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Recent European Elections And Their Implications On Capital Markets

 

The elections for the European Parliament, held between 6th and 9th of June, could end up significantly impacting capital markets on the continent. This juncture could have the effect of reshaping regulatory landscapes, influencing market stability and altering cross-border economic activities. 

The shift to the far right in the elections saw a European sell-off, led by French markets. There have been widespread declines in stocks and increased bond yields, reflecting heightened political risk across the Eurozone following President Macron’s call for an early parliamentary election after a defeat by Marine Le Pen’s far-right party. The currency market was also impacted, with the euro falling 0.6 per cent against the dollar, according to the FT.

 

Ultimately, the election results could lead to potential shifts in regulatory and fiscal policies, trade relations, innovation incentives and overall market stability, with an impact on investor behaviour and long-term competitiveness of European capital markets. 

Each of these topics is covered in turn below:

 

Regulatory Policies

The EU has long been at the forefront of promoting ESG (Environmental, Social, and Governance) criteria. As Stéphane Boujnah, CEO of Euronext, has noted, we are transitioning into ESG 2.0, where the focus expands beyond mere compliance to a more integrated approach towards sustainability and energy security. The election results will heavily influence this shift. Observers will watch with interest to garner the political support for the Capital Markets Union (CMU), which was originally created to reduce investment barriers and foster cross-border opportunities for a healthier European market.

 

Fiscal Policies

Election outcomes will also influence the European Central Bank (ECB) and its approach to economic stability and monetary policy. The ECB’s leadership, shaped by political appointments, will steer interest rates, liquidity provisions and inflation controls. Potential changes in fiscal policies will then have an impact on the debt market, investor confidence and economic stability.

 

Trade Relations

Brexit continues to cast a long shadow over EU-UK financial relations. The outcome of both the EU and UK elections will play a pivotal role in determining the future of London as a financial hub and the evolving financial dynamics between the UK and the EU. Shifts in political sentiment could either ease or complicate these relations, with significant implications for market stability and investor flows. On a global scale, the EU’s trade policies with major economies like the US and China are also at stake, potentially affecting market stability and investor sentiment.

 

Innovation Incentives

The elections will likely influence the trajectory of fintech and digital finance in Europe. Critical areas like crypto, digital assets, digital banking and cross-border payment systems will be at the forefront of these discussions. Ensuring robust data privacy and cybersecurity measures will also be pivotal.

 

Overall Market Stability

Political dynamics, including the evident rise of populism and Euroscepticism, will play a critical role in the region’s stability. A more fragmented political landscape could disrupt pro-EU integration policies, while a cohesive, pro-integration parliament could ensure continued stability and growth.

 

Impact on financial market infrastructures

Each of the above potential shifts will in turn impact the workings of financial market infrastructures. A supportive regulatory environment, for example, will be crucial in fostering innovation within trading technologies. This includes prioritising cybersecurity, a necessity highlighted by the Digital Operational Resilience Act (DORA), and encouraging modern trading technologies that enhance efficiency and reduce costs. The integration of blockchain, smart contracts and other fintech innovations into capital markets will depend on regulatory harmonisation. Standardisation across markets is essential to ensure seamless integration and functionality. 

 

Legislative priorities will also significantly impact settlement cycles and the operations of Central Securities Depositories (CSDs). A shorter, harmonised settlement cycle can reduce counterparty risk and increase market liquidity, a critical factor in maintaining a robust financial landscape. Furthermore, financial institutions, including banks and asset managers, will need to adapt their operations and strategies to comply with any new regulations, and enhance compliance and risk management practices. 

 

Achieving the strategic goals for European capital markets

The results of the European Parliament elections will affect the realisation of the strategic goals for European capital markets, which include reducing market volatility, maintaining positive market sentiment and eliminating barriers to market entry. Improved market infrastructure and harmonised regulation will inevitably enhance liquidity and ensure smoother market operations. When combined with innovation, a more dynamic and resilient financial ecosystem can be expected.

 

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Guy Melamed

Guy Melamed

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Exberry

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This post is from a series of posts in the group:

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