FX.co ★ EUR falls prey to political turmoil in France

The future of the European currency looks bleak. The euro has been losing ground due to political jitters in the EU. For instance, pressure on the euro intensified after a vote of no confidence was announced against the French government. The political turmoil in France is raising significant concerns among investors.

Market participants are braced for a prolonged period of political disputes in France, which experts believe will negatively affect the euro's outlook at least in the short term.

Recently, heated debates over France’s budget for next year led far-right leader Marine Le Pen and the left-centrist coalition to declare a vote of no confidence against Prime Minister Michel Barnier's administration.

Skylar Montgomery Koning, a currency strategist at Barclays Plc., acknowledged that "the eurozone has entered a prolonged period of political instability in France." The expert added that this state of affairs could last for quite some time, describing it as a "headwind for the euro."

The outcome of the vote was no surprise to markets. However, further escalation "will push France into uncharted territory" and hinder efforts to contain the budget deficit, analysts warn. Preliminary estimates suggest that by the end of 2024, France's budget deficit could exceed 6% of GDP—double the EU's prescribed limit. In such a scenario, pressure on the euro will intensify. This development is particularly unwelcome as markets are already pricing in significant monetary policy easing by the ECB to support the EU economy.

Sean Osborne, chief forex strategist at Scotiabank, stated that the current French government "will have to make further concessions to pass the budget, which will weaken overall fiscal policy." Many experts are calling for a swift resolution to the conflict of interests. "If the current situation worsens, the euro will remain under constant pressure, given the looming deadline for budget approval," Osborne added.

The bill initially proposed by Michel Barnier’s government included €60 billion ($63 billion) in tax hikes and spending cuts aimed at reducing the deficit to 5% of GDP by 2025.