{"text":[[{"start":5.92,"text":"The writer is chief economist at Allianz, a senior fellow at Harvard Kennedy School and a member of the French Council of Economic Analysis"}],[{"start":14.04,"text":"For bond investors, political risk in Europe should no longer be considered a defensive afterthought. It is becoming part of core portfolio construction."}],[{"start":22.92,"text":"Since central banks stepped back from programmes of bond buying in 2022 known as quantitative easing, the sensitivity of sovereign debt markets to political fragility has jumped."}],[{"start":33.32,"text":"And investors are learning that the resulting risk premium in markets moves differently for different countries depending on how power is organised, not just how fragile their politics may be. And once switched on, a risk premium can persist."}],[{"start":47.96,"text":"An Allianz index that tracks political fragility using weekly polling data across eight European countries has risen sharply to an eight-year high reflecting forces such as the fragmentation of the party system, disaffection from mainstream parties, polarisation towards the extremes and the erosion of governability."}],[{"start":66.28,"text":"A significant swing in political fragility — a “one standard deviation” move in statistical terms — now adds almost half a percentage point to what Italy pays to borrow money for 10 years over the benchmark rate in swaps markets. It adds a third of a point for France, and a quarter of a point for Belgium or the UK."}],[{"start":83.92,"text":"All in all, since 2022, political fragility has added roughly €100bn to the cumulative interest bill of Italy, France, Spain, Belgium and the UK. That is about 3 per cent of their annual debt-servicing costs on average and as much as 5 per cent for Italy. Germany, the Netherlands and Austria show no such effect yet but this may change."}],[{"start":null,"text":"
"}],[{"start":106,"text":"There was a reminder of the political sensitivity in the recent sell-off in global bond markets. The German 10-year Bund yield hit 3.26 per cent, its highest since May 2011. Countries with the highest fiscal concerns and perceived political fragility were penalised even more. The French 10-year government bond yield hit 4.13 per cent, its highest since the depths of 2008. The spread between German and French benchmark debt also increased to 0.87 percentage points."}],[{"start":135.46,"text":"It appears sovereign spreads in countries with majoritarian political systems such as the UK and France are more sensitive than in consensus ones such as Germany or the Netherlands. This might be because coalition systems make governments fragile but policies sticky. In contrast, majoritarian systems make governments durable but policies volatile. A single election winner can rewrite the fiscal stance of a country entirely and weaken institutions."}],[{"start":163.7,"text":"The main problem with political fragility is that it is a one-way ratchet: once activated, the cost of it stays in the fiscal equation for years, and the sensitivity to it persists, even after the headlines fade away. Think Liz Truss’s “mini” Budget in 2022, Emmanuel Macron’s snap dissolution of parliament in 2024, or the formation of Italy’s League-Five Star coalition government in 2018."}],[{"start":189.04,"text":"One piece of good news: redenomination risk, the fear that a country might actually leave the euro, has essentially vanished from eurozone bond spreads since 2015. What markets price today is almost purely fiscal risk."}],[{"start":202.7,"text":"The next 18 months will continue to test the true cost of political fragilities: the French-German bond spread could cross 0.90 percentage points anytime soon and wider spreads in the run-up to next year’s French elections, up to 1.20 per cent, are very likely. Italy’s spread looks calmer for now, near 0.80 percentage points, but a proposed new electoral law hands a large majority bonus to whichever coalition clears 42 per cent of the vote. This raises the stakes considerably with risks for markets from both the populist left and a resurgent nationalist right."}],[{"start":237.64,"text":"Policymakers and rational candidates are in a bind. Voters do not want their leaders to fall under the market’s very visible thumb; they want them to be able to choose policies and govern. Yet, markets are more than ever putting pressure on those in office to hold the line on fiscal policy. The more voters seek freedom from the market’s discipline, the more forcefully that discipline reasserts itself, at a real and rising fiscal cost."}],[{"start":262.12,"text":"Populist parties play a game of political brinkmanship: offering even more generous social security without explaining how to pay for it. They can deny trade-offs for the green transition or promise unrivalled sovereignty without explaining any of the costs attached to it."}],[{"start":276.48,"text":"It will be a super-electoral year in 2027 for Europe with France, Italy, Spain and Greece going to the ballots, while other countries such as Germany and the UK are trying to fend off premature political swings. Investors should prepare."}],[{"start":292.74,"text":""}]],"url":"https://audio.ftcn.net.cn/album/a_1787833275_7648.mp3"}