All Eyes on France

According to Italy's Europe minister Britain's vote to leave the European Union has started the bloc’s “disintegration” following the countries vote this weekend to reject a planned constitutional reform. While the referendum itself was not about EU membership the vote against the reform is largely considered another example of the populist uprising sweeping Western Democracies. Furthermore, the opposition to the reform was made up a variety of populist movements from both the left and the right whose singular commonality is opposition to the EU.

As a result of losing the referendum, the Italian Prime Minister, Matteo Renzi, resigned following which opposition calls for new elections have intensified. It is uncertain whether the ruling coalition will be able to continue and it is also uncertain if elections are called the populist opposition parties would be able to win an election. Yet given what we have seen over the last year with BREXIT and the election of Donald Trump, it would be unwise to bet against a anti EU coalition taking power. Irrespective of the subject of the referendum, the result very much endangers Italy's EU membership. Furthermore the result heightens anxieties over upcoming French Presidential election in January.

For the past 6 months the UK has been tearing itself apart over the BREXIT vote. A lot of the economic fallout from the vote was both predictable and justified. Yet right now BREXIT is probably the least of Europe's concerns. With potential elections in Italy and the election in France, Europe could be facing disintegration within the next 3 months. In our opinion BREXIT would not be the cause of this disintegration but a symptom of the same malaise that has hovered over western economies, and particularly in Europe, for the last 8 years and for which respective governments have been so hopeless in tackling. If this collapse were to occur BREXIT would have simply been the warm up act and much of the resulting tumult in the UK will turn out to have been almost irrelevant.

It is not without reason that sterling has climbed aggressively against the euro over the last few weeks to 1.18 (albeit still heavily down since the BREXIT vote). Right now if you want to bet which way sterling will go then you need to follow the French elections. If polls show Le Pen gaining traction then expect sterling to climb and climb fast. The choice of the much further to the right candidate, Francois Fillon, over Alain Juppe as the republican choice seems to have calmed fears somewhat.

It is a statement of the obvious but nevertheless worth making, politics is the driver of the markets. If you have a political science degree then perhaps it would be a wise move to get into the investment game.