What's going on?

Data keeps coming out showing that the eurozone�s economy is picking up steam � but investors were jumpy on Monday as political risks emanating from France caught their attention.

What does this mean?

Lately, various positive data points concerning the eurozone�s economy have been released, ranging from last week�s news on fourth quarter economic growth to Monday�s improving factory activity in Germany (Europe�s biggest economy).


On the other side of the coin is political risk. Marine Le Pen, a populist French presidential candidate, outlined her election platform over the weekend, and it included a pledge to hold a referendum on France�s European Union membership and, by extension, its use of the euro. A �Frexit� would have unpredictable consequences because, unlike Britain, which does not use the euro, it could jeopardize the overall euro currency union (tweet this). Meanwhile, Le Pen�s chances of winning the election, which is in a few months� time, appear to have increased because one of her mainstream opponents is in the midst of a political scandal.

Why should I care?

The bigger picture: The eurozone outperformed the US in 2016 � but it�s only a moderate catchup.

The eurozone grew at a marginally faster rate than the US last year. But it�s worth remembering that the eurozone has grown more slowly than the US since the 2008 financial crisis. A moderate outperformance in one year still leaves it with a lot of catching up to do.


For the markets: The prices of French bonds are, arguably, indicating a higher risk of Frexit.

French government bonds are at their lowest level relative to their German counterparts in almost four years (Germany�s bonds, partly because it has the biggest economy, are generally used as the benchmark euro-denominated government bond). It�s difficult to speculate what would happen in the event of a Frexit, but it would likely increase the risk that owners of French bonds would be paid back in some currency other than the euro, which is an unappealing prospect for most investors (and probably, at least partly, why they�ve been dropping in price).