Spain and the Euro

Will the Euro survive?
Will the Euro survive?

Headlines such as “Catastrophe in Spain”,”the worst since Franco times”, and “pain in Spain” have been the main focus during the last couple of weeks and of course, it in turn generates fear and uncertainty so the euro and its currency has taken a bit of a battering. It is worth however reminding ourselves of what has been happening elsewhere.

In the UK, the inflation report for May did not make particularly good reading as the Bank of England’s main forecasts went against them. They had to revise downwards the economic growth number for 2012 from .8% to 1.2% and retail sales also hit a rough time in April as they fell to its lowest since 2010. On the plus front unemployment fell to 8.2% and inflation also fell so a bit of welcome news for all. We also know that the Bank of England decided inflation was still one of its main issues so at this moment decided against further money printing.

Looking at the eurozone we have seen lots of conflicting data and whilst some has been negative there is always a balance. The Purchasing Managers’ Index (PMI) fell for the 4th consecutive quarter due to weaker business activity and new orders, manufacturing also fell to unfortunately near a 3 year low. The eurozone did however manage to avoid a recession but data suggests that the next quarter will be much more difficult. Germany once again being the lynchpin for the zone as unemployment fell, bond yields all time low and retail sales figures rising for the second month, sounds like the good ole days!!

There are two main areas of concern right now and that is, what will happen at the forthcoming Greek election and what impact that will have on the euro. Will they stay or will they go (must be a song in here somewhere) and of course Spain and the ever deepening saga over its banking strength. The latter highlighted very much by Spain’s 4th largest bank Bankia which need a capital injection to keep it going and whilst the Spanish government stands very much behind it and wants to help, how it is going to find around 19 billion euros is still the main question. Bond yields in Spain have also been perilously high and the rate now seems to be settling around 6.5% a huge price to pay for raising money. Rumours are also out there that Spain will need a bailout of around 100million euros to keep it alive, sounds a lot on money and of course it is but remember it wasn’t that long ago that the British taxpayer had to foot the bill for the Royal Bank of Scotland and that alone cost around 45.5 billion or c60 billion euros. Lets see if Spain will accept the suggestion from the ECB that it should accept a loan package.

Going forward the key issue will be trying to restore confidence in the eurozone and its currency so that investors feel they do not need to switch to dollars. It seems also that the EU has learnt a little from history in accepting all comers into the euro as it has recently advised 8 countries under review that none meet the required standards for entry.

Impact upon exchange rates has been considerable as the euro has lost ground against both sterling and the dollar or put another way, your pound is now worth more euros.

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