Merkel election flop could resurrect existential questions over the EUR
The weakening of German chancellor Angela Merkel is a potential blow to European integration and could be a set-back to the long-term survival of the EUR, particularly if serious structural flaws were to resurface in the Eurozone.
Fortunately for the EUR, the German election result came on the back of relatively strong and broad-based growth across the Eurozone — so for the time being markets have more or less taken the result in their stride.
But as a result of her loss of public support she will now have to govern with at least one party that is not so integrationist in its views making it harder for Germany to go along with French plans for ‘ever closer union’. Also, one of the main opposition parties, the AfD, which is Eurosceptic, made a big electoral breakthrough, a result that will be hard for the German government to ignore. Indeed, politically, Merkel may not even survive much longer as Chancellor, which could unsettle markets if she was ever forced to resign and would create political uncertainty.
This doesn’t mean European integration is dead, despite eroding popular support for the cause. What it does mean is that come the next crisis — which could come about as a result of the European Central Bank winding down its stimulus programme or the Italian election (due before May 2018) or problems in Spain with Catalonia or a global recession — is that the EUR will be subject to bouts of excessive volatility.
What will then transpire are the all too familiar emergency meetings between Eurozone leaders and EU institutions to put in the necessary support mechanisms to shore up the EUR. A lot of that work has already been done as a result of previous EUR crises.
However, it still lacks the crucial large scale fiscal transfers and centralised political decision making that are typical of other ‘unions’ such as the UK, US, China and Russia. It will probably take another deep crisis to put those finishing blocks in place, providing there is enough political support to do so. If there isn’t, it could be disastrous for the EUR.
TECHNICAL ANALYSIS: EUR/USD consolidation breaking down
USD managed something of a recovery last week on Eurozone political uncertainty and better prospects for US growth as President Donald Trump readies his tax reform plans. However, some areas of key support have held so far. Meanwhile, EUR/USD fell through a short-term consolidation pattern and should the news catalysts present themselves a breach of more key support levels is distinctly possible. Also, the 50-day moving average (turquoise blue) has been breached, which is potentially bearish.
Support levels include 1.1747, 1.1717-9 and 1.1675. If that last level is breached then question marks will surface over the sustainability of the recent EUR rally. Indeed, the bounce off the short-term low of 1.1717 (and off the lower Bollinger band) does look potentially like a short-term recovery. More tests to the downside can’t be ruled out with the RSI still in neutral territory.
Meanwhile, resistance can be seen around 1.1867, 1.1884, 1.1980 and 1.2034