As several key elections approach and issues surrounding sovereign debt remain, there are increased concerns over the future of the European Union.

Amid market nervousness that Europe could be back in a state of crisis, Italian, French and Greek government bond yield spreads over the German bund have reached new highs.

“Somehow the market is there already,” Beat Wittmann, partner at Porta Advisors, said.

“We will have elections in the Netherlands, in France, in Germany, in one, two, three, four months and that’s an eternity in politics, as we have seen in the last 12 months. So yes, in Europe, things will get rougher and more nervous but a lot of that is in the market already,” Wittman added.

The political calendar could become busier with the possibility of snap elections in Italy and Greece even at present it is busy, with core member states electing new leaders.

Noting the biggest rise since February 2014, On Wednesday morning, the yield on the Italian 10-year government bond rose to 201.8 basis points over Germany. This was due to political risks, according to Alex Dryden, global market strategist at JPMorgan Asset Management.

Investors see the possibility of snap elections being called in the near future, he said.

“We do have some concerns if they call elections,” Dryden added.

After former Prime Minister Matteo Renzi resigned late last year, Italy is under a caretaker government. However, before political parties agreed on changes to the electoral law, President Sergio Mattarella has refused to call elections. Supporting views that elections before the summer were possible, a court ruling at the end of January upheld some changes to the constitution.

If the populist 5-star movement in Italy, which has promised a referendum on the country’s membership of the euro, makes a strong showing in the polls, the Italian election would further destabilize the euro zone and this is a cause for worry among investors.

“The most immediate reason why Italian bonds fell this morning is their close connection to renewed tensions over the Greek bailout terms with new disagreements between the Eurogroup of sovereign creditors and the IMF,” Jan Randolph, director of sovereign risk at IHS Markit said.

“This “Italian connection” pattern was established in past bailout tensions amongst Greece’s pubic-based creditors; and highly indebted euro zone governments like Italy are seem as vulnerable. If Italy were to ever to get into debt trouble again – like in the last few weeks of the Berlusconi government – then a bailout would be virtually impossible if the euro zone creditors and IMF cannot agree on debt sustainability issues. This scenario would be potentially explosive for the Eurozone,” he added.

And in France the outcome of the presidential election are getting more uncertain by the day.

“A Le Pen win in France with a clear program to put the EU, the euro, NATO, etc up for referendum of course is going to drive these spread yields as we get closer to the election,” Wittman said.

However, the chances of a final win for the far-right of Le Pen are decreased as the the election includes two rounds, and hence the political risk is “overdone” in France, believes Dryden from JPMorgan.

Despite this, there should be some buying opportunities around, as the political calendar advances and the European political landscape becomes clearer.

“I am a firm believer that by the end of the year there’s full integrity of the euro zone, I’d treat that as a buying opportunity (Italian bonds),” Wittman said.

(Adapted from CNBC)

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