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The euro suffers a sharp fall as risk premiums resurface in Europe

The euro suffers a sharp fall as risk premiums resurface in Europe

Jeickson Sulbaran

June 10, 2024 | 2:03 pm

The rise of the far right generates uncertainty in the markets and affects the stability of the euro and risk premiums in Europe

The recent victory of far-right parties in several European countries has had a significant impact on the economy. The euro has fallen almost 0,5% against the dollar, reaching 1,0748 units. This situation has generated uncertainty in the markets, negatively affecting the economic stability of the European Union. Analysts predict that this drop could be just the beginning of greater volatility for the single currency. In addition, risk premiums in southern European countries and France have increased, which has led stock markets to turn red due to the "risk-off" movement in European markets.

Public debt in Europe has also started the week with significant losses. The 10-year French bond has climbed to 3,184%, while the Italian debt has once again exceeded 4% interest. The yield of the 10-year Spanish bond has risen above 3,42%, touching the highest levels of the year. In contrast, the German bond has maintained its stability, which has caused an increase in the risk premiums of other European countries. The Spanish risk premium, for example, has risen eight basis points, reaching its highest level since April of this year.

The role of the European Central Bank in debt stabilization

To mitigate the negative effects on risk premiums, the European Central Bank (ECB) has a tool known as TIP (Transmission Instrument Protection). This allows the ECB to intervene in the secondary debt market to prevent risk premiums from affecting the effective transmission of monetary policy. Although initially designed to protect countries like Italy or Spain, This tool could now be used to prevent France's risk premium from rising too much. Analysts believe that this intervention will be crucial to maintaining stability in the European debt market.

The uncertain future of the European Union and the euro

Analysts warn that the current situation It could be just the beginning of a series of changes in the European Union. The victory of a far-right party in one of the bloc's most important countries could generate a significant risk for the stability of European institutions and the functioning of the euro. Although parties such as Marine Le Pen's National Rally have moderated their stance since 2017, many of their policies clash with the values ​​and norms that dominate European politics. It is clear that Europe faces an uncertain and potentially tumultuous future.

The impact of the recent elections in France and Germany has generated new pressure on the euro, which has fallen to its lowest level in a month against the dollar. The defeat of Emmanuel Macron and Olaf Scholz by far-right parties has led to early elections in France, which has added more uncertainty to the economic outlook. Investors are now questioning Europe's determination toward closer fiscal and financial integration. According to experts, any widening of peripheral sovereign yield spreads against bunds could be considered negative for the euro. In summary, Europe is moving towards a stage of changes and challenges that will define its economic and political future.

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