The complexity and fragility of European institutions have contributed to maintaining a specific political risk premium on European assets, including the euro. But institutions were ultimately strengthened when negotiators agreed in July to launch the New Generation EU package. The euro’s recent appreciation may be an early sign of decline in this “risk premium”.
Foreign investors may therefore want to rebalance their portfolios in favour of Eurozone assets, which could push the euro higher. Should the euro appreciate too fast, the ECB would not stay on the side-lines.
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