Euro-zone benefiting from falling Euro

News from the eurozone continues to be dominated by the problems in Greece, with the end of the month seeing the grouping’s leaders agree a £20bn financial aid package for the country if it runs into difficulties with its debt repayments.

The euro fell sharply on rumours Greece had tried to renegotiate the terms of its bailout package – which its government vehemently denied – while the country is still struggling with social unrest.If nothing else, the problems are putting downward pressure on the euro, which has helped some parts of the eurozone’s economy. The currency has weakened around 10% against the dollar since the start of the year. The effect of the euro’s depreciation was most apparent in industrial production figures, which rose 1.7% in January – much more than expected. The growth came from ‘durable’ consumer goods, such as cars, furniture and appliances, and raised hopes the weak GDP growth figures for the last quarter of 2010 might be revised up.

Confidence indicators improved although they were unevenly spread between countries. France and Greece saw confidence improve, while Greece, Spain and Portugal all continued to suffer. Germany had some more encouraging statistics after weak GDP data for the final quarter of 2009 as unemployment continued to fall – from 8.1% to 8% - in contrast with much of the rest of the eurozone.

The picture elsewhere was bleaker. Portugal saw its rating downgraded by Fitch on the back of its escalating debt while Ireland’s problems seem entrenched – the economy ticked down 2.3% in the last quarter. The country’s momentary lift out of recession proved short-lived as the rise in the previous quarter was also revised down.

Europe excluding UK funds have languished since the start of the year. The average fund has returned 4.36% to investors over the year to date, leaving it significantly behind the UK All Companies sector, where the average fund has delivered 6.84%.

The declining euro is likely to prove a headwind for UK investors. There is some support for the view that the euro is about to see a precipitous drop as currency markets wise up to the relative strength of individual global economies – particularly after a recent assessment by the OECD suggested the eurozone recovery is stalling while those of the UK and US are moving ahead.

European markets did reasonably well during March. The FTSE Eurofirst index delivered 7.2% – about 1.1% ahead of the FTSE 100 and 1.4% ahead of the S&P 500. Germany’s Dax was the strongest of the individual markets, rising 8.9%, while France’s CAC 40 rose just 6.3%.

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