Spanish riots add to Euro woes

12 July, 2012

Earlier this week, BoE governor Mervyn King announced that, in his opinion, the Eurozone crisis is going to continue to negatively affect the world economy. Speaking on Tuesday, he said “there is a great black cloud of uncertainty hanging over businesses all around the world,” concerning the crisis, and that “until they know how this situation is going to be resolved” the world currencies, especially those with strong ties to the Euro would see weakness. For the short term however, sterling is doing very well against the European currency, with rates for transferring sterling to euros raising to a 3 1/2 year high, caused primarily by the European Central Bank lowering its deposit rates to zero.

Some positive news might have come from Spain yesterday, where Prime Minister Mariano Rajoy introduced new austerity measures, including raising sales tax from 18% to 21%, slashing the budget of local authorities, and cutting councillors by 30% in some areas. However, these measures were met with widespread anger by the Spanish populace, mostly caused by the announcements coinciding with a miner’s rally in Madrid, which eventually turned into a running battle with law enforcement, with the police being forced to use rubber bullets on miners using fireworks as improvised weapons. Public dissent to austerity measures, such as the ones seen in Spain, only serve to show the weakness of the Eurozone economy in the eyes of investors, and will probably add to the economic woes plaguing the region.

Despite austerity measures being seen as the only way to save the European economy, the International Labour Organisation yesterday claimed that the Eurozone could see the loss of 4.5 million more jobs in the next four years unless the region shifts away from austerity, and focuses towards job creation. Seeing as the unemployment rate in the Eurozone already stands at 11.1%, this is a significant drop. The disagreement in whether or not austerity is the answer only serves to highlight the key problem in the Euro crisis – nobody knows exactly how to fix it. This continues to make investors nervous, causing them to look towards ‘safer’ currencies.

Over in the United States, we saw a drop in the fortunes of the US dollar as it was stated that Federal Reserve officials are open to the possibility of a new round of asset purchases. However, it is believed that this will cause the US economy to get weaker before it gets stronger. This announcement caused the Dow Jones to drop 1% shortly after the announcement, although it recovered slightly in the hours that followed.

Some analysts believe that the Eurozone may weaken further in the upcoming weeks. However, anyone looking to transfer sterling to euros should remember that we are currently at a 3 ½ year high on the rates, and that the markets are dangerously volatile. Therefore, it would probably be a good idea to give Currency Index a call, to see how we can assist you in getting the best rates available.