Europe Economic Predictions 2016: Markets To Remain Strong, But Face Political Challenges Ahead

A European economic recovery may continue in 2016, but potential challenges lay ahead that might derail the financial markets there, the Wall Street Journal reported Friday. Among them, political issues ranging from disagreement over how to handle a massive influx of refugees to the U.K. vote on its European Union membership could spell trouble with a capital "T."

The European Central Bank's "easy-money policies" and an expected rise in corporate earnings could support European equities in 2016, Ewen Cameron Watt, global chief investment strategist at the BlackRock Investment Institute, told the Journal. However, the EU has seen several new political controversies arise in recent months.

The EU has a strong open-border policy, but that has come under scrutiny as millions of refugees have crossed into Europe during the past year. Politicians have remained divided over how to handle the influx of refugees, many of them seeking safety from the wars in Iraq and Syria. But the attacks in and around Paris in November that were carried out by supporters of the Islamic State group have stoked fears the open-border policy has put the continent at risk. Some are now calling for borders to be guarded.

Also, the U.K., the second-largest economy in the EU, is considering leaving the bloc. A June report by the advisory firm Global Council found that could mean trouble for other countries in the EU as financing costs would be expected to rise across Europe. Meanwhile, opponents of the EU in other nations could be emboldened by the move, according to the Wall Street Journal. Whether a so-called Brexit could happen in 2016 is unclear, with British Prime Minister David Cameron indicating only that a referendum on the U.K.'s membership in the EU would be conducted by the end of 2017.

Some are predicting European stocks could stay strong this year as the continent has seen rare growth that has driven the markets, Paul O'Connor, co-head of the multiasset unit at Henderson Global Investors, told the Journal.