In the Eurozone, Politics Trumps Data

Over this past week, the common currency faltered from its recent uptrend despite some clear and welcome signs that the Eurozone’s economy is improving. One well respected gauge of economic health is the Purchasing Managers’ Index manufacturing survey or PMI, which rose last month to 48.6, besting analysts’ predictions of a rise to 48.2 from December’s 47.2. Because the reading is still below the 50.0 threshold, it is considered in contractionary level, but the 48.6 reading hasn’t been met since early 2012 and is in fact the third time in as many months as the reading climbed.

On the face of it, the aggregate Eurozone PMI data is welcome news, but individual country results have varied greatly, and the data does show that there is a widening gap between Germany and France and as France is the second largest economy, the slippage is disconcerting to analysts and investors alike. Germany’s Manufacturing PMI reading at 49.8 not only beat expectations but was the largest single month’s gain in more than two years. Meanwhile France’s 42.9 reading for the PMI Manufacturing sector was a drop from December’s 40.6; the PMI Services sector fell to 43.6 from 46.0 and lagged even that of Spain and Italy.

Despite the encouraging signs which have supported the common currency, politics as usual is offsetting recent gains and continues to weigh on not just the Euro but investors’ collective psyche. The political concerns are two-pronged; from Spain, Spanish media alleges that certain key members of the government, specifically and among others Prime Minister Mariano Rajoy, has been accepting monthly cash payments over the past 15 years which have gone unreported.

In Italy, the former Prime Minister’s campaign to be reelected is gaining considerable momentum, despite the fact that Silvio Berlusconi has been brought up on corruption charges on numerous occasions. Berlusconi is generally viewed as the reason that Italy’s economy is in such poor condition. The current Prime Minister, Mario Monti, has fallen out of favor for the many austerity measures he had been forced to push through in his attempt to reduce the country’s debt burden. However, Berlusconi has been playing up the electorates’ great displeasure of Monti’s austerity measures with promises to eliminate taxes and cut government waste, though he is short on details as to exactly how he can accomplish both.

Looking ahead, Euro traders will be anxious to hear from Mario Draghi, the head of the European Central Bank, as to what measures the bank might be willing to take to cap the Euro’s rise which is detrimental to many of the Eurozone’s struggling economies, especially France’s price-sensitive exports. French President Francoise Hollande has been very critical of the Euro’s recent rise, and has said that he would raise the issue at the upcoming G20 summit but many policy watchers doubt that the G20 will take any significant action against it. According to a recent study, the French economy begins to struggle with a Euro priced at $1.22 to $1.24, while Germany’s economy can sustain a rise in the EUR/USD to 1.54 or even 1.94.