European elections: why the spread has started to rise again (and for once it’s not Italy’s fault)

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Increase in the spread between BTp and Bund up to 150 basis points and BTp yield above 4%, the highest since last December. If this was the most tangible effect of the outcome of the European elections, we can try to investigate the causes that are causing a clear fibrillation in the markets. The most immediate conclusion is that for once our country is not in the crosshairs, at least in the first instance.

The France effect on the spread

The uncertainty surrounding the next political steps starting from the early elections in France called by President Emmanuel Macron for 30 June and 7 July and the uncertain political balance in Germany is causing tensions on the government bonds front. Suffers the Francealso there Germany is grappling with the effects of the sensational defeat of the SPD and Chancellor Scholz and with the affirmation of the far-right party Afd: in the rebound, the country that after Greece has to deal with the highest public debt in Europe ends up in the crosshairs and which according to the European Commission will exceed 141% of GDP by 2025.

It is the element of greatest vulnerability and, therefore, one cannot be surprised if it is the country that suffers the consequences which, despite the political stability sanctioned by the vote, has to deal with the new political situation that has arisen in the two largest economies of the continent. A climate of uncertainty that seems destined to continue at least until the outcome of the next elections in France, especially in the far from remote hypothesis that the Rassemblement national headed by Marine Le Pen and his dolphin Jordan Bardella . The uncertainty concerns first of all the attitude that France will have in the coming months on the main European dossiers. The fear of a possible disintegration of the European project should not be underestimated.

The risk Europe

The question which, even beyond the French case, is creating tensions in the markets concerns the future of Europe grappling with the affirmation of the right, and with the consequences of possible alliances between the coalition (if it is reconfirmed) between popular, socialists and liberals and some conservatives. The markets – it is known – do not like uncertainty and the tension on spreads clearly attests to this. What is needed is a relaunch of the European project, the completion of the banking union, an integrated single market and the capital market union to deal with what has clearly highlighted the governor of the Bank of Italy Fabio Panetta in his recent Final Considerations: in the last two decades the EU’s weight in global GDP has fallen from 26 to 18%, while in the United States it has remained unchanged at 26% and in China it has quadrupled to 17%. The old continent is struggling with “insufficient productivity dynamics”, which is 20 points behind the United States. Given these urgencies, it is clear that the disintegration of the European integration process is currently seen by the markets as a risk to be avoided.

The political weight of Italy

It will certainly also be necessary to take into account the greater pressure that will come from Italy, which, unlike what happened in Paris and Berlin, saw the Government and its majority strengthened by the outcome of the vote. The negotiation (once the passage with the appointments at the top of the European institutions has been completed) will serve to guide the priorities of the European Union in the next legislature. As regards our public finances, the focus is now on the consequences of the infringement procedure for excessive deficit that will be announced by the European Commission on 19 June and on the “reference trajectory” that will follow on 21 June: preliminary steps for the preparation of the multi-annual spending plan which must be presented by 20 September and the budget for 2025 to be prepared in October.

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