Stronger euro tempers Europe’s rally

Container ship © iStockphoto
The exports should keep moving

Continental stocks have slipped since they reached a two-year high in May, but this may just be a pause for breath. Investors impressed by the eurozone’s economic recovery — GDP grew by 2.3% year-on-year in the second quarter — have started to fret that a strengthening euro will dent growth and company profits. The eurozone is more reliant on exports than other major economies: they account for 44% of the bloc’s GDP, compared with around 28% in Britain and 13% in America.

Nonetheless, the fuss looks overdone. As we noted last month, the euro, having fallen for years, is nowhere near its historic highs. And a weak euro did little to bolster company profits and growth during the crisis and its immediate aftermath, suggesting that it is hardly the pivotal factor underpinning growth. Indeed, many analysts point out that improving domestic and global demand should negate the drag from a stronger euro. Both euro area and global growth are at multi-year highs. Barclays, for instance, has left its earnings growth forecast for Europe excluding the UK at 10%, despite the euro’s recent upswing. It also notes that there is plenty of money still on the sidelines that could find its way into European stocks as confidence spreads.

We may hear a lot less about the strong euro in any case over the next few months. The German election result is a reminder that political uncertainty has hardly disappeared from the eurozone, while the European Central Bank is loath to wind down its money-printing programme too quickly. That militates against monetary tightening – which implies a stronger euro – occurring anytime soon. The euro rally could be largely over: there seems limited scope for it to shoot to the moon.