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Potential Euro Risks in the Months Ahead

Last month was a chaotic one for the Eurozone. In order to meet the terms of its IMF/EU bailout Cyprus was encouraged to introduce a levy on public bank deposits. Although the initial proposal was rejected and a slightly less controversial one settled on, the situation sparked concerns that other struggling Eurozone nations might be advised to use the same template – something which could put significant stress on the Eurozone’s banking system and its common currency, the Euro.

During a tumultuous few weeks the Euro dipped against several of its main trading partners, notably the British Pound and US Dollar. Although it has since recouped much of its recent losses, it has yet to regain the levels achieved prior to the Cyprus crisis against some of its counterparts – and additional Eurozone troubles in the months ahead could continue to weigh on the currency.

In the second week of April the European Commission issued a stark warning – high levels of debt and labour costs are damaging the competitiveness of key Eurozone nations France and Italy. This circumstance could have a ripple effect, potentially causing major economic problems across the currency bloc. The Commission also commented on the ‘excessive’ structural economic imbalances in Spain and Slovenia. Although the report stressed that decisive policy action is helping to stabilise European economies, it noted that actually achieving stability is still a long way off.

Record levels of unemployment are also upping the odds of social unrest becoming a major problem in the EU. According to a recent ILO report, there are currently 26.3 million unemployed Europeans, compared with a figure of roughly 16 million before the outset of the current global economic crisis. Some industry experts are envisaging that unless the situation starts to improve for the better, the protests already seen in nations like Spain and Greece could increase in frequency and severity, potentially spreading across the Eurozone.

All of these factors could heap pressure on the 17-nation currency bloc in the months ahead, potentially driving down the Euro. Meanwhile the Pound, which has been on a losing streak since the onset of 2013, could move into a slightly stronger position. Although the UK was stripped of its coveted AAA credit rating it seems the nation may have avoided a triple dip recession. If final figures confirm this Sterling could be boosted. That being said, Mark Carney (current Governor of the Bank of Canada) is due to take the reins of the Bank of England this summer and the Pound could be in for volatility depending on the policy stance he adopts.