In 2014 economics, not politics, has been the chief concern for the EUR and European assets. Draghi, after all, provided an implicit guarantee in 2012 to do whatever it takes to save the euro, which appeared to signal the beginning of the end of the crisis. Since then, periphery yields have collapsed, the DAX has rallied nearly 50%, and the nominal trade weighted effective EUR increased 6%.
Even so, the European Parliamentary elections this week should not be ignored and do pose some risks to European assets.
We highlight a couple of points to note.
First, the key risk is that anti-EU parties draw a big share of the vote, potentially reversing some of the progress made on economic reform. The focus will be on the election outcomes in Italy, Spain, Portugal and Greece. Of the four, the biggest risk is in Greece given the potential for an early national parliamentary election if Syriza were to win a large share of the vote. Indeed, a big win by Syriza could trigger a ‘shock’ to European assets as Greece would struggle to implement reforms.
Second, the elections in Italy, Spain and Portugal are secondary to Greece but the issue of the voter’s willingness to carry on with austerity and structural reform that hampers growth in the short-run could test investors’ appetite for European assets.
Crédit Agricole