Chart of the Week: The eurozone’s crisis management team moves from “Merkozy” to “Merlande”
In recent weeks, the eurozone members that have been the focus of much of the world’s scrutiny have been on the periphery of the region and especially Greece, in the weeks leading up to its election, and Spain, where the country’s government has just introduced another reform package aimed at resolving the Spanish banking industry’s woes. But in the wake of the election of the Socialist Party candidate, Francois Hollande, as France’s next President, investors worldwide are certain to swing their attention back to the “core”, and the two biggest economies of the eurozone.
Until now, Germany and France have been firmly on the same page when it comes to questions of how to handle the eurozone crisis, with the media even dubbing outgoing French President Nicolas Sarkozy and German Chancellor Angela Merkel, “Merkozy”. Only hours after being sworn in tomorrow ((TUES)), Hollande will travel to Berlin for his first meeting (of any kind; the two have never met before) with Merkel. What kind of relationship can the two leaders build to replace “Merkozy”?
There is a lot at stake. Greek leaders have failed, one after the other, to cobble together a coalition government and it now seems possible that voters will have to head back to the polls. Once again, the possibility of Greece’s departure from the euro looms large: German newsmagazine Der Spiegel suggested that this might be the best option in an editorial entitled “Acropolis, Adieu!” One phrase making the rounds last week was entitled “Grexit” – a new acronym coined for the scenario.
The focus during the crisis has been on the periphery, but this week’s summit meeting of “Merlande” – or whatever catchy moniker is coined to devise the eurozone’s new reigning duo – is a reminder that there is a lot at stake for the currency block’s two biggest economies. If the eurozone is to survive, it will be largely because they are able to agree on successful policies. Meanwhile, they will have to struggle to ensure that the weakness on the periphery doesn’t spill over into the core.
As shown in the package of charts, above, that collectively make up this week’s Chart of the Week, both countries may be at a turning point. Both have seen their PMI, a key indicator of economic health, decline, and both have a government deficit that exceeds GDP. While their government bond yields are lower than those elsewhere in the eurozone, the growth outlook for both remains murky. Both will shortly report their first estimates for GDP for the first quarter of 2012, a key metric. The Reuters poll of economists forecasts that France’s economy contracted by 0.2% in the first quarter, following its 0.2% advance in the fourth quarter, while Germany will have eked out growth of 0.1%. (Should Germany defy those expectations and post a contraction in GDP, the country will officially be in recession.)
But there also are differences that explain why Hollande’s anti-austerity campaign fell on receptive ears among the French electorate. France’s debt to GDP ratio is higher than that of Germany, and although yields remain fairly low in both nations, the bond market has begun to price in this reality. Yields on French 10-year notes now stand at 2.84%, still low, but significantly higher than those on German debt with the same maturity, which yield 1.48%. Another even bigger contrast between the two countries are their respective unemployment rates: in France, unemployment has climbed to 10%, pushing voters away from the “austerity” camp of Angela Merkel and toward support for Hollande’s “growth” oriented policies.
Even if the two leaders can’t agree on how to fix the crisis on the periphery, the pressure will be on them both to find a way to stop it spilling into their own two “core” economies – an event that would deepen the eurozone’s woes still further.
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