Euro: French political stress raises volatility – Rabobank

Rabobank strategists Joe DeLaura and Florence Schmit have noted increasing French political risk due to protests and looting, which have caused French bond yields to surge and led authorities to consider curfews. They stress that France cannot be permitted to fail within the EU, but also question whether the far-right National Rally party can be allowed to succeed.

This dilemma could weigh on the Euro and overall EU stability. Yesterday, French 10-year yields increased by 13 basis points, while Italian yields rose by 8 basis points and German yields climbed by 3 basis points. Even focusing solely on fiscal metrics, French borrowing costs are now half a rate hike higher than the previous day.

France's importance within the EU is undeniable, but so is the question of whether the RN can be permitted to thrive. The hypothetical choice seems to be between the ECB intervening to support France at the expense of the Euro and facing German criticism, or not intervening, potentially leading to EU-wide economic, political, and market instability. Regardless of the outcome, volatility is expected rather than a return to normalcy.