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Germany, France and Italy brace for political change. Why markets care

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French President Emmanuel Macron and Mario Draghi (Italian Prime Minister)

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Financial markets could be affected by the changing balance of power in three major economies within the European Union.

Germany is about to turn the page Angela Merkel’sFrance, after 16 years as a leader, is preparing for uncertain presidential elections in spring. Italy, on the other hand, is eagerly awaiting to hear if they will win. Mario DraghiHe will resign as prime minister.

Erik Nielsen (group chief economist at UniCredit), stated in a December letter to clients that it was possible for us to be in for quite a profound “watershed moment” with important positive implications for policy.

Germany

Nielsen stated that “the new German government” would bring about significant reforms to Germany. However, it may be less obvious and simple than desired. It will likely also help reforms in Europe.

Newly established government promises to reduce carbon emissions and invest in digitalization. It is planning to implement a fiscal strategy from 2023, after obtaining stimulus funds to address the crisis. pandemicIt has now been lost.

These targets are likely to influence European discussions on how to update the fiscal rulebook — a topic that market players are following closely. Although the euro area has set strict debt and deficit targets, enforcement has not been consistent. Others question the validity of these targets in an era where there is no pandemic. What and how much government spends could directly impact the bond market.

As European Growth Champion 2022, the German Economy should make a strong comeback.

In December, analysts from ING wrote that “Previous government stimuli plus the new government’s incredible investment policies will unfold by 2022 and lead to stellar performance in growth,” in a note.

The German economyAccording to national statistics, the GDP grew by 2% and 1.7% respectively in the second quarter 2021. For the entire 2020 period, GDP declined by almost 5%.

This has had a significant impact on these numbers. pandemicsupply chain problems.

“As soon as global supply chain frictions start to abate and the fourth wave of the pandemic is behind us, industrial production will strongly rebound, private consumption will start to pick up and investments will flourish and the German economy should stage an impressive comeback as European growth champion 2022,” he added.

In October, the International Monetary Fund projected a GDP growth rate of 4.6% for Germany in 2022 — this was higher than the estimatesFrance and Italy

France

French voters will head to the polls late April. Incumbent President Emmanuel MacronHe has yet to announce his intentions to run again for the second mandate. He is polling the highest among all candidates.

There is still plenty of time to make changes in voter polls, especially as candidates form their presidential plans.

Eric Zemmour,An anti-immigration candidate is seen as a threat by Marine Le Pen. If Macron decides to run again, it will be a problem to Macron if Valerie Pecresse arrives to head her centre-right conservative campaign.

Nielsen called Pecresse a “serious competitor against the favourite, yet undeclared Macron,” should she make it to round two. She is currently fourth in the polls, behind Macron and two far-right candidates.

Analysts at ING stated that Macron would have to follow a narrower route to reform France, particularly in relation to pensions and the public service.

A Macron win would mean France has still a pro European leader, looking to partner with Germany or Italy to reform this region.

Italy

In Italy and abroad, everybody wants to know if Mario Draghi will remain as the country’s prime minister —or if he will choose to be the next president instead. Given the fractured nature of the Italian Parliament, the latter could bring about a wave of political uncertainty.

“The bottom line, however, is that Draghi’s election as the PM has caused a shakeup in the political balance,” Wolfango Piccoli of Teneo said in a December memo.

Draghi, as president of Italy would be less influential on Italian politics.

Piccoli stated that Draghi “would struggle to act for Italy vis-a-vis EU from the presidential palace.”

Italy’s pro-European president would be able to influence certain measures being taken by the new government.

If DraghiPiccoli observed that while he remains the prime minister, the work of his successor “could become more difficult in the coming months depending on how and the ruling coalition manages presidential elections process.”

Draghi heads a technocratic government that is supported by various political parties in the Italian parliament. Draghi could run into problems when trying to present new laws without their support.

Nielsen said that Draghi could still be prime minister in this scenario until 2023 elections. This would give Italy unprecedented control over key European policy areas next year, while possibly leaving Italian politics less stable for the long term.”

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