More trouble ahead for the euro in Dutch and French elections

So far the euro is hanging tough and the French financial markets are doing better than I expected.

But I think that’s likely to change in the next four to six weeks. In Dutch elections on March 15 Geert Wilders and his far-right Freedom Party look likely to win the most votes from a badly splintered electorate. And that, in turn, is likely to upset the current consensus that says that Marine Le Pen, the anti-euro far-right leader of the French National Front party, can’t possibly win the presidential elections that begin in April.

Rising fears of a Le Pen victory would send French bond prices tumbling and send the euro down again against the dollar.

Wilders standing in the polls has surged since he was convicted in December of inciting discrimination against the Moroccan minority in the Netherlands. (The court did not punish Wilders despite his loss in the case.)  The Freedom Party, polls now say, could win 20% of the vote. That wouldn’t be enough, probably, to enable Wilders to put together a coalition government but it would be enough to give the party the largest bloc in a divided parliament.

A Wilders win would further rattle a nervous political establishment in France and Germany. Wilders’s platform is anti-immigrant and anti-euro and at times he sounds like he’s running against German Chancellor Angela Merkel.

And it would be enough to lead financial markets to rethink their calm in the face of polls showing that Le Pen and the National Front could win the biggest share of the first round vote in the presidential elections in France. The markets have put their faith to date in a French electoral system that requires a run off between top candidates if no candidate for president wins a majority. The consensus now is that Le Pen would not win in this second round.

So far the financial markets reflect some nervousness at the rise of Le Pen in the polls. The spread between 10-year French and German sovereign bonds hit a four-year high on February 7 but the spread is still just 79 basis points. That doesn’t indicate a full scale panic–especially considering that Le Pen is running on a platform of pulling France out of the euro and returning to the franc along with big deficit spending.

The euro closed flat today, February 8, against the dollar at $1.0698. The 52-week range is a low of $1.0341 to a high of $1.1616. I wouldn’t be surprised to see the euro test parity with the dollar after the Dutch election–assuming that the Trump administration doesn’t do or say anything to weaken the U.S. currency.