Euro sinks as Eurozone commitment wavers

Welcome to my weekly account of what’s affecting the euro exchange rate.

Changes over one week:

Pound to euro: 1.267 to 1.282 (+1.2% increase)
Euro to US dollar: 1.219 to 1.226 (+0.53% increase.)

Further evidence this week that the Eurozone’s politicians inhabit an alternate plane of existence, in which the economic woes befalling us mere mortals are but a cipher, or passing dream. French Finance Minister Pierre Moscovici said to officials in Washington: “People are, I think, happily surprised about what we’re doing.” To which, I would have asked Monsieur Moscovici had I been there, to which people are you referring?

Because, based on the tens of thousands of people protesting the Spanish government spending cuts this week, it certainly isn’t the Spaniards. And judging from Fed chairman Ben Bernanke’s remarks that Europe’s debts still pose a significant threat to the US, it’s not the Americans. And judging from this week’s decline in the euro against the pound, the finance markets are not what you’d call “happily surprised” either.

Out of touch?

The pound hit a fresh peak of 1.2819 against the pound this week: its highest point against the common currency since March 2008. Of course, if you plan to buy a home on the continent this is fantastic news. Yet, it’s true that the pound has climbed largely because of a widening gap between the rhetoric of Eurozone politicians, and the economic situation on the ground. As I mention, it makes them look bizarrely out of touch.

For instance, German Chancellor Angela Merkel gave an interview this week, in which she said: “We have of course not yet organised the European project in such a way that we can be sure it will work.” Huh? Doesn’t she realise the impact her words will have, as the leader of the biggest economy in the Eurozone? In fact, Mrs. Merkel’s comments can be directly attributed to a rise in Spanish bond yields to 7.02% this week, showing us that, when she opens her mouth to say the wrong thing, people elsewhere get hurt.

This sense that Europe’s politicians are not aware of the consequences of their actions is evident elsewhere too. Mariano Rajoy’s latest €65 billion in spending cuts can be seen as an attempt to convince his Eurozone partners that Spain is trustworthy. Yet, as Ignacio Toxo, leader of the Comisiones Obreras union, notes: “This is just the destruction of the fabric of our economy.” No good can come from these cuts – no jobs, no growth. But to keep up appearances with the Eurozone paymaster’s, it is ordinary Spaniards who must suffer.

Looking ahead, there’s no reason to think this will change. Indeed, as Michael Derks at FxPro noted this week: “It doesn’t take a rocket scientist to predict that the euro will likely slide further over coming weeks.”

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