Eurozone reforms may come to a naught

Eurozone reforms may come to a naught

Good morning and welcome to today’s foreign exchange market commentary on Monday, the 12th of October.

European Central Bank President Mario Draghi sent out pleas for market deregulation in the eurozone in his monthly press conference last Thursday. Draghi hoped for labour flexibility and said it should stimulate labour mobility. Though the peripheral countries are not listening to him with enthusiasm because of the obvious difficulties in presenting them before the electorate, they have his attention anyway. That is because Draghi controls Europe’s purse.

Draghi’s home country Italy, under the technocrat Prime Minister Mario Monti, has been the fastest off the block on labour market reforms. Monti has cut public-sector wages and liberalised closed professions. Three other countries whose bond markets have been saved by the ECB, Greece, Portugal and Spain, have been reluctant but radical reformers as well. Spain, for example, has cut redundancy payments of permanent workers drastically. Draghi’s logic has been simple enough; rigid labour laws in these countries hampered employment rate, stunting economic output.

The ECB thinks deregulation will do economic good in the long run and keep sovereign debts under control. But it’s unlikely the current pace of market deregulation will be sustained. The reason? Politicians don’t act unless there’s no other option. The former French President Nicholas Sarkozy enacted a raft of measures after bond yields soared suddenly last year. The pace slowed down when yields fell to near safe-haven levels.

The ECB has called for employment deregulation in a 2011 paper on economic output, stating nominal and real rigidities in labour markets will hinder wage adjustment and reallocation of labour resources. The European Commission has warned of a long-term decline in total output if economic policies are not overhauled because Europe’s working age population is set to witness decline soon. The commission has revised its growth projection to 1.25 percent between 2015 and 2020 from an earlier estimate of 1.90 percent before the present crisis hit.

The problem with reforms is that they can diminish economic output temporarily before the growth. As experience from Spain and Greece has showed; it’s far more difficult to convince the voters about reforms during downturns. That means it could be difficult to implement good economic measures in bad times.


GBP/EURO – 1.2501
GBP/US$ – 1.5890
GBP/CHF – 1.5074
GBP/CAN$ – 1.5876
GBP/AUS$ – 1.5254
GBP/ZAR – 13.8321
GBP/JPY – 126.25
GBP/HKD – 12.3172
GBP/NZD – 1.9470
GBP/SEK – 10.7184

EUR: Greece is back in headlines over its next tranche of bailout money and the country’s parliament voted over the weekend, passing further spending cuts and tax hikes. The move however, didn’t cause much of a surprise and the EUR/USD pair opened slightly higher at 1.2720 today morning. Athens will need some cash immediately which is unlikely to be forthcoming; so expect some game of brinkmanship this week. Greece will certainly be on the agenda as the Eurogroup meeting gets underway in Brussels while Spain should also attract some attention. We have a raft of data due from the eurozone today with third quarter GDP figures being the most eagerly awaited one. The euro has made some gains against the pound over Friday and the GBP/EUR pair opens at 1.2500 this morning.

USD: The greenback has been witnessing upward movement since Friday as worries over US fiscal cliff and Greece bailout money mount. We have a raft of data due this week starting with the UK inflation reading for October followed by comments from the Bank of England over quantitative easing and interest rate. Also UK retail sales numbers are due on Thursday. News reports suggest the BoE will return GBP 35 billion in interest income from its assets purchase program to the government over the next 18 months to help it pay-down national debt. The cable has weakened over the weekend and the GBP/USD pair opens at 1.5880 this morning.

Have a great day!


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