Currency exchange markets gripped by fears of populism

After Trump and Brexit, the attention over the next few weeks shifts to the voting rounds in Italy and Austria. "Smart entrepreneurs are arming themselves against the possible consequences for the euro,” says Joost Derks of the Dutch payment & Exchange Company in the column below: 

In the aftermath of the election victory of Donald Trump, the value of the US dollar has increased. This gain in ground is at the expense of the euro amongst other currencies. The euro has dropped to its lowest levels since the end of 2015. There is a big chance that the attention on the currency exchange markets shifts from America to Europe. After the elections in the United States, the European mainland can ready itself for a political change. 

In Italy on the 4th of December, a referendum will take place in which the population can give its opinion about certain measures that Prime Minister Matteo Renzi will take that will make way for political reforms. Renzi has bound his political fate to the result of the referendum. Between 21 October and 15 November, 11 different organizations held a total of 32 polls. In each of these, the No camp was in the lead, which seems to increase even more. There is a significant chance that the Italian government will soon be looking for a new Prime Minister. 

On that same day, there will be elections in Austria. The right-wing Populist Party FPÖ has had some success with the Constitutional Court in fighting the small victory that Alexander van der Bellen (the Green Alternative) achieved in May. If FPÖ candidate, Norbert Höffer, wins during the re-election, Austria will be the first country in Europe with a populist Prime Minister. 

The unexpected result of the Brexit referendum, the victory of Trump, the imminent departure of Renzi, and the chance that Höffer wins the presidential elections in Austria, are all symptoms of the same underlying movement. The increasing income inequality in the world is often cited as an explanation for the dissatisfaction that led to the result of the Brexit referendum and the rise of Trump. Large parts of the population see that there are jobs lost due to competition with low-income countries and the arrival of cheap labour. The increase in welfare budgets passes this group by completely. The existing institutions and political parties are not doing enough in the eyes of many people to defend their interests. The victory of populist, national parties is, therefore, the loss of the established order. 

From an economic point of view, the advance of isolationism and protectionism is a bad development. The Dutch welfare system would take a huge hit if we closed our borders and put the well-paid trade consultants to work in the mines of Limburg. Besides, insecurity will increase if all European countries put self-interest above all else. The European Coal and Steel Community – the precursor of the European Union, established in 1951 – was mainly established to improve the collaboration between European countries. It was also to ensure that these countries would never go to war with each other again. 

The mobility of the exchange rates will increase further due to the coming elections and referendums. The best way for Dutch companies to arm themselves against the rise of the populism is to follow a well thought out currency policy. Every signal of an increasing disagreement in the European Union will pressure the euro even more. Even though, this is an advantageous development for export companies that are paid in different currencies, this will lead to higher costs for entrepreneurs that import (half) their products from outside the Eurozone. For these companies, it will be even more important to cover the currency risk. 

Exchange Company 
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joost@nbwm.nl
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