Potential pitfalls ahead for the euro

THOUGH Europe seems to have moved past its calamitous period of bumbling from one disaster to the next, there are still potential pratfalls ahead for the euro.

The two biggest obstacles this week are signs of German slowdown and wobbles in the expansion of the Eurozone’s rescue infrastructure – also heavily dependent on the German economy. “The euro is Germany and Germany is the euro. Without one another you could almost say neither would exist,” says Angus Campbell, head of sales for Capital Spreads. “Germany has benefited from an artificially low exchange rate boosting its export-led economy and helped it maintain its status as one of the biggest economies in the world.” Campbell adds that the euro would most likely have fallen apart completely by now if it wasn’t for the fact that Germany is still part of the Eurozone.

German IFO business climate data released yesterday suggested German strength a boost with its fifth straight monthly increase, indicating that the European lynchpin might be avoiding the fallout from peripheral Eurozone worries.

The index, based on a survey carried out by the IFO think tank of 7,000 German companies, showed an increase to 109.8 in March, up from 109.7. However it is important to note that that the IFO index is based on business sentiment, which in past months has increased even when growth figures have been down.

Germany further highlighted its position as the Eurozone kingmaker when Chancellor Angela Merkel said yesterday that Germany was open to temporarily increasing the Eurozone’s firewall to €700bn.

This is something of a volte face from the German leader who has long insisted that there was no need to increase the bailout fund from the earmarked €500bn. Indeed, many will question whether this €200bn is sufficient to keep peripheral Eurozone worries under control – firewalls tend to be good at keeping fire from traveling from one room in a burning building to the next, but are notoriously ineffective at dealing with financial contagion.

While the recent European‚ÄąCentral Bank’s three year long-term refinancing operations and Greek private sector involvement deal success have given sentiment in peripheral bond markets some improvement, spreads on Italian and Spanish debt are widening once again. This is a worrying move and it wouldn’t take much to kick the euro downwards. The euro has some support at $1.3150, but any more skips and slips from the Eurozone will see it slide downwards.