- Wednesday's EU council meeting key moment for Euro
- Macron criticises lack of EU unity over corona bonds
- says EU project at risk
- EUR to underperform amidst this rising political uncertainty
Above: Mr Emmanuel MACRON, President of France. Copyright: European Union
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Fresh warnings about the future of the Eurozone sounded by France's Emmanuel Macron have renewed the foreign exchange market's focus on the Euro, which is tipped to remain under pressure unless EU leaders can ease political uncertainty at a crunch meeting scheduled for Wednesday.
Speaking to the FT from the Elysée Palace, Macron warned of the collapse of the EU as a “political project” unless it supports stricken economies such as Italy and helps them recover from the coronavirus pandemic.
Macron said there was "no choice" but to set up a fund that "could issue common debt with a common guarantee" to finance member states according to their needs rather than the size of their economies. But such a fund is opposed by EU states such as Germany and the Netherlands, creating a line of division right through the Eurozon's political core.
The fund - sometimes colloquially referred to as a coronabond - has been promoted by those Eurozone economies that require substantial funding to stave off the economic effects of the coronavirus, such as Italy and Spain but it has more widespread support with northern nations such as France also being in favour.
However, countries such as Germany and Netherlands believe that by underwriting this new borrowing they are effectively asking their citizens to directly fund other Eurozone nations that might be regarded as being proligate in their spending habits.
While logic might suggest that a common currency requires a common fiscal policy, this final stage of Eurozone integration is being fiercely resisted by some European countries, which in turn asks questions about the Eurozone project's future.
Recognising this, Macron says the bloc faced a "moment of truth" in deciding whether it was more than just a single economic market, with the lack of solidarity during the pandemic likely to fuel populist anger in southern Europe.
"If we can’t do this today, I tell you the populists will win - today, tomorrow, the day after, in Italy, in Spain, perhaps in France and elsewhere," said Macron.
The Euro Feels the Pressure
The Euro was an outright winner at the start of the coronacrisis, as a severe global stock market meltdown prompted a surge in repatriation flows of Eurozone domiciled capital.
However, this flow has since dried up and the Euro has shown little ability to increase in value whether markets are rising or falling.
A number of foreign exchange analysts suggest this inability to find traction reflects the market placing a new premium on the currency owing to perceived rising political risks.
"We all know that the strength of a relationship can be severely tested during times of crisis. This is currently very obvious in the EU, and the euro is not taking it well," says Thu Lan Nguyen, FX & EM Analyst at Commerzbank.
Pound Sterling has seen its fortunes against the Euro shift after the markets turned direction and started rising in the second-half of March, allowing the Pound-to-Euro exchange rate to rise by 7%.
Above: Sterling has risen against the Euro in line with a recovery in global risk sentiment, as highlighted by its relationship with the S&P 500 index.
Emphasising the Euro's underperformance is an inability to reclaim losses suffered against the U.S. Dollar, which has fallen back notably against other currencies since market sentiment started to improve.
The Euro-to-Dollar exchange rate has only managed a 1.0% gain since the Dollar started to see its strength fade against a host of currencies in mid-March as panicked investor demand for dollars dried up.
The Dollar was one of the big winners of the covid-19 market meltdown that gripped markets in the first half of March, we would have therefore expected the Euro to reclaim a good chunk of lost ground as sentiment improved.
Above: EUR/USD daily chart
However the Euro's underperformance against the Greenback lends itself to the idea that a degree of political uncertainty has crept back into the equation, and looking forward the ability of the Euro to appreciate therefore lies with a resolution to the question of Eurozone unity.
EU leaders are set to convene via video link for a conference on Wednesday to discuss the impact of the Covid-19 pandemic, where the issue of financing the Eurozone and EU recovery will once again be on the table.
Eurozone finance ministers last week agreed on a package of stimulus measures to in lieu of an actual coronabond, and leaders are likely to be asked to sign off on these next week.
"However, that agreement left out a lot of the detail including how the so called “recovery fund” will be paid for, so this still has the potential to cause issues between leaders. Discussions about the stimulus package may be complicated by it being tied into the negotiations on the EU’s upcoming seven-year Budget," says Rhys Herbert, an economist at Lloyds Bank.
If tensions emerge once again, something that is possible given Macron's combative stance, we could see the Euro come under pressure this week.
According Petr Krpata, Chief EMEA FX and IR Strategist at ING Bank, the Euro is expected to remain under pressure against Pound Sterling for the duration of the near-future.
Krpata says he sees a "modest downside bias for EUR/GBP."
Above: EUR/GBP daily chart
"EUR/GBP continues to hover around 0.8700 (1.15 in GBP/EUR), failing to break this support level significantly," says Krpata. "Sterling is also shrugging off comments from UK officials that rule out the extension of trade talks with the EU beyond 2020. For now, we continue to expect a gentle move in EUR/GBP lower as investors´ concerns about the EU long term fiscal outlook should be a marginal negative for EUR/GBP."
According to David Bloom, Head of Foreign Exchange Research at HSBC, the pressures on then Euro are likely to be relatively short-term in nature:
"Given the strong political commitment to the project that still exists (not to mention the huge cost of break-up), the EUR is highly unlikely to break up. But the FX market does not value the EUR based on a single outcome. Its value is a cocktail of various possible paths, with shifting probabilities. One such possible path is a fragmentation of the Eurozone due to the potential economic and political repercussions of the COVID-19 pandemic. The market does not appear especially preoccupied with this topic, and is perhaps more fixated on the near-term cyclical outlook than grander considerations about the structural integrity of the Eurozone project. This indifference might be challenged in the coming months.
"This creates downside risks for the EUR from a structural perspective with any increase in the probability attached to break-up, however small that probability might remain, likely to pressure the EUR."
EU leaders are nevertheless likely to do enough to patch over the internal political issues the coronavirus has exposed, therefore the likelihood of this negative drag on the Euro is likely to be limited.
"Ultimately history shows that the Eurozone finds the political will to respond to any existential threat to the EUR, and we would expect a similar resolve were the COVID-19 pandemic to create a new challenge to the EUR project. It just might get worse for the EUR before that pan-European political resolve becomes more apparent," says Bloom.