NewAnti-austerity populism may be on the rise in Euro zone
“The European Union is not going very well,” admitted Jean-Claude Juncker, President of the European Commission on October 22, although you might not know it judging by the scale of investor demand for euro zone members’ government paper that has led to negative yields on many of the member nations’ 2-year sovereign bonds.
That said, markets have reacted rationally, understanding the European Central Bank’s (ECB) efforts to ease the euro zone’s economic problems, including a possible expansion of quantitative easing via asset purchases, necessarily lend themselves to yet higher prices for euro zone government paper and thus lower yields.
But it also reflects a touching belief in the ECB’s capacity to manage events while ignoring signs that, as Juncker put it, there are “cracks and fractures” in Europe.
The catalyst for the latest rally in euro zone government bond prices was ECB President Mario Draghi’s announcement on October 22 that the European Central Bank was contemplating the introduction of new stimulus measures as soon as December. The yield on 2-year Italian paper went below zero for the first time ever on Draghi’s comments.
Although a rising tide raises all ships, it could be costly to assume all vessels were equally seaworthy
Meanwhile, equally understandably, the euro nosedived in value as foreign exchange traders reacted to the fact that euro zone monetary policy settings appeared on track to become even looser.