The French left has won the election in what many see as a popular revolt against austerity. Add to this the ongoing political issues in Greece which make a Greek exit ever more likely and the problems which Rajoy is encountering in trying to get his austerity plans passed in Madrid and the future for the Euro is far from certain.
The CAC 40 index dropped 1.52pc in early trading with investors nervous about the growing pressure for a eurozone economic policy switch from austerity to growth, reflected in the French and Greek election results and President Hollande’s priorities.
The euro fell heavily. Traders said the euro’s losses, which saw it hit a 3 month low against the dollar, its lowest in 3 ½ years against sterling and a 2 ½ month trough versus the yen, were likely to be extended in coming days.
Stocks in Italy fell 2.2pc, the main Madrid index slipped 1.76pc while a 2.02pc drop in the DAX index of leading German shares was blamed on a local election setback for Chancellor Angela Merkel.
There is a limit to how much support Merkel can give. The Germans are, quite understandably, frustrated that they are continually asked to support economies which have a history of tax evasion and fiscal indiscipline.
Add to this the fact that Merkel is unlikely to find the same support from Hollande that she received from Sarkozy and I think it is fair to suggest that we may soon see the Germany’s patience completely exhausted.
The signs are that the Euro will continue to depreciate over the coming days, but beyond this it is hard to predict and I think we will continue to see volatility as political news influences economic sentiment.
My advice to clients who have any form of exposure to the Euro, either directly or indirectly, is to assess their current level of exposure and to mitigate the risk as far as possible. This mitigation can take several forms from the use of Forward Contracts from your Bank, through to contract amendments with Euro suppliers
or buyers. It is also worth remembering that this issue could cause the failure of businesses in Europe.
In conclusion therefore I am advocating a wholesale re-assessment of my clients relationships with trading partners in Europe, as there is a significant risk of further deterioration.