Markets are anxious about several upcoming European elections, all featuring anti-European Union (EU) or anti-euro parties. Last year proved upsets can happen, but we believe European near-term political risks are probably overstated.

Written by Richard Turnill (BlackRockBlog.com)

The Netherlands holds elections next week, soon to be followed by France, and later Germany and Italy. We are most focused on the outcomes in France and Italy, where populist parties could potentially gain power. Government yields there are up sharply, as evident in the chart below, with spreads at some of the widest levels since the eurozone sovereign debt crisis.

Markets view France’s presidential vote as the next potential electoral shock. Populist candidate Marine Le Pen, who has flagged a referendum on EU membership and reintroducing the franc, appears poised to make it to the final round of the two-round voting system. If she does, however, polls suggest she will likely lose, with a polling gap far wider than that seen ahead of the Brexit and U.S. election surprises. Even if Le Pen were to win, we believe she would have a hard time securing a majority in parliament, lowering the near-term risk of a eurozone breakup.

Italy’s shaky political outlook worries us more and should keep Italian bond spreads wider ahead of a likely late-2017 or first-half 2018 election. Italian populist and right-wing parties together garner about 45% support in a country where anti-euro sentiment is strong and majorities in parliament may be factious and fragile.

Conclusion

For now,