On Monday, the euro woke up its pre-election hangover with a severe “headache”. The single currency fell almost 0.5% against the dollar to 1.0748 units per dollar. The rise of the far right in Europe is creating something that markets don’t like at all: uncertainty. Many of these parties, which continue to gain weight in the political spectrum of the Old Continent, want to change the rules and framework by which the European Union and the euro have been governed for many years. Therefore, analysts believe that such a fall in the euro could only be the beginning of “greater volatility” for the single currency. To all this we must add the awakening of risk premiums in Southern Europe and France. For their part, stock markets turned red due to moves to de-risk European markets.
Meanwhile, government debt started the session with heavy losses, led by 10-year French bonds, which rose to 3.184% this morning. Italian debt again exceeded 4% per annum. In turn, the 10-year Spanish bond yield rises (the price falls) above 3.42%, reaching its highest level of the year. Meanwhile, German bonds are trading calmly. what sparked the awakening of risk premia in Europe. For example, the risk premium in Spain increased by eight basis points to exceed 80 basis points, which is the highest level since April of this year.
However, it should be remembered that the European Central Bank (ECB) has an instrument known as TIP (Transmission Instrument Protection), which allows the central bank to intervene in the secondary debt market to precisely prevent risk premiums from threatening the effective transmission of monetary policy. . This means that the ECB is prepared to purchase debt from countries that are suffering from more sales in a timely manner and thus prevent risk premiums within the monetary union from rising too much. Although this tool was originally introduced to “protect” Italy or Spain, it can now be used to prevent risk premiums from rising excessively in France.
The thing is, analysts believe this may just be the beginning. The victory of an “ultra” party in one of the most important countries of the European Union may be getting closer, which poses a significant risk to the stability of institutions and the functioning of the European Union and the euro in its current form. known today.
Although the party National group Marine Le Pen has moderated since 2017 (no longer calling for France to leave the eurozone), many of its key policies are in direct conflict with the values and norms that dominate European politics today. Everything indicates that collapse is a matter of time. Nobody talks about the end of Europe or the euro, but what is clear is that Europeans are moving towards a different Europe.
Voting in France and Germany
It is likely that growing political “anxiety” in Europe is generating new pressure on the euro after parliamentary elections on the Old Continent produced very favorable results for the far right in two of the bloc’s most important countries: traditional parties suffered important blows in France and Germany, which could cause some chaos in the euro, strategists say Bloomberg agency.
The single currency fell to its lowest level in a month against the dollar after the French president’s speech Emmanuel Macron and German Chancellor Olaf Scholz were defeated by far-right parties.in the European elections on Sunday, prompting the former to call early voting in the legislature at home.
The result is likely to spark fresh volatility in the world’s second most traded currency, which was already under pressure after strong U.S. jobs data on Friday triggered its biggest one-day fall since April, when the dollar soared.
The end of fiscal and financial integration in Europe?
Strategists and analysts are focusing on the potential impact on France’s economic outlook, especially if Macron’s options diminish as the far right consolidates power in upcoming elections. Investors may also begin to question Europe’s commitment to closer fiscal and financial integration, according to Credit Agricole’s Valentin Marinov.
“This can be seen as a blow to the nascent positive sentiment towards the euro, which has begun to dominate foreign exchange markets in recent weeks,” says the French bank’s head of G-10 currency research and strategy. “Any further widening in the yield spread of peripheral sovereigns relative to bonds could be seen as a negative impact on the euro.” The European currency fell 0.5% to $1.0748 on Monday, while the debt of France, Spain and Italy fell significantly in value and therefore increased in their yields. Many of these “ultra” parties are unhappy with European funds and other policies aimed at reducing economic inequality within Europe.
China Banking Corporation strategist Christopher Wong is also keeping an eye on developments that he believes could have a knock-on effect on policies such as aid to Ukraine. “Electoral risk remains volatile,” he said. “The last decade has shown that the rise of far-right sentiment in Europe could undermine the euro.”.