The pound rose to its highest level in nearly two years against the euro today, after populist gains in the EU elections. Also, Emmanuel Macron’s surprise announcement to hold a snap election in France.
The share prices of major European countries dropped, and the cost of borrowing by the French government increased. This was due to traders reacting to the uncertainty caused by the huge gains by nationalist Eurosceptic parties.
Analysts have said that the shift towards the hard right may complicate EU policies and undermine efforts to deepen EU integration.
The euro fell, even against the pound. Its value increased by nearly a eurocent to €1.18, which is its highest level since August 2022. The dollar rose to nearly 93 eurocents.
The weaker euro will reduce the cost of goods imported from euro-area countries and holidays on the continent, but could make it harder for UK companies to sell into Europe.
The vote, which was a blow for the leaders of France and Germany as well as the liberal and socialist centre parties, raised questions about the ability of the EU’s leading powers to influence policy within the bloc. The vote also raised questions about whether Ursula von der Leyen, the president of the European Commission, will be reelected.
The yield gap between French bond yields and German bond yields – a measure for the premium that investors are willing to pay to own French bonds – widened to 0.13 percentage points, or 0.545 percent.
As long as the center-right groups are not coherent, the impact of the policy on the direction will be limited, according to Marion Muehlberger. Senior economist at Deutsche Bank.
She added that “fears of populist shock appear to have been premature but may serve as barometers of where national politics are headed.”
CAC 40, an index of blue-chip French stocks, dropped by 1.4 percent to 7,894 Monday. French banks were particularly hard hit, with BNPParibas and Societe Generale each falling by over 4 percent.
Morningstar’s banks analyst Johann Scholtz said that investors are concerned by the National Rally [the party led by Marine Le Pen] economic interventionist policies. Banks are becoming a popular target in many European countries, with measures like windfall taxes or restrictions on dividends/shares buybacks.
The DAX Index in Germany fell 0.3 percent to 18,495.
Lizzy Galbraith is a political economist with the fund manager Abrdn. She said that Le Pen was likely to make major gains in France’s election. The parliamentary elections won’t affect Macron’s status as president but will leave him vulnerable because he may have to govern with the opposition in control of Parliament, which would further entrench his difficulties in passing legislation during his current term.
The sterling has fluctuated between €1.14 to €1.17 over the last year. After the Brexit vote, it fell from €1.35 to €1.40 and never recovered.
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