EUR fall halts but a serious fall could be ahead
It seems the Euro’s slide has been halted, at least temporarily, after a week thus far of significant weakness in the aftermath of the Irish bailout. Rates against the Dollar and Sterling are virtually where they were this time yesterday, though looking at the financial press over yesterday and today, to say temporary is the operative word in the above would be an understatement. An army of doom merchants are now hypothesising the various outcomes for the Euro depending on where the whirlwind bailout tour may reside next, and as commented yesterday it is clear that many are starting to question the efficacy of applying a single monetary policy to a population of 330 million people, and to member states with such vastly differing economic fortunes and fiscal idiosyncrasies (though the powers that be in Beijing may snigger at the ECB’s incompetence in steering such a micro economy).
The latest set of Purchasing Managers Indices clearly shows the great divide between the core nations and the periphery. The unified German economy has bounced back from recession with gusto, and the quarterly survey points to a further surge in GDP growth. In France, which emerged from the downturn with a much less impaired fiscal position than most of its partners, output is also expanding at a good clip, and though the expectation is for the German growth rate to slip next year as fiscal austerity measures bite, it remains in a different league to the periphery states. With the natural pendulum of market exchange rates unavailable in reconciling such differences within the Euroland by assisting exports or imports, it is difficult to see what options the monetary authorities have apart from pump money at the latest black hole, and it is as damaging to the fortunes of the stronger looking nations as it is restrictive for the nations that are in trouble.
The latest conjectures suggest that it may only take a debt crisis to one of the larger states to convince the Germans to leave the Euro. With Portugal and Spain seemingly certain to go next, hand-in-hand, the threat of default to a larger economy, such as Italy, could be the last straw for a financial powerhouse such as Germany or France. Angela Merkel’s calls for European treaty changes are a signal that the German people, government and economy are tired of bailing out incapable EU neighbours.
Today is one of the quietest we have seen on the data calendar in a while, and with little out, with the US enjoying Thanksgiving, market participants may be spending more time tracking Eurozone bond yields and the latest newswires for any further developments on the above.