France’s Prime Minister’s coalition faces significant challenges as it navigates complex budget discussions, particularly focusing on the contentious issue of pension reform. The fight comes amid many positive economic indicators from France and Germany. Taken together, these signals are creating a very negative impression of the euro on financial markets.
Further economic indicators from France show ongoing contraction in both the manufacturing and services sectors. The recovery of the services sector is accelerating, back in positive territory and surging to 52.6. This figure has broken the ceiling of the original reading of 51.3 and broken through market expectations of 51.1. Unlike infrastructure, there has been a sea change in services. The big picture economic atmosphere remains very tense with the country facing down budgetary limits and continued discussions around reform.
Germany’s economic data is much more a reversal. The manufacturing sector showed a slight negative change, reflecting continued struggles in that sector. The services sector came through with a good one! It’s printing an index level of 54.5, crushing the expected print of just over 51. This growing chasm in overall economic performance between the two eurozone countries makes for an increasingly complicated economic outlook for Europe’s common currency region.
Markets are looking for a period of stability in monetary policy. They expect the European Central Bank (ECB) to do nothing at its next decision. Market sentiments are rapidly changing thanks to the German and French turnabout. They are further conditioned by economic trends more broadly across the eurozone.
“The EUR’s fundamentals remain bullish as we note the continued rise in Germany-US spreads, offering support as they threaten a break to fresh highs.” – Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret
As political uncertainty looms in France due to the Prime Minister’s coalition struggling with budget discussions, market participants remain cautious. This is a much-discussed subject, but the sensitivity of the pension reform topic is profound. It could make or break public sentiment and economic policy for years to come.