11:46 AM EDT, 05/13/2024 (MT Newswires) -- The election to the European Parliament (EP)will take place between June 6 to 9 across the 27 European Union member states, noted UBS.

The 720 members of the European Parliament (MEP) -- up from 705 in 2019 -- are elected for a five-year term directly (the only EU institution to be directly elected) and proportionately in 27 separate national elections.

In the past, EU elections have generally not had a clear impact on core yields in the short run, but the bank saw potential medium-term implications through fiscal governance and the debate about joint EU borrowing. On fiscal matters, the EP election outcome will directly and indirectly impact leadership at the European Commission (EC) and Council, which will help determine the extent to which high public debt ratios can be put on a downward trajectory while also improving EU competitiveness.

Public debt continued to fall in Q4 2023, by one percentage point to 88.6% of gross domestic product (GDP) but the support from elevated GDP deflators is weakening, stated UBS. The EC is expected to propose in mid-June that Italy, France, Belgium, Malta and Slovakia should be put into an excessive deficit procedure (EDP).

The final decision on opening EDPs is then upon the Council, perhaps in July. Member states will have to submit their fiscal adjustment plans by Sept. 20. Another implication could be the discussion about a successor to the NextGenerationEU (NGEU), and as such whether or not there will be continued (or even enhanced) supply of EU bonds. The EC has also reached out to index providers to include EU bonds in government bond indexes, with the creation of a repurchasing facility for EU bonds expected in the summer.

UBS continued to believe that the adoption of a new fiscal rulebook combined with the EU recovery fund (and potential support through the European Central Bank's transmission protection instrument, or TPI) has set the stage for tighter country spreads.

Political developments have often been the key driver of country spreads. Italian spreads, for example, rose sharply after the parliamentary elections of March 2018 pointed to a coalition with a more confrontational approach to EU institutions. Italian 10-year spreads rose to 287bps after the Lega obtained a 34% voting share at the EU elections of May 2019, but then tightened to 130bps after the second Giuseppe Conte government without the Lega party was established in September 2019.

Italian bonds rallied after the 2022 parliamentary elections pointed to a collaborative approach between the national government and the EU. A focus in the EP election will be the performance of Italian Prime Minister Georgia Meloni's FdI party (PM Meloni announced that she will be a candidate for the EP).

Country spreads are trading close to the bank's end-2024 targets but could also benefit from remaining net issuance of just 32 billion euros in Italy and 20 billion in Spain, compared with 48 billion euros in Germany and 61 billion euros in France. Later in the summer, UBS expected attention to turn to the first budget plans under the new fiscal rules, to be submitted to the EC by Sept. 20.