maintain debt mountains that are huge concerns for the financial stability of the continent and wider world.

"Ninety-nine per cent of businesses in Ireland are SMEs, and their exposure to a potential fallout of European banks wouldn't be felt until a later stage," says Katharine Byrne, BDO partner in corporate finance.

“If European banks were to fail it is the corporates that would be hit immediately as they have much smaller margins in their funding. The corporates will therefore be attempting to ensure that they don’t currently have any over-exposure to European bonds. Back to SMEs, which is our main market in Ireland, when they are entering into new forms of debt they need to be very clear what the costs of funds are going to be, and that they lock into realistic rates if they are available to them.”

It’s hard to quantify such matters, but the last two years has certainly been one of the most uncertain periods in modern history, with much of that uncertainty concentrated on events in Europe. Yet the truth of the matter is that there will be no fast resolutions to any of the major issues, from either a political or financial perspective.