French Austerity Plan

The recently announced French austerity plan reminds us that it is not only the so called PIIGS nations in the European Union that need to cut expenses. In announcing the French austerity plan Prime Minister Francois Fillon forecasted that the French austerity plan needs to save 100 billion euros. President Nicolas Sarkozy and his government would like to avoid a downgrade of their credit rating (as seen in the USA) and is thus cutting budgets and looking to raise taxes. With the Greek debt crisis ever so painfully in the news Italy is seen as the next, and worse, problem confronting the EU. The news the other day carried a telling item. The very Catholic nation of Ireland will no longer have an ambassador to the Vatican. It appears that everyone is cutting something in their budget.

French growth forecasts have been cut in half. Analysts say the French austerity plan will certainly reduce debts but may not be sufficient to avoid a cut in the nation’s credit rating. This issue is a little like looking at Illinois or California within the USA. It has to do with a member of the EU and not the EU itself. But, maybe not. In order for the bailout plans of the various nations in the EU to work the two largest economies must grow. Italy, the third largest EU economy is in trouble. France is looking to reduce debt which will likely reduce economic growth. That leaves Germany whose economy is recovering from the recession more slowly than desired. How does all of this affect the seemingly continuous downward direction of the Euro? Europe, for all of its current problems, is either the first or second largest economy in the world, depending upon whether they or the USA are in the lead for the year. However, the value of the Euro versus other currencies will adjust based upon the economic strength of the EU in relation to other economies.

French officials are cautioning the nation that sacrifices may be required as the idea of a European nation going bankrupt is no longer an abstraction. With Greece, Spain, and now Italy in danger of debt default it is altogether possible that one or more nations might leave the EU. How this new reality will affect the Euro versus the dollar is uncertain. A national bankruptcy could cause a cascade of defaults in weaker European economies. This could lead to nations leaving the EU. On the other hand it could end up with a stronger and more economically viable union. As with all Forex trading the issue of the French austerity plan requires continual fundamental and technical analysis of the currency involved, the Euro. Obviously a true global economic recovery would speed the recovery of the major nations of Europe and help stave off the wave of defaults that trouble world markets. As always traders need to watch two economies and two sets of data at once in Forex trading as traders trade one currency against the other.