Since the Eurozone debt crisis of 2010 investors have been fearing a collapse of the Euro currency, which would trigger financial mayhem in Europe and have global impact.
Those fears have been evident during the various iterations of the Greek debt crisis and following the Brexit vote in 2016 and have re-emerged this year, but should investors really be worried or are the concerns just ‘noise’?
This year, the Euro fears have centred on Italy and Germany.
In Italy, there has been tension between the European Commission (EC) and the country’s newly-elected populist Government over the country’s proposed budget deficit of 2.4% of gross domestic product for 2019.
The deficit, while low relative to some other countries, has annoyed the EC because it was higher than previously agreed targets and given Italy’s very high public debt relative to GDP.
Investors have been worried that the EC’s demands for greater fiscal restraint could trigger a further anti-Euro backlash in Italy.
While support for the Euro is a little bit lower in Italy then the Euro-wide average of 75%, at the end of the day a deal will likely be struck with Italy on their budget to avoid emboldening the Eurosceptics there. I think that issue will ultimately be resolved although it could cause a bit of consternation in investment markets along the way.
The emerging political situation in Germany has also been viewed as a possible threat to the Euro.
Support for the governing grand coalition parties – the Christian Democratic Union (CDU), the Christian Social Union and The German Democratic Party – have suffered at state elections, most recently in the key state of Hesse.
And German Chancellor Angela Merkel – one of the Eurozone’s key political figures and a stabilising influence – will step down as Chancellor come 2021 and not contest elections then.
But in the German State elections in both Bavaria and Hesse, it wasn’t so much the anti-Europe parties that did so well, it was actually the Greens, and they’re known to be pro-Europe and pro-Euro.
And when we look at German support for the Euro it’s running at around 83%. It’s actually gone up. So there is nothing in any of this to suggest there is a major problem in terms of German support for the Euro.
A collapse unlikely
There are political issues in Europe, as there are in Australia and indeed everywhere.
But I don’t think any of these will result in the demise of the Euro.
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