Markets are overstating Europe’s political risk
13 OCT, 2026
The recent widening of the spread between French and German bonds has sparked broad debate and has been accompanied by a new phenomenon: the contagion of tensions to the rest of the eurozone. Until now, other European assets had generally remained immune to concerns over France's budgetary situation, but in recent days spreads in numerous countries have widened while equity markets have come under pressure. The spread between German 10-year bonds and those of Italy and Greece rose by around 30 basis points (0.3%), while Spain's spread widened by 15 basis points. Even Portugal's spread increased, despite the country having what is arguably one of the soundest debt and deficit trajectories in the eurozone.
This phenomenon, which echoes the 2011–2012 sovereign debt crisis, also reflects an almost Pavlovian market reflex: when political issues pile up in Europe, investors – especially international ones – pull back and wait. It is true that, beyond the French case, several European countries are facing significant political developments, such as Germany with its recent regional elections and Spain, which has just announced that it will hold snap elections on 29 November, not to mention Italy, which will hold legislative elections before the end of 2027. However, these various situations appear far less relevant than the upcoming presidential election in France.
In Germany, Chancellor Merz's position has undoubtedly been weakened by the recent defeats of his party, the CDU, but it seems unlikely that the governing coalition will collapse before the 2029 election. Based on current polls, early elections could produce a political landscape that would make forming a new alliance extremely difficult. The ruling parties would have a great deal to lose at a time when public investment plans are finally gathering pace. In Spain, the economy is enjoying a run of strong growth, but the country will soon have to face the end of the European funding it has benefited from in recent years and will therefore need to apply somewhat greater fiscal discipline. In this environment, a solid, newly elected governing majority will be essential. It is therefore difficult to see any serious economic risk in these elections. In Italy, the opposition is currently divided, and the recently passed electoral law could strengthen the current prime minister's leadership of the Italian right. As a result, Italy is very likely to extend its longest period of government stability since the post-war era.
In light of these factors, European political risk, along with the associated economic and fiscal risks, appears to be overstated, and contagion beyond the French case is hard to justify. For investors, this may in fact be good news. If this exaggerated contagion to the rest of the eurozone continues, the ECB could step in quickly, as it is far more sensitive to this risk than to the specific situation of a single country. At present, the absence of an explicit central bank put, or safety net, is one of the reasons behind market nervousness. An ECB intervention, even if only verbal and without activating the anti-fragmentation mechanism, could reassure investors and allow European assets to rebound. Moreover, the recent sequence creates opportunities to return to sectors or themes that had performed well and where positioning may have become overly consensual, such as banking.
Clearly, the situation in France warrants close monitoring, all the more so given its systemic importance for the eurozone, but investors need to take a broader view of Europe, which as a whole is far from being as negative as it may seem.
