Shorting the Euro: European Elections and The Eurozone

The past several months have been full of political surprises tracing back to Brexit, the British Referendum vote to leave the European Union last June, to the November election of U.S. President Donald Trump. Both of these election turnouts have had serious ramifications on the stability of the global economy, particularly, the Euro. However, the Euro’s volatility doesn’t end there.

In the next several weeks, other Eurozone member countries will hold elections to determine their respective country’s political and economic futures. On March 15th, the Netherlands will hold their Presidential election, which will serve as an indicator for the later French election on April 23rd and May 7th (France operates on a runoff voting system).

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French Presidential Candidate Marine Le Pen (Left) and Dutch Presidential Candidate Geerts Wilders (Right) 

In both countries’ elections, populist party candidates have rallied to the national stage and gained support from large volumes of voters. In the Netherlands, Geert Wilders leads the Dutch Party for Freedom (PVV) and has drawn comparisons to President Donald Trump for his anti-immigrant and anti-Islamic rhetoric as well as for his popular use of Twitter. Wilders also stated that if elected, he promises the Netherlands would receive their own referendum to exit the European Union (EU) and once again become a sovereign state.

Mr. Wilders insists that exiting the EU would enable the Netherlands to save billions of dollars that are annually spent on EU regulations. However, according to data from the Observatory of Economic Complexity, sponsored by MIT, the Netherlands would suffer from exiting the EU. In 2014, the Netherlands held a negative trading balance of $27.3 Billion. Additionally, the country’s top trading partners are Germany, Belgium-Luxemburg, the United Kingdom, France, and Italy, the majority of which the Netherlands benefits from trading with because of agreements with the EU.

Given that the Netherlands is one of the founding countries of the European Union and that is it one of the more stable economies in the region, a “Nexit” (Netherlands exit) would make the Euro increasingly more unstable. To provide perpsective, just before the British Referendum, the Euro was trading with the U.S. Dollar at $1.13 per €1. As of today, the Euro is currently trading at $1.06 per €1. A Nexit could have serious effects on the authority of the Euro causing the currency to drop to its lowest levels of the decade.

With this being said, is it currently possible for a far-right candidate like Wilders to win the upcoming election? Wilders’ PVV party is currently second in a recent Dutch poll, and trails only the incumbent People’s Party for Freedom and Democracy (VVD) by just 1%. The Dutch Government operates on a parliament seat-based system where parties are awarded seats for particular amounts of votes. With recent polls, this would award the PVV party 24 seats in Parliament, giving them significant political influence.

Even if the PVV does not receive a large volume of votes, their message has made an impact on the overall voter base and influenced the platforms of other parties. Parties such as the Socialist party, which is expected to do well in the election, has also rallied on an anti-EU and anti-globalization platform.

With this high-level of risk and uncertainty associated with the Euro, my expectation is that the Euro will fall significantly after the Dutch election. Therefore, prudent investor advice would be to short the Euro against the dollar to hedge against election risk just before the March 15th vote. Now, depending upon the developments in the French Presidential race, investors should consider potentially shorting the Euro again in April.

While the Netherlands await the results of their election in a few short days, France, which has a long history of political revolution, is also facing a populist right-wing candidate in Marine Le Pen. Le Pen has voiced her opposition to globalization, refugees, immigration, and France’s affiliation with the EU establishment. Based on current reports and polls, Le Pen is expected to pass through the first round of voting in April. However, the majority of polls have her losing to any leading candidate in the final round. While she is not likely to become president, investors should be wary of the rising nationalistic influence in France and throughout Europe that could undermine the stability of the Euro.

“The Euro could collapse within the next 18 months”

Growing nationalist sentiments like that of France and the Netherlands can also be found in stable economies like Germany. President Trump’s recent nomination for the position of Ambassador to the European Union, Ted Malloch, stated that he believes the Euro could collapse within the next 18 months. If both of these candidates are able to significantly influence their respective governments, we can expect that further anti-European Union sentiment will succeed in other parts of the continent further threatening the security of the Euro.While much of this discussion is speculation, it points towards growing concerns of the security of the Euro and the attractiveness in shorting the currency for short-term gains.

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