Conversely, the Eurozone has started to perform above expectation. Of course, Europe has lagged the US recovery markedly and is probably due a catch-up. Given the almost diametrically opposite moves, however, perhaps we should look for a more immediate cause. That cause, I would suggest, is the currency.
The US dollar has been very strong recently, while the euro has been comparatively weak – first as a result of talk and then action on quantitative easing from the ECB. If there is one thing Germany and Greece can currently agree on, it is that a weaker euro should help combat deflation and drive export-led growth. It is the best medicine for the Eurozone economy. Nor is this an abstract economic effect: a weaker euro is a very real impetus for European corporate earnings, and converts what was a headwind a year ago into a helpful tailwind.
The theory has been that euro would remain relatively weak against sterling: Europe was the only region not to have engaged in QE and would probably end up there eventually. The Bank of England has finished its QE programme and its next step will be raising rates, but it is unlikely to raise rates before the US and may push out further than expected. Neither the employment situation nor inflation rate currently demands a rate rise in the UK. Inflation remains extremely weak, though it is worth pointing out that UK core inflation (i.e. food and energy) is considerably more robust than headline CPI, which may indicate that we are approaching the nadir of inflation.
Having announced QE, Europe now faces something of a travel and arrive story. Nonetheless, as a sub-optimal currency union without a single finance minister, the euro is unlikely to discover a hidden source of strength imminently. With populist parties on the rise everywhere from Spain to Germany, lunatic plans for debt-restructuring will occasionally be put forward. Some parties may even attain power, as per Greece. Spain, for example, faces elections in December in which Syriza’s ideological bedfellow, Podemos, is expected to do well. There is, therefore, plenty of meat for Euro bears.
