There was a huge sigh of relief among investors when it became clear that the populist-nationalist wave that ostensibly led to Brexit and Trump’s election was not going to sweep through Europe. The euro gapped higher on April 24, and it has not looked back. We have suggested that with the outcome of the German election, European politics shift from tailwind to headwind. 

Spain’s most serious constitutional crisis in 40 years appears to have climaxed this week. The business and political elite came together to resist the secessionist pull of Catalonia.Other European countries, including Germany and France, as well as the EU, defended the territorial integrity of Spain.   Although the crisis may linger into next week, Spain’s assets began recouping some of their recent underperformance.

The political focus is already shifting within the eurozone. In Italy, the Chamber of Deputies finished today its third vote on the electoral reform. The bill now goes to the Senate, which is unlikely to take it up for several weeks. Next year’s budget is a more pressing issue. Still, the Senate is likely to approve the bill before the end of the year. While this makes possible an election at the end of Q1, we suspect it will be a Q2 event.  

The new electoral rules favor coalitions, and this was immediately seen as a setback for the Five-Star Movement, which had ruled out forming a coalition. Recent polls showed the Five-Star Movement running neck-to-neck with the center-left PD. There are suspicions in some circles that Berlusconi’s forces may have struck a grand bargain with the Renzi’s PD that could involve not only the electoral law, but the budget, appointments to some state-run companies, and other issues. There seems to be some risk that no coalition or block will secure a majority, which would leave the situation not too dissimilar from the present.