Newsletter article

Currency Report - April 2013
It has taken a decade to get there but at last, as far as the European Commission is concerned, Croatia is "ready to join the EU". The final monitoring report noted that Croatia "has completed the ten priority actions identified in the previous report in October" and just about everything is clear for accession in 1 July. There are still a couple of boxes to tick. Five of the 27 EU member countries have yet to ratify the entry treaty but the Commission expects them all to do so "in good time".

It will be several more years before Croatia joins the single currency. If Latvia joins the euro next January, as planned, it will have taken ten years from accession to adopting the common currency. Croatia is doing its bit to speed the process though. The central bank keeps the kuna steady against the euro, though there is not the rigid peg used by, for example, Bulgaria and Denmark. In February and March the kuna remained between 7.578 and 7.596 per €1, a variation of just ±0.12%. That is steady by any standard.

By contrast, sterling covered a range between €1.1840 and €1.1340, varying by ±2.16%. That still represented relative stability compared with the previous two months when the variation was nearly twice as big at ±4.06%. Towards the end of March the pound had almost recovered to its early February high. It was helped up there by a combination of relatively good news from the UK and renewed concerns about the euro zone in general and Cyprus in particular.

In one week the pound jumped several hurdles, all of which could have been damaging. The economic data for inflation, employment, retail sales and government borrowing all either met or exceeded investors' expectations. The Chancellor did not use his Budget to change the remit of the Monetary Policy Committee from inflation to growth and the minutes of the March MPC meeting showed no increase in the number of members voting for more asset purchases by the Bank of England.

At the same time Italy remained unable to form a government a full month after the general election and the European Central Bank was threatening to put Cyprus's banks out of business unless the Nicosia government came up with a €5.8bn contribution to its own bailout. The Cypriots got there in the end by raiding bank deposit accounts larger than €100k but the Italians are still struggling with the unintended consequences of proportional representation.

Investors are not at all sanguine about the implications of Euroland governments confiscating people's savings, especially as it looks as though this will be the model for any future bailouts. They have shown their disapproval by marking down the euro while people and firms across Europe have begun to ask serious questions about the safety of depositing money in euro zone banks.

The euro will probably get over the crises in Italy and Cyprus in the same way it recovered from previous ones in Ireland, Greece and Portugal. For the moment though it is out of favour and sterling is looking relaxed


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