This morning two events in the EMU look likely to exacerbate the ongoing debt crisis:
Credit rating agency Moody’s has downgraded Ireland’s debt five notches to Baa1. This means that Moody’s has less confidence Ireland can pay back its debt and has reduced its value.
The German IFO Business Confidence survey has revealed that Germany’s economy is shooting ahead. In 2011 the Germany economy is expected to grow 3.5% (double the EU average.)
The first event is bad news for the EMU for obvious reasons. It suggests that even after the EMU-IMF bailout the markets should be wary about Ireland’s finances. This has reflected badly on other indebted euro members (following the downgrade credit default swaps rose in Portugal and Spain too.)
The second event is bad news for more obscure reasons. On the surface the positive German IFO results ought be positive for the EMU: they indicate the Germany can buoy the common currency even though several of its members face defaulting. The markets can rely on Germany to keep the euro stable.
In the present political climate though the German IFO results highlight the difference between the storming German economy and those of indebted members. The German Chancellor Angela Merkel for instance is under intense domestic political pressure to avoid implicating Germany in the debt problems of other members. Hence the IFO results can only intensify these pressures.
In the short term the euro might fare positively from the German IFO results. However in the long term the figures provide new ammunition for people that advocate ending the euro. This can only be negative for the common currency.
By Peter Lavelle with foreign currency exchange specialist Pure FX.
