Last week, European markets were under pressure despite generally positive global news. The potential for a political crisis in Europe due to the situation in France weighed on risk appetite. While the stock market underperformed, it raises the question of how concerned forex traders should be over the no-confidence vote in France.
Early on Monday, it appears that European markets received a slight boost. But that was for reasons outside the EU. A court ruling in the US found that US President Donald Trump exceeded his authority in imposing tariffs, including those targeting the EU. The court allowed the levies to remain in place, pending an appeal of the case to the Supreme Court. The White House has until October to file the appeal, and the Supreme Court might not rule until well into next year. That leaves the status quo in place for now, which puts the situation in France at the forefront for the markets.
What Happened in France?
France, like many European governments, is facing a debt crisis. Its debt-to-GDP ratio is 113%, which is significantly above the EU’s target of 60%. The ratio rising into triple digits is often seen by economists as unsustainable, given the cost of servicing the debt. The government, headed by Prime Minister Francois Bayrou, is seeking to cut spending by €44 billion in an effort to balance the country’s finances. Or, his finance minister warns, the government might have to seek a bailout from the IMF.
Evidently, this is not popular with the people of France, and there is substantial political pushback. Bayrou is only in power due to his predecessor losing a vote of no confidence in December of last year. The French legislature is fractured, with strong divisions among opposition parties, and the current crisis is an opportunity for both the hard right and hard left to advance their agendas.
What Happens Next?
To break the gridlock within the legislature, Bayrou called for a no-confidence vote in his own government to be held on Monday, September 8th. The idea is to shore up his own political power and secure the votes necessary to pass the spending package. If he manages to do so, then the markets could return to expecting calm from the European political scene.
If the vote fails, and political analysts say it poses a substantial risk, then this could lead to the Bayrou government’s collapse. The fractious nature of the legislation leaves scant hope of forming a new government. As a result, President Emmanuel Macron might be forced to call for new snap elections, leaving the country uncertain who would ultimately take control of its finances. That prospect could leave markets nervous for several months as it plays out.
How Does It Affect the Euro?
The Euro has gained against the dollar as investors move assets to the relative stability of Europe. European stocks are considered undervalued compared to their American counterparts, and the continent is experiencing a modest resurgence in growth. But a political crisis in the continent’s second-largest economy could reduce or halt those flows, and drag on the Euro.
In the short term, the ECB is not expected to change monetary policy. Which means that price pressures on the Euro side of forex pairs could depend on what happens in France over the next week.
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