The pound remains at its highest level against the euro since November 2008 despite the poor economic conditions in the UK after the European Central Bank (ECB) cut euro zone interest rates by 0.25% to 0.75% last Thursday; Monday saw yields on the latest Spanish bond sale top 7% (Yields of 7%+ triggered the bailouts for Greece, Ireland and Portugal in the last 3 years) and yesterday, the German Constitutional court threatened to delay German participation in the euro zone’s latest bailout scheme, the European Stability Mechanism (ESM).
The US dollar also reached a two year high against the euro yesterday.
The euro remains centre stage, mostly for the wrong reasons. Yesterday, Italian prime minister Mario Monti sparked a fresh wave of nerves about the euro zone crisis when he did not rule out the country needing further bailout funds. This after the decision of the German Constitutional Court to start a hearing looking at whether the ESM and expected changes to the euro zone’s budget rules are in line with German law.
In addition, in talks that dragged on long into the night, euro zone finance ministers announced an extension of Spain’s deadline for containing its fiscal deficit and confirmed that €30 billion has been made available to help Spanish banks.
The euro zone finance ministers decided to give Madrid an extra year to reach the 3.0% GDP/deficit target (2014).
Meanwhile, the EU Commission along with the ECB and the IMF are currently conducting its seventh review of the Irish adjustment programme and the fifth review of the Portuguese program
Whilst the pound continues to make and keep hold of gains against the euro, the problems of the UK economy are undermining its value against the majority of the 16 most actively traded currencies in the market. The National Institute of Economic and Social Research (NIESR) reported yesterday that UK gross domestic product (GDP) declined by 0.2% in the second quarter of this year.
The NIESR estimates that underlying growth for the three months to June was around +0.2% suggesting that the UK economy remains broadly flat, a trend that has persisted for around 24 months.
Meanwhile, in a radio interview with the BBC, the Governor of the Bank of England (BoE) Sir Mervyn King put forth a gloomy view of the UK economy, saying that, “the economy has basically been flat for two years and doesn’t show a great deal of signs of impending recovery.” At the same time, King expressed his worry about the outlook for UK exports. In his own words, “I am worried about the outlook for exports because Sterling has risen over the past year and that’s going to be a challenge (because of the state of the euro area).”
King also reiterated his belief that normal basic banking activities that apply to households and small businesses must be separated as far as possible from the investment banking activities and that more competition needs to be introduced into the UK banking sector.