Eurozone Recovery Could Easily Be Scuppered

LONDON, June 2, 2015 /PRNewswire/ --

Economic data from the Eurozone this week has seen a recurring theme of surpassing market expectations with the most recent manufacturing data being a case in point.  It wasn't just the Eurozone as a whole that saw Markit's manufacturing PMI come in above the 50.0 level once again, which indicates expansion, but the likes of Italy and Spain provided upside surprises with Spain in particular being a stand out as the survey figures suggested its manufacturing sector was expanding at its fastest for over eight years.  The weakening euro is assisting Spanish firms that build and export goods such as ships, cars and electronic devices and despite their recent political upheavals the country's economy is starting to establish itself as a bright spot within the Eurozone, especially when compared to a couple of years ago.

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The ECB's quantitative easing program came at a time when there were already signs that the Eurozone's economy was turning a corner and now QE is in full flow, it is little wonder that inflation data has just exceeded expectations giving the euro a boost.  EURUSD had looked like it was going to have another run at parity and it has only taken a few pieces of economic data to make that a more challenging prospect.

The EURUSD rate has been very quick to recapture the 1.1000 level, however each and every time the euro attempts a recovery it seems to look and feel temporary.  The overriding issue for Europe remains Greece and it will continue to be so until the situation is resolved.  For months, even years now, we have been supposedly reaching make or break when it comes to the future of the Eurozone and Greece's part in it.  If the financial markets are anything to go by investors would easily be fooled into thinking all was well within the Eurozone, considering how the euro is behaving and that Greek stocks have recovered between 10-15% since the middle of April, depending on whether you look at the composite or general Athens index.

But the reality is far different with depositors continuing to withdraw cash from Greek banks as if it was going out of fashion and negotiations between Greece and its creditors ongoing with little prospect of a resolution.  No one is willing to back down and so it's understandable that so many believe a Grexit is inevitable.  However, as the Grexit camp gradually increases it doesn't mean we are any closer to the end of the Eurozone as we know it, because even if Greece does not pay back the IMF in full, this doesn't necessarily mean they must or will leave the single currency since non-payment would not officially constitute a default.  But if Greece does manage to cling onto the euro the ramifications of a missed IMF payment will be felt across the borders beyond the Continent as other creditors will be quick to call in debts.  The situation could very quickly spiral out of control with contagion back on the cards before we know it and the Eurozone recovery an all but distant memory.

Angus Campbell, Senior Analyst
Twitter: @angusjmcampbell

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