| Saving EMU |
| 15.11.11 10:18 | |
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The pressure on French and Spanish bond markets yesterday is a clear indication of the systemic risk which continues to gnaw its way through the Eurozone. With the core of EMU now suffering the effects of contagion the EUR can be expected to remain vulnerable. Over the past couple of months the markets have gradually come to recognise that it is not the size and structure of the Eurozone’s bail-out fund that is the key to the future of Eurozone, but the budgetary structures and values that are maintained by each member country. The presence of a robust and credible bail-out strategy is imperative, but clearly it would be better if budgetary discipline were such that each country could fund itself on the open market. Merkel has been cracking the reform whip for the best part of two years in an attempt to bring EMU into shape for the long-haul and is now openly talking about a closer ‘political union’ which could police budgetary policies and keep EMU members in line. While smaller countries can be bailed, Italy with its EUR1.9 trn debt is too big to be offered a comprehensive support package and it is this that has emphasised the need for countries to adopt and follow good budgetary practices. The ousting of governments in Italy, Greece, Ireland and Portugal this year and the likelihood that it will be the opposition that wins this week’s Spanish election is testament to the difficulties associated with structural reform. While many budgetary changes will be charged with improving productivity and competitiveness some reforms can take years to bear fruit. Since reform and austerity so often go hand in hand it follows that growth prospects are been threatened and this suggests that even more austerity may be required for each country to hit its debt/GDP target. This morning’s as expected 0.4% q/q Q3 French GDP number will provide some relief, though a flat growth rate in the final quarter is likely. Yesterday’s poor -0.4% q/q Q3 GDP data for Portugal highlights the difficulties facing that government and the flat q/q Q3 growth pace in Spain suggests that if the People’s Party does win this week’s general election it may have difficulty achieving its budget targets without touching pensions or raising taxes as is promised. Slow growth suggests that saving EMU will be a lengthy uphill battle. We continue to see risk that EUR/USD can dip back towards 1.3300 on a 3 mth view. Near-term, EUR/USD will continue to react to headlines. A better than expected US retail sales report this afternoon may create a EUR selling opportunity. source: Rabobank |
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