Political Woes Grip European Markets: ETFs To Watch

After posting the best year of growth since 2007, Europe is caught in a double whammy of politics and geopolitics. This is especially true given the deepening political crisis in Italy and new political drama brewing up in Spain. Additionally, Trump’s protectionist trade action, which is likely to have an impact on global economic growth, is making investors’ jittery.

Inside Politics Gyrations

The political risk in Italy has escalated given that an effort to form the first populist government in Western Europe has collapsed after president Sergio Mattarella rejected the choice of a euro-skeptic as finance minister, which could provoke "Italy's exiting of the euro”. The leader of the two parties — anti-establishment Five Star Movement and the far-right League — were in talks to form a coalition for weeks. Italy’s FTSE MIB index dropped 2.1% on May 28 after tumbling 4.5% last week.

The latest development in the euro-zone’s third-largest economy has triggered a possible constitutional crisis as Italy has been without a government since Mar 4. It has raised the likelihood of another election this year, raising the concerns over the Italian membership of the currency bloc and the country's role in the European Union. The longer-than-expected crisis could also lead to fears of a euro-zone meltdown.

Meanwhile, more political risk seems to be in the cards with the heightened risk of a snap election in Spain. The biggest opposition party in Spain, the Socialists, called a vote of confidence against prime minister Mariano Rajoy in response to a corruption case engulfing the ruling Popular Party that led to a bloodbath in Spanish stocks. Notably, Spain’s IBEX 35 index declined 1.7% on May 25 and another 2.3% on May 28.

Coming to geopolitics, the Trump administration might not extend the exemption for the European Union on steel and aluminum tariffs after Jun 1. The White House had proposed to cut European Union steel and aluminum exports to the United States by about 10%.

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