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Euroscepticism is making less of a splash

Summary:
Renewed political risks are leading to very limited repricing of the sovereign risk premiums.A Catalan crisis, a Dutch eurosceptic-leaning government coalition, the return of Austrian populists, difficult German coalition talks… Eurosceptics have had plenty of opportunities to make a comeback, and yet the market continues to trade each event as largely idiosyncratic in nature.Explanations abound for the resilience of peripheral markets to political risks, including a stronger and broad-based economic recovery, the ECB’s “prudent and persistent” approach to rescaling QE, prospects of further euro area governance reforms, etc. We believe that the Brexit vote and the current difficult state of negotiations are also playing an important role, as populist parties have reviewed their positions,

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Renewed political risks are leading to very limited repricing of the sovereign risk premiums.

Euroscepticism is making less of a splash

A Catalan crisis, a Dutch eurosceptic-leaning government coalition, the return of Austrian populists, difficult German coalition talks… Eurosceptics have had plenty of opportunities to make a comeback, and yet the market continues to trade each event as largely idiosyncratic in nature.

Explanations abound for the resilience of peripheral markets to political risks, including a stronger and broad-based economic recovery, the ECB’s “prudent and persistent” approach to rescaling QE, prospects of further euro area governance reforms, etc. We believe that the Brexit vote and the current difficult state of negotiations are also playing an important role, as populist parties have reviewed their positions, dropping calls for EU referendums.

Still, risk appetite is likely to remain contained ahead of upcoming events. Political fragmentation looks to be here to stay, which is making it more difficult to anticipate the composition of future governments. In Austria, the populist right-wing FPÖ is likely to join a government coalition with the centre-right ÖVP, which is expected to win the election on Sunday. In Germany, the regional election in Lower Saxony on the same day looks equally important, as the outcome could shift the debate at the national level in favour of a ‘Jamaica’ coalition if the FDP and the Greens do well.

Looking ahead, Italy remains arguably the elephant in the European room, but there, too, risks have started to diminish. If the latest agreement on a new voting system is approved by both Houses, it will reduce the uncertainty ahead of the next general elections. An absolute majority for any single party is unlikely, but the new rules would significantly reduce the chances of an anti-establishment party winning a majority.

Mr. Frederik Ducrozet is a Senior Econoist at Banque Pictet & Cie SA, Research Division. Prior to this, he served as Senior Eurozone Economist at Credit Agricole Corporate and Investment Bank, Research Division from June 2006 till September 2015. He joined Crédit Agricole SA in 2005. Mr. Ducrozet contributed to the various publications of the research department, with a special focus on macroeconomic developments in Eurozone countries, including on the outlook for fiscal policy and the ECB’s monetary policy. Nadia Gharbi is economist at Pictet Wealth Management. She graduates in Université de Genève, Les Acacias, Canton of Geneva, Switzerland Do not hesitate to contact Pictet for an investment proposal. Do not hesitate to contact Pictet for an investment proposal. Please contact Zurich Office, the Geneva Office or one of 26 other offices world-wide.

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