Eurozone, which faced economic and political risks over the last few years, is seeing abatement of the risks. European equities are at record highs, the Euro is strengthening and Eurozone countries bond yields spreads with the benchmark German Bund are coming off. Charts 1,2 & 3.
The 2008 financial crisis brought to the fore the economic risks in the Eurozone. Major economies were deeply indebted and markets were starting to factor in issues of debt servicing by the PIIGS countries (Portugal, Ireland, Italy, Greece & Spain). Greece went into default mode and had to be bailed out. Other countries faced austerity measures imposed by the EU. Economies went into recession, prompting the ECB to embark on a sustained QE program even as it brought down interest rates to negative territory.
Political risks also rose with terrorist attacks in France, Brexit and economic hardships giving rise to far right political parties. Netherlands and France went into elections with gaining popularity of anti Euro parties. However, both Netherlands and France saw moderate parties being elected to power, leading to a sharp abatement of political risks.
The Eurozone economy is also showing signs of picking with unemployment rate dropping to multiyear lows, inflation picking up and economic growth picking up. The fiscal position of many countries including Greece has improved and with growth, the countries debt servicing worries are receding.
ECB continues to pump in Euro 60 billion a month of liquidity through bond purchases and this QE will go on till December 2017. Eurozone interest rates will stay negative for a while and ECB will first stop QE, judge its after effects and then start to normalise rates.
The abatement of economic and political risks in the Eurozone is highly positive for global financial markets, which tends to turn risk averse on any issues in the Eurozone.