Pound Euro Exchange Rate Spirals As Investors Take Fright At French and Dutch Political Impasses

Published: Tuesday, 24 April 2012 09:00 BST - Written by Ben Hughes

STORY LINK Pound Euro Exchange Rate Spirals As Investors Take Fright At French and Dutch Political Impasses

Like the fabled damn which springs leaks at a rate which the boy in the myth can not keep up with, the eurozone appears to be generating problems which are too many and varied for it to handle.

The signs at the end of last week were that Spain’s debt problems were easing, as the yield on 10-year Spanish bonds headed lower following Thursday’s successful debt auction, which saw a stronger than anticipated uptake.

However, yesterday’s session saw the emergence of a new problem for the region in the guise of political turmoil. The eurozone had previously enjoyed a relatively stable situation from which its key policy-makers could launch a response to the single economic area’s rumbling debt crisis. However, Sunday’s French presidential elections put a stop to this, as the current incumbent Nicolas Sarkozy trailed in second to his fellow socialist candidate, Francois Hollande. The two candidates will now go ‘head-to-head’ in a political fight to the death in order to determine France’s next head of state. This is hardly good news for the eurozone, as Sarkozy, along with German Premier Angela Merkel, has been one of the key drivers in reconciling the ‘rich’ Northern states with their fiscally-challenged peripheral cousins.

Meanwhile, there were further worrying political developments in The Netherlands, as budget talks between warring parties broke down, leading to fears over the commitment of Dutch policy-makers to the country’s austerity plan.

Even the one piece of ostensibly positive news from the region was shrouded in dark clouds, as official figures from Eurostat revealed that the eurozone states’ combined deficit dropped from 6.2% in 2010 to 4.2% last year. However, yesterday morning’s dismal German PMI Manufacturing survey suggested that the heavy deficit cuts are coming at a price.

Not surprisingly, the euro suffered a torrid day on the markets, losing further ground against the go-ahead Pound, sending the GBP EUR exchange rate spiralling to a new 20-month high of 1.2269 on the day. The potential remains for further near-term gains for the pair, unless eurozone leaders manage to get their collective house in order.

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