As Germany deteriorates why is the euro looking up?

(Source: Yahoo! Finance)

While the trend of a strong Germany among contracting Eurozone neighbours appears to be broken, another seems to be emerging. Bad news in the Eurozone seems to be driving equities higher. This morning's German IFO figures for April were troubling. Business climate was down from 106.7 to 104.4, current assessment from 109.9 to 107.2 and expectations slipped from 103.6 to 101.6. All declines that were worse than expected, yet, the euro is up against the dollar.

It's not always possible to tell why markets have moved, but giving the timing of this euro surge, it seems fairly clear that this bad news was related. Some commentators have suggested that this bad news is actually good. The data is poor enough to justify further action by the European Central Bank (ECB) in the form of a rate cut or asset purchases, but not bad enough to bring about a Eurozone collapse. The prospect of such monetary manoeuvres saw the Stoxx 600 witness the biggest daily rise in eight months yesterday.

But this analysis is flawed. Bad news remains bad news, and while ECB action may drive up equities in the short term, it may imperil future growth. The Eurozone as a whole hasn't seen much in the way of rebalancing since the crash. Interest rates are still low and major financial institutions are still implicitly backed as Too Big To Fail. Supporting what are broken structures, rather than allowing them to fail and be replaced by new entrants, is not just bad for productivity but may also sow the seeds of a future crisis.

The Eurozone crisis is still intensifying; the cost of government borrowing has declined sharply in many countries, but such numbers have become meaningless indicators of their underlying economies as a result of massive central bank intervention. Even mighty Germany is in trouble.

The surveys reveal a strange disconnect between reality – the Eurozone economy is in a spiral of recessionary decline – and the perception, which is that the crisis is abating despite Cyprus, and is primarily confined to the southern fringes.


There will be more explosive crises, and at some point one may yet be sufficiently destructive as to bring down the entire rotten edifice.

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