Emmanuel Macron Francois Fillon Marine Le Pen
Giant figures of (L-R) Emmanuel Macron, head of the political movement En Marche !, or Onwards !, and candidate for the 2017 presidential election, Francois Fillon, former French prime minister, member of The Republicans political party and 2017 presidential candidate of the French centre-right, and French National Front leader Marine Le Pen, are seen during preparations for the carnival parade in Nice, France, February 2, 2017.
REUTERS/Eric Gaillard
With major elections coming up in France, the Netherlands and Germany in 2017, European investors are understandably focused on the political risks in the eurozone right now.

Far-right, eurosceptic candidates like Marine le Pen and Geert Wilders seemingly have a reasonable chance of gaining power in some form or another, and fears that one of the euro's founding members could leave the single currency area, or the EU as a whole, are beginning to crystallise.

However, according to a team from BNP Paribas Investment Partners, with the furore surrounding these elections, one major risk to the continent is being virtually ignored — Italy.

Last summer, in the months following Britain's vote to leave the EU, Italy began to rear its head as a big problem for the EU. A massive surfeit of bad loans in the country's banking sector threatened financial stability, with the world's oldest bank Monte dei Paschi a particular flashpoint. Italy also faced down a potentially destabilising referendum on political reforms that was widely seen as a vote on Prime Minister Matteo Renzi.

That referendum came and went, with Renzi losing, resigning and being replaced by a technocratic government led by new PM Paolo Gentiloni. The Italian banking sector's problems have also retreated from centre stage, although they are still bubbling below the surface.

That means that Italy is now virtually being ignored in mainstream discourse, something that BNP Investment Partners' Multi Asset Strategy team sees as unwise. Here is the kicker from their latest note (emphasis ours):

"In the eurozone markets are focusing on upcoming elections. Sure, there are downside risks, but we give them a low probability. In the Netherlands the anti-immigration and anti-EU PVV may get the most seats in the lower house in the March elections, but it will most likely not be able to form a coalition government. In France, reform-minded Emmanuel Macron looks set to win in a second round of the presidential elections in May. Actually, a lack of reforms, slow growth, a troubled banking sector and high government debt in Italy may be a bigger risk for the eurozone."

BNP's basic argument is that the fears about either France or the Netherlands leaving the EU are being hugely overplayed. In France, Le Pen — who is highly unlikely to win the presidency if polls are even remotely accurate — would need to change the country's written constitution to even think about leaving the 28-nation bloc.

France's constitution says that proposed laws on the organization of state powers, reforms relating to economic, social and environmental policy, or a request for authority to ratify a treaty can be decided by referendums. But it stops short of providing the power to withdraw France from an existing international agreement.

In the Netherlands, not only is Geert Wilders also very unlikely to gain any meaningful power, but there is actually relatively little appetite for leaving the EU.

As Deutsche Bank wrote in a note last week: "Only the PVV [Wilders' party] has taken a clearly pro-Nexit stance. Other (soft) Eurosceptic parties have been more cautious, for instance, suggesting separate votes on aspects of EU participation rather than complete ‘in or out’. A poll by TNS Nipo asking the hypothetical Nexit question suggests that it would get a majority only among PVV voters."

Italy however, remains a serious problem with no real end in sight.