It was another difficult month for the euro. In early July it touched a two-year low against the US dollar and came close to the 12-year low against the yen that it had established a month earlier. At the same time the euro at last broke below the psychologically-important 80p barrier, allowing sterling/euro to reach its highest level since October 2008. Since then the euro has halted its retreat. It is not clear whether it has come to stop because investors are reappraising their outlook or simply because of the seasonal torpor that afflicts financial markets during the summer.
If the problems facing the euro are not identical to those of recent months, then they are not a whole lot different. Greece has a new government, one which is pledged to keeping the country in the euro zone and toeing the austerity line, but the pro-euro coalition has yet to come with a workable idea to achieve the economic growth necessary to balance the budget. The best guess is that the Greek economy will shrink by between 6% and 7% this year and it is not difficult to find economists who predict that Greece will eventually have no alternative but to leave the single currency.
Spain has negotiated a €30bn bailout-lite package to help troubled banks, with outline permission to triple that amount if necessary. EU Commission President Herman Van Rompuy described as a "breakthrough" the German Chancellor's agreement to allow the money to be channelled direct to the banks rather than going via the Madrid government. Investors tended to agree with him at the time (in late June) but have become sceptical at the subsequent lack of progress. Spain's sovereign bonds are no more popular with non-Spanish investors today than they were a couple of months ago. In mid-July the government raised €3bn of two- to seven-year debt but only by paying 6.7% for the longer maturity.
The French President and the Spanish Prime Minister have both announced that more savings need to be made to bring their budget deficits below the 3.5% required by the fiscal compact. For Spain the extra cuts will amount to €65bn, not a helpful development with a quarter of the workforce unemployed. It is still by no means certain that Spain will be able to manage without the full-fat EU bailout that Sr Rajoy is so keen to avoid.
Another possible obstacle to a comprehensive solution to Euroland's sovereign debt crisis is the German constitutional court, which has the last word on whether or not government policies are permissible. It will not be until mid-September that the court publishes its opinion on Germany's participation in the European Stability Mechanism upon which much of the EU's strategy depends.
The International Monetary Fund has been stirring the pot too. In its latest comment it described the euro zone situation as "critical" and advised the European Central Bank to push ahead with "unconventional measures" to provide liquidity. For good measure, the IMF described the euro as overvalued.
Some would say the same about the pound, at least as far as its relationship with the euro is concerned. Sterling is within three cents of its peak in autumn 2008 and there can be little doubt that, if it gets that far, there will be a longish queue of investors, firms and expats keen to buy the cheapest euros they will have seen in nearly four years.
Statistical evidence of UK economic activity has been chequered. Purchasing managers' index readings for June indicated continuing expansion in Britain's manufacturing and services sectors but there is a suspicion that the figures for second quarter gross domestic product will be negative. Inflation has come back into line at 2.4%, further narrowing - but still not closing - the gap with earnings, which rose by 1.5%. Unemployment fell from 8.2% to 8.1% while, simultaneously, the number of people claiming job seeker's allowance went up.
Sterling has had a good run in the last 12 months, strengthening by 16% against the euro. It has made back half the loss it incurred between August 2007 and December 2008. It is impossible to imagine it continuing at that upward pace for another 12 months. Anyone with euros to buy should give serious consideration to covering part of their requirement at current levels.
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