Eurozone's Softer Stance On Austerity Should Support Risk Currencies
The two year reprieve granted to France to bring its budget deficit to under 3% of GDP is a sign that the austerity drive is easing in Europe, which should prove supportive for risk currencies and risk assets.
European policy makers are moving closer to slowing the austerity drive designed to balance budgets with much of the Eurozone periphery in the grips of an economic depression. Simply put the more governments cut spending the more their economies contract making it even harder to balance their books.
The reprieve won by France – a key Eurozone player, which never practised austerity that seriously – is a strong sign that the tide is turning, a shift which senior officials in the European Commission appear to support. This is also partly as a result of soaring Euro-sceptic sentiment, which is now far from being a mainly UK phenomenon. Unchecked it could eventually rip the Eurozone apart.
EUR looking firmer as austerity questioned
Boost for Europe's peripheral currencies
If the Eurozone is seriously moving towards 'austerity light' or even 'austerity delayed' then it could foster hopes of a return of economic growth in the region. This would certainly be supportive of currencies such as GBP, CHF and SEK versus USD as the fortunes of the economies of the UK, Switzerland and Sweden are closely tied to those of the Eurozone.
But even the EUR could move higher as investors place bets on a return to economic growth in the region's struggling economies and look towards convergence, which should strengthen faith in the single currency. But there is still a long way to go.
It is by no means certain that such a policy change will happen quickly. The European Central Bank is deeply committed to fiscal consolidation and any sign of back sliding on that front could see it being less supportive in terms of monetary policy.
Then there's Germany, the keenest advocate of austerity and now indisputably Europe's most powerful country, even France can hardly claim to be an equal partner any more in the Eurozone, not even politically. Though there have been some signs that Germany is softening its stance on austerity it is unlikely to go along with a major change in its position until at least after its elections in September or unless it to becomes baldy infected with Europe's recession bug.