Eurozone Will Take Center Stage in Q1 2017

The single euro is no newcomer to controversy as it stares into what could a highly volatile first quarter in 2017. Having come a long way since its introduction nearly 18 years ago, the single currency has brought a lot of benefits (and a fair share of headaches as well). The most notable achievement has been the expansion of the EU from 12 to 19 members over the last decade.

The sovereign debt crisis in Greece, the weak state of the banking sector in the economic bloc has highlighted the fact that the single currency can be resilient and flexible to any risks. Most of this comes from the fact that the euro area members have been committed to preserving the single or common currency, engaging in a series of bailouts including Greece, Portugal, Ireland, Cyprus and Spain. Out of the crisis came the multi-billion euro rescue funds, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM).

Despite being hit continually by crisis, the euro area members exhibited substantial progress, including undergoing harsh austerity measures and introducing new mechanisms of governance and increased surveillance by macroeconomic indicators such as the real exchange rate, housing prices among other things. While the single currency has managed to come out unscathed, the euro will be looking into a tough period ahead next year.

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EURUSD, year to date performance: -5.11% (Source: WSJ.com)

Banking woes still remain

The non-performing loans in the Eurozone’s banking sector continues to remain a high priority as the loans reach worrying levels, even in previous crisis hit nations such as Cyprus and Greece. The latest nation to add to the list is Italy, where Monte dei paschi di Siena, considered to be the world’s oldest bank had to seek state bailout funds to the tune of nearly €5 billion euro just a week before Christmas. The amount was funded by the Italian government which allocated €20 billion to prop up its banking sector.

While the €5 billion might give a lifeline for the bank, the European Central Bank came out with its view that the funding gap for Monte dei paschi di Siena (MPS) could be as high as €9 billion.

Besides MPS, there are other banks in Italy such as UniCredit among other banks, all set up like dominos that could lead to another round of banking crisis in Europe.

Election year in Europe

The year will kick off with elections lined up in France, Germany and Netherlands with the possibility of Italy, all within a short span of time. Questions remain on the outcome of the elections which could see the anti-EU parties rise to power that could potentially upset the status quo.

The main concerns have been the rising migration, fueled by the Syrian crisis and increasing security threats have put economic reforms on the backburner. This has made the more favorable conjuncture, a combination of low interest rates, lower exchange rate against the U.S. dollar and falling oil prices. All of this could potentially mean that policy makers will put off making any long term reforms in the near term.

For the populist parties, the euro is the main target and no matter what, their influence in European politics is set to rise.

The outcome of the elections especially in France and Germany will likely have far reaching consequences, especially in other aspects such as Brexit which is expected to pull the Article 50 trigger next year in March, which coincides at the same time of the elections.

It will be hard to predict the outcome from the Eurozone next year but the only constant being that traders should brace for potential volatility in the common currency as we head closer into the first quarter of 2017.