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Euro Exchange Rate Nerves as "Most Important Elections Since 1979" Loom over the European Parliament

100 days until EU parliamentary elections

Above: A briefing at the EU parliament marking the 100-day countdown to the EU-wide vote that could have implications for the Euro exchange rate complex. Image by Emilie GOMEZ. Copyright © European Union 2019 - Source : EP

A dilution in the power of Europe's traditional centrist parties following this spring's European parliament elections could keep the Euro under pressure over coming weeks and months we are told.

The elections, taking place in all EU member states this May, promise to be the most anticipated in decades as they could pave the way for anti-EU forces across Europe to come together in the parliament and disrupt how the EU functions by taking up senior committee jobs and blocking votes on EU policies.

The centre-right is set to remain the biggest group in the European Parliament after elections in May, but polls suggest a surge in seats for the far-right and a diminished vote share for the traditional centrist parties will inject fresh policy uncertainty into the EU legislature.

An uncertain policy mix at the European Parliament has meanwhile seen foreign exchange strategists turn more cautious on the Euro, with many suggesting the prospect of political uncertainty over coming months is one reason to bet against the currency.

A survey by the European Parliament out on Monday shows German Christian Democrat CDU/CSU alliance led by Chancellor Angela Merkel would remain the biggest single party with 29 seats, but only just ahead of Italy's League, the far-right group now in government in Rome which is expected to be the single biggest winner in the vote.

EU parliament expected vote share

Above: The first set of vote share predictions released by the EU parliament.

The League's 27 seats will be symptomatic of the increased popularity of nationalist and populist parties against the old-guard across Europe.

This will be the most important EU election since the first was held in 1979, the EU Parliament's chief spokesman Jaume Duch told a news conference on the polls.

"The bigger risk is political fragmentation, where the traditional more centrist parties have lost ground, and government formation might be difficult. This is will particularly the case in Spain and in Belgium. In the European parliament, fragmentation may also create some difficulties," says Aline Schuiling, an economist with Dutch lender ABN AMRO.

While traditional parties should still account for the largest blocs following the May vote, gains of about 40% for radicals on the right, to 14% of seats, may introduce more policy uncertainty according to an analysis by Reuters.

The European parliament has traditionally been dominated by the centre-right conservative European People’s Party (EPP) and the Progressive Alliance of Socialist and Democrats (S&D).

The two parties currently hold respectively 217 and 187 of the total of 751 seats in the European parliament. Combined they therefore occupy almost 54% of the seats.

However, recent opinion polls indicate both parties have lost support, with the EPP falling to around 170-175 seats and the S&D to around 130-135 of the total 705 seats that are left to be divided following Brexit.

The European People's Party (EPP), to which Merkel belongs, would take 183 of the 705 seats, or 26% of the seats after he vote which is down from the present 29%, according to the compilation of national polling data from the 27 member states.

That would outstrip the 135 seats for the centre-left Socialists and Democrats, whose share would drop six points to 19%, partly due to the loss of British seats after Brexit as the parliament slims down from a total of 751 seats.

"Centrist parties will still be the biggest but will have lost ground to populists," says Schuiling, "the two parties combined would no longer have a majority of the seats."

This could impact on the Euro exchange rate complex.

"It is not just changing markets views with respect to ECB policy which could serve to undermine the EUR in the weeks ahead," says Jane Foley, FX Strategist with Rabobank. "...on the agenda is the May European Parliamentary elections which could see populists winning a greater share of votes and encourage a sense of disharmony across the region."

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Schuiling notes some nationalist populist right-wing parties have grouped in the Europe of Nations and Freedom (ENF), of which the French National Rally (or Rassemblement National, previously called Front National) and the Italian Lega are the main members.

"Although they could still be joined by more groups or parties, they currently would get around 60-65 seats. The other populist group the Europe of Freedom and Direct Democracy (EFDD) would lose 24 of its current 41 seats in the European parliament after the departure of the UK’s Independent/UKIP members following Brexit," says Schuiling.

The new parliament will have to approve a new European Commissioner by the end of October. "In addition it could over time have an influence on the stance the region takes on area such at the EU budget and trade policy," says Rabobank's Foley.

Spain political risks

Image © curto, Adobe Stock

Ahead of the European elections, market attention will be on Spain where the country are set to head for the polls yet again.

Spain’s prime minister, Pedro Sánchez, last week called a snap election for April 28 after Catalan secessionists joined rightwing parties in rejecting the socialist government’s national budget earlier in the week.

The move kicks off a season of political risk for the Euro.

Spain's third general election in less than four years was seen as an inevitability following Sánchez’s defeat last Wednesday and will force investors to start pricing a political risk premium into European assets, including its currency.

The Euro was seen under pressure amidst the headlines with the Pound-to-Euro exchange rate climbing 0.4% to 1.1371 and the Euro-Dollar exchange rate falling 0.13% down to 1.1279.

For markets, the emergence of the far-right VOX party in Spain is of particular concern, the ascension of which appears to have roots in the tensions surrounding Catalonia.

"We argued before that the Catalan secessionist issue was here to stay. And it is pretty much dominating, whether explicitly or implicitly, most of the political and policy debate these days. Nationalism on both sides keeps gathering steam," says Chiara Angeloni, Europe Economist with Bank of America Merrill Lynch Global Research in Milan. "The secessionist movement is partly responsible for the appearance of the far-right party, VOX."

VOX is a nationalist movement that has aligned closely with France's National Front, pursuing an agenda for, among other things, less decentralisation of Spain, promotion of the national symbols and values, undoing the law on gender violence, a tougher stance on illegal immigration including suspending Schengen until there are better controls, and building a wall in Ceuta and Melilla.

Additionally, it argues for a more aggressive response from central government towards regional nationalism and, in particular, the secessionist push in Catalonia. It has called for, again, applying article 155 to Catalonia but with tougher implementation (Article 155 of the constitution allows the Spanish government to take control of a region under some specific circumstances).

"The party is also calling for redefined European rules that take power away from Brussels institutions and return it to the Member States. So it does not have an explicit Eurosceptic message, but implicitly some of the measures it proposes would run contrary to the current European framework," says Angeloni .

Angeloni notes the Spanish political arena has gone from a simple two-party system, with a centre-left party (PSOE) and a centre-right party (PP) dominating the landscape and shaping governments, to one with five parties polling above 10% and which is increasingly polarised (moving away from the centre).

"I expect the Euro to start weakening, and the spreads to start widening versus the bunds,” says the CEO of ABP in an interview with Bloomberg News. "The area which I think the market is underpricing is the risk of ‘Europe’. I believe that power is going to be moving away from Brussels over the next decade back into the national areas with Merkel and Draghi not there to control and drive the centre. I believe the parliamentary elections in May are going to be vitriolic in terms of politics - we have already seen a little bit of that in the spat between France and Italy.”

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