Will the split in politicians cause a split in the Euro?

The Euro faced further pressure yesterday as economic data from the EU showed a decline in the manufacturing and services sector. A reduction to 46.0 and 47.9 was noted respectively. Jobs were also affected as even Germany was lead to shedding workers and consumer confidence in Italy dropped to a record low. Spain contracted by 0.4% in the first quarter of 2012 and France’s business climate deteriorated further due to the on-going elections. The EU’s second largest economy saw its bond yields rise as Sarkozy experienced defeat from the socialist Francois Hollande in the first round of elections. European stock markets plummeted on the back of these results as Hollande is seen by investors as anti finance.

The bleeding failed to stop with France as further political unrest tore the Dutch coalition apart. Dutch Prime Minister Mark Rutte gave his resignation yesterday after failing to gain sufficient support for his budget cuts. Rutte was hoping to reduce the deficit by €14Billion which was rejected by the nationalist Freedom Party. Pressure remains on the Euro and unless the French elections results turn in favour of Sarkozy it may continue its downward momentum.

On a more positive note the UK economy is showing signs of recovery, albeit at a slow pace. Nevertheless investors are seeing the UK as a safe haven at present and are not reluctant to invest in UK governments bonds. Not only does this show confidence in the UK government but it is also bringing down the cost of borrowing in these dire times. The Pound was trading near a 19 month high versus the Euro and extended its rallies against the USD. The main concern is whether a strong Pound is the best thing for the UK economy as it reduces the amount the country can export due to lack of demand.

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