Resolving Europe’s distributional disputes

Resolving Europe’s distributional disputes

Good morning and welcome to today’s foreign exchange market commentary on Tuesday, the 7th of August.

Resolving Europe’s distributional disputes

Even though German Chancellor Angela Merkel’s ruling coalition signals they won’t block a possible ECB intervention to bring down yields of peripheral bonds, the Bundesbank seems undecided. The political flare up between Italy and Germany over widening borrowing-cost spreads has its roots in distributional disputes which invariably transforms into ‘us versus them’, thus complicating the overall situation. If every policy dispute turns into a zero-sum game where one party essentially end up on the losing side, progress and trust becomes the first casualty.

We have seen this example in the US as the country inches forward towards the so-called ‘fiscal cliff’ while the Democrats and the Republicans lock horns over tax and budgetary issues. But nowhere it exemplified more than in Europe since the region plunged into crisis three years ago. The lines have already been drawn; the first group argues that the individual failings of the members have imposed enormous costs on neighbours while the second highlights the broad policymaking deficiencies and the measures to correct them. While the north believes the south is robbing them of their savings, the south is getting angry over the emergence of ‘creditocracy’ in Europe, a term used by the mild-mannered Italian Prime Minister Mario Monti to point out those who pretend to be donors in Europe. Monti rightly pointed out that contrary to popular perception, Italy still contributes to fight the crisis and hence still a creditor.

The solution to these distributional disputes need not overlook the ground realities since successful societies don’t stop differing over taxation, regulation and redistribution. But they should not consume entire debates, essentially turning the entire affair in a zero-sum game.


GBP/EURO – 1.2574
GBP/US$ – 1.5581
GBP/CHF – 1.5108
GBP/CAN$ – 1.5588
GBP/AUS$ – 1.4732
GBP/ZAR – 12.7250
GBP/JPY – 121.92
GBP/HKD – 12.0835
GBP/NZD – 1.9012
GBP/SEK –  10.4683

EUR: There has been a change of perception over the last couple of days that Germany will not oppose the ECB’s bond buying program, formulated to bring down the spread between the core and peripheral borrowing rates. Sentiments were further bolstered after US President Barack Obama reportedly called Spanish Prime Minister Mariano Rajoy, offering his support to Rajoy to get the Spanish economy back on track. The single-currency has strengthened against the greenback in the past 24 hours, gaining further traction after ECB Governing Council member Ardo Hansson said bonds purchase by the region’s bailout funds will substantial and sustainable, but will be subject to strict conditions. In the absence of tier-1 economic data today, the euro is expected to move on the ECB’s bond-buying news even though we have the Italian GDP number and German factory order due in the morning. The GBP/EUR pair opens at 1.2430 this morning.

USD:  GBP long traders rushed to book profits in early London trading yesterday, pushing the GBP/USD pair down to 1.5550. The cable however gained some ground by late afternoon trade to close at 1.5644 after risk sentiments improved over news reports suggesting possible German concessions to ECB’s proposed bond purchase plan. The Pound continued to grind higher after UK retail sales improved mildly, posting a growth of 0.1 percent against an estimated -0.2 percent. Though markets will eye the UK Manufacturing Production reading, it’s unlikely to impact the GBP/USD pair. The pair opens at 1.5615 this morning.


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