That sovereign debt crisis is creating a tale of two states within the European Union (EU). On one hand, Germany and France are doing very well, particularly Germany because of its export structure. On the other hand, peripheral nations still are struggling to bring spiraling debt problems under control.
Kathy Lien, director of currency research at GFT, says a new round of banking stress tests that are being planned could highlight the problem. "The first round of stress tests they had last year was aimed at restoring investor confidence, but this stress test is aimed at weeding out the weak links. There could be a number of banks that will fail the stress test and that could bring back the sovereign debt problem," she says.
Be that as it may, Trevisani expects the European Union to move forward with austerity measures. "The damage to the peripheral countries happening now and what will occur in the future because of austerity measures is trumped by Germany," he says. "Even though austerity budgeting will be bad for Spain, Portugal, Greece, Ireland and probably Italy, the euro still can rise on the strength of the German economy."
The Governing Council of the ECB left interest rates unchanged at their latest meeting on March 3, leaving rates at the same level since May 2009. Speculation has been growing that they will raise rates in the near future. Following the March meeting, ECB President Jean-Claude Trichet said a rate increase could be seen as early as the April meeting and that "strong vigilance" is needed. The move is expected despite Eurozone unemployment over 9% (see "Worse off").