Centrist parties maintain control in Brussels
The euro fell against the British pound on Monday following European political upheaval, marked by France calling an unexpected election and the resignation of Belgium’s prime minister.
The euro (EURGBP, -0.36%) dropped 0.5% to 0.8457 pounds, marking the largest daily decline since March 8, according to FactSet data.
The major news came from France, where President Emmanuel Macron called for parliamentary elections after his party suffered a significant defeat in European Union elections. Meanwhile, Germany’s ruling parties struggled as the far-right Alternative for Germany gained ground.
France’s CAC 40 stock market index (FR:PX1) opened nearly 2% lower, marking the steepest decline among major European markets, with major French banks BNP Paribas (BNP, -5.14%) and Societe Generale (GLE, -7.65%) experiencing significant drops.
Belgium’s prime minister, Alexander De Croo, announced his resignation following his party’s poor results, though these were due to the right-wing New Flemish Alliance rather than the anti-immigration Vlaams Belang party.
Despite the upheaval, the actual results were close to poll predictions, and centrist parties remain in control in Brussels. The Greens experienced the largest losses, dropping to sixth from fourth in representation.
“While the elections didn’t cause a seismic shift in EU-level politics, they are likely to influence policy direction over the next five years,” said Deutsche Bank economists led by Marion Muehlberger. They noted that far-right parties, holding about 22% of seats, will only influence policy when centrist parties are divided.
“Fears of a populist shock seem premature, but they may indicate where national politics is headed.”
In France, two rounds of elections are set for June 30 and July 7. Nico FitzRoy, a senior Europe analyst at Signum Global, suggested Macron might have been inspired by the Spanish election last year, where Pedro Sanchez called an election immediately after his party suffered major losses in local elections.
However, the 16-percentage-point gap between Macron’s Ensemble and Marine Le Pen’s Rassemblement National may be difficult to close. “The ‘us or the far-right’ narrative that Macron will try to use works better in presidential elections, where Macron has faced RN’s leader Marine Le Pen directly. Parliamentary elections, with multiple parties, are less easily polarized,” FitzRoy added.
Holger Schmieding, chief economist at Berenberg, indicated that an RN victory could impact markets. “For a fiscally challenged France, new parliamentary elections add uncertainty, which could concern markets,” he said.
France’s credit rating was downgraded by S&P last week due to political fragmentation concerns. The yield on the French 10-year bond (BX:TMBMKFR-10Y) rose by 8 basis points.
Ironically, after years of instability, the U.K. is now seen as more politically stable by markets. Labour holds a polling lead exceeding 20 percentage points ahead of the July 4 elections, and JPMorgan analysts note the largest polling lead overcome in 50 years was nine points.
“Labour’s agenda is modestly pro-growth, but with a likely cautious fiscal approach. Our economists believe Labour will focus on supply-side reforms to boost economic growth,” they said.
