How Would a Heightened Nationalist Approach in Europe Affect the Euro?

2016 was a transformative year for Europe after the United Kingdom decided to leave the single market and Italy voted down constitutional reform, paving the way for Prime Minister Matteo Renzi’s resignation. 2017 could potentially pack an even bigger punch as the region’s biggest economies head for elections amid rising nationalist sentiment. For currency traders, the rise of nationalism may signal a downfall for the euro, which has been in all sorts of trouble over the past two years.

Leading the wave of right-wing populist nationalism is France’s Marine Le Pen, who has promised liberation from the European Union (EU) if she succeeds in the spring election.[1] Le Pen has also vowed to “return to monetary sovereignty” by reintroducing a national currency.[2]

The Netherlands also has its own populist uprising in the form of Geert Wilders, the leader of the far-right Party for Freedom, who could potentially win the general election later this month. Like Le Pen, Wilders has vowed to leave the euro and EU if successful in the upcoming election.[3]

Germany, the euro area’s biggest economy, is also due for an election later this year. The populist Alternative für Deutchland (AfD) party has already gained ground in municipal elections, putting pressure on Chancellor Angela Merkel’s weakening coalition.

The upcoming elections are likely to have an effect on the euro, which is losing its status as a global safe haven currency. The threat of Eurozone fragmentation could undermine what little confidence is left in the common currency.

Next year, Italian elections could bring Beppe Grillo and the Five Star Movement into the leadership position. Following Renzi’s resignation, Five Star has emerged as a favorite to overtake the leadership. Grillo shares the same Euroscepticism as his French and Dutch nationalist counterparts, and has also vowed to exit the euro as quickly as possible.

The EUR/USD exchange rate has declined more than 23% over the last three years, as the European Central Bank (ECB) has a hard time trying to boost a struggling regional economy. For many analysts, parity for the EUR/USD is a foregone conclusion – it’s only a matter of when. The spread of nationalism and the undermining of regional stability will likely be what drag the common currency toward parity or even lower.

That says nothing about an actual vote to leave the euro or EU by France, the Netherlands, Germany or Italy. If that were to occur, there’s a chance that the euro could follow a similar path as the British pound following the June 23 Brexit vote.

Although nothing is set in stone, 2017 has all the ingredients to be a highly volatile year for the euro, especially as the U.S. dollar gains traction in the wake of multiple interest rate increases from the Federal Reserve. The Fed is expected to raise interest rates three times this year, which could push the dollar up against a basket of other major.

[1] Jon Henley (February 5, 2017). “Marine Le Pen promises liberation from the EU with France-first policies.” The Guardian.

[2] Helene Fouquet (February 6, 217). “This Is Marine Le Pen’s Plan to Break Up the Euro.” Bloomberg.

[3] Alice Foster (February 28, 2017). “Will Geert Wilders win the Dutch election? Latest polls for the Netherlands election 2017.” Express UK.

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