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

French President Emmanuel Macron and Italian Prime Minister Mario Draghi.

Alessandra Benedetti – Corbis | Corbis News | Getty Images

The balance of power is changing in the three largest economies of the European Union, which could have important implications for financial markets.

Germany has just turned the page of Angela Merkel’s 16 years of leadership, France is gearing up for an uncertain presidential election in the spring and Italy is eagerly awaiting whether Mario Draghi will step down as prime minister.

“We may well be in a fairly deep ‘watershed’, with significant positive implications for policy,” said Erik Nielsen, chief group economist at UniCredit, in a note to clients in December.


“The new German government will introduce important reforms in Germany, if they are less eye-catching and direct than desirable, and this will most likely facilitate reforms in Europe as well,” Nielsen said.

The newly established government has pledged to decarbonise the German economy and invest in digitization. At the same time, his idea is also to conduct a sound fiscal policy from 2023, once the incentives to cope with the the pandemic has subsided.

These targets are likely to influence European discussions on how to update fiscal rules, a topic market participants are following closely. The eurozone has had strict deficit and debt targets, but there has been a lack of enforcement of these rules. Moreover, others wonder if these targets are still valid in a post-pandemic world. How much governments will spend, and where, could have direct implications for the bond market.

The German economy is set to make an impressive comeback as the 2022 European Growth Champion.

“The government’s previous stimulus measures and the new government’s impressive investment policies will unfold in 2022 and lead to exceptional growth performance,” ING analysts said in a note in December.

the german economy rose 2% in the second quarter of 2021 and 1.7% in the third quarter, according to the national statistics office. Over the whole of 2020, GDP fell by almost 5%.

These numbers have been significantly affected by the pandemic and supply chain issues.

“As soon as the frictions in the global supply chain begin to subside and the fourth wave of the pandemic is behind us, industrial production will rebound strongly, private consumption will begin to recover and investment will flourish and the German economy will flourish. is expected to make an impressive comeback as European Growth Champion 2022, ”he added.

In October, the International Monetary Fund forecast a GDP growth rate of 4.6% for Germany in 2022, which is higher than estimates for France and Italy.


French voters go to the polls at the end of April. Past President Emmanuel Macron has not yet announced his intention to run for a second term. However, he currently votes first among all the candidates.

But there is plenty of time for voter polls to change, especially as new candidates formalize their plans for the presidency.

Eric Zemmour, an anti-immigration candidate, is seen as a threat to like-minded politician Marine Le Pen. At the same time, the arrival of Valérie Pécresse to lead his conservative center-right campaign is also seen as a challenge for Macron, if he decides to run for a second term.

Nielsen described Pecresse as a “serious contender against the still undeclared favorite Macron” if she makes it to the second round of the election. For the moment, she is fourth in the polls, after Macron and the two far-right candidates.

“Macron will therefore have to take an even narrower path to reform France, especially with regard to pensions, the civil service and the labor market,” say ING analysts.

Nonetheless, a Macron victory would mean France would still have a pro-European leader seeking to work with Germany and Italy to reform the region.


In Italy and abroad, everyone wants to know if Mario Draghi will remain the prime minister of the country or if he will choose to be the next president instead. The latter would bring a new wave of political uncertainty given the fragmentation of the Italian Parliament.

“Ultimately, the political balance that has prevailed since Draghi’s appointment as prime minister is likely to be shaken, if not upset, by the upcoming presidential election,” said Wolfango Piccoli, co-chairman of the Teneo consultancy firm. , in a note. in December.

As president, Draghi would have less direct influence on Italian politics.

“Draghi would find it difficult to act on behalf of Italy vis-à-vis the EU from the presidential palace,” Piccoli said.

However, Italy would still have a pro-European president who would have a say in some of the steps a new government might take.

Yes Draghi remains prime minister, his job “could be more complicated in the months to come, depending on how the ruling coalition handles the presidential election process,” Piccoli noted.

Draghi is at the head of a technocratic government, supported by the different political groups in the Italian Parliament. Without their votes, Draghi’s work could face obstacles when introducing new laws.

Nonetheless, “in this scenario, Draghi would almost certainly remain Prime Minister until the 2023 elections, thus ensuring Italy’s unprecedented influence over key European policies next year while perhaps leaving Italian politics a bit behind. less entrenched in the longer term, ”Nielsen added.

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