Recently, conventional uncertainty indicators have fallen to all-time lows, and
economic recovery has gained pace in Europe.
Despite the economic news
delivering mostly positive surprises to market participants, the Brexit referendum
and rising populism in some countries create significant uncertainties about
future economic policies in Europe. To illustrate these, chart 2 presents the
evolvement of the smoothed European EPU index from 2001 onwards. In the
early years of the millennium, on the back of weak or even negative GDP
growth, the BBD uncertainty index rose.
Yet the upward trend in EPU reversed
around 2004, when economic policy reached a period of broad consensus. With
the outbreak of the financial crisis, the index jumped. With the intensification of
the euro area debt crisis in the second half of 2011, the uncertainty index saw a
further huge upswing, surpassing the highs of the global financial crisis. Despite
the rollback between 2012 and 2014, the run-up to the Brexit referendum and its
outcome triggered another surge and led to a new all-time high, with an index
value almost 5 times higher than in 2007.
The extraordinarily high level of EPU
is probably among the most significant concerns of businesses, households and
even central banks, and has important implications.