Europe: How Markets View Unity vs. Disintegration


Opposing forces championing integration versus disintegration are assailing Europe.  In the past two years both sides have scored important victories.  Britain’s Brexit, Spain’s Catalonian independence referendum and the entry of the nationalist Alternative fur Deutschland (AfD) party to the German parliament, or Bundestag, were victories for proponents of lesser European unity.  The electoral defeat of far-right forces in the Netherlands and the victory of Emmanuel Macron in France were celebrated by those favoring the guiding principle of an “ever closer union.” 

Whatever one thinks of Brexit, the prospects for deeper European integration and the legitimacy of the various national independence movements, the currency markets’ view is unambiguous: they strongly favor deeper political integration:

  • When exit polls mistakenly called the Brexit referendum for the ‘Remain’ voters, the British pound (GBP) rallied from 1.45 to 1.50 versus the U.S. dollar (USD) before crashing, first to 1.32 and later to as low as 1.18 versus the USD when the “Leave” victory became apparent.  The euro fell 3% versus the USD on the day of the Brexit referendum and fell nearly 10% versus the USD within six months.
  • Euro rallied 2% versus the USD in the week after Dutch voters dashed the hopes of the Geert Wilder’s Eurosceptic Party of Freedom.
  • Euro soared more than 10% to a two-and-a-half-year high in the weeks after Macron won the French presidential election on a platform advocating domestic economic reform and deeper European integration.
  • September’s German election results halted this advance after it became apparent that not only did AfD enter the Bundestag, as expected, but that Angela Merkel underperformed the polls by about 5-6% and would have to create an unwieldy coalition with the enthusiastically pro-European Greens and the Free Democrats, who oppose deeper economic integration.
  • Catalonia’s independence referendum led to a 1% one-day decline in the euro, further offsetting gains from the Macron victory. Ninety percent of Catalans voted to leave Spain in the referendum on Oct 1 that the Spanish state considers illegal and attempted to repress with force, leading to nearly 900 injuries.

In each case, a victory for the forces of integration sent European currencies higher, while a victory for the forces advocating less unity, whether within or among nations, led to weaker currencies.  

In addition to the political concerns there are, of course, many other factors that determine the direction of the euro-dollar (EURUSD) and pound-dollar (GBPUSD) exchange rates, including the relative economic strength of the eurozone, the U.K. and the U.S. and the relative direction of monetary policy. Solidifying recoveries in the eurozone and the U.K. combined with the seeming inability of the U.S. Congress to pass anticipated economic reforms boosted European currencies and weighed on the dollar for much of 2017.