Euro: Volatility rises amid French political strains – Rabobank

French political risk is intensifying, according to Rabobank strategists Joe DeLaura and Florence Schmit. Protests and looting have sent French bond yields sharply higher, while authorities weigh curfews. The strategists say France cannot be allowed to fail within the EU, yet ask whether its far-right Rassemblement National (RN), or National Rally party, can be allowed to succeed. This leaves the ECB facing a policy dilemma with potential consequences for the Euro and wider EU stability.

French political turmoil puts ECB policy in focus

"Yesterday saw an ugly bond reaction to the ugly protests and looting in France (and Belgium and Italy, following earlier peaceful protests in Spain and Portugal) with 10-year French yields +13bps, Italian +8bps, and German +3bps."

"Even if we only focus on fiscal metrics, French 10-year borrowing costs are now half a rate hike higher than Friday."

"Of course, France can’t be allowed to fail given its importance within the EU. Then again, can the RN be allowed to succeed?"

"The hypothetical whispered realpolitik binary is between the ECB bailing France out if needed, at a cost to the Euro and the fury of Germany, and not doing so at a cost to EU economic, political, and market stability."

"But could the ECB bail everybody else out from French contagion and leave Paris to sort out its mess?"

"Whatever happens now, more volatility seems far more likely than a ‘reversion to mean’. "

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)