Spanish Economic Prospects

The €1.1 trillion Spanish economy is more than four times as large as Greece's and six times Portugal's. Its consequence for the EMU is commensurately greater. Spanish GDP in the second row of EMU and the EU importance, ahead are only the three core countries, Germany France and Italy. If the bond market contagion that is spreading from Greece to Portugal reaches Spain then only the core of the EU will remain untouched. The issue at the center of the Greek problem, economic productivity, is the same for Portugal and Spain. Their economies are not as efficient as those of the central trio. The euro works against their export interests because its relatively high value puts their manufactured and agricultural exports at a price disadvantage. IMF conditional austerity will force lower living standards in any country under its charge and exacerbate fiscal problems as higher taxes encourage resort to the black economy. These issues cannot be solved by a Greek or Spanish bailout. The adjustments ahead for citizens of the EMU are going to be painful and long lasting.

FOMC

No change in rates, little change in language and retention of the most famous economic term of the recession extended period. The status quo FOMC statement produced scant reaction from the currency or equity markets, The Fed's twin concerns of inflation and unemployment remain solidly on the side of low rates. Core CPI was 1.1% in March and the unemployment rate was 9.7%. The Governors cannot remove the extended period characterization without exciting the credit markets into rate hike speculation. If 1st quarter GDP comes in as expected at 3.3%, it would-be the third quarter of growth at an average of 3.7%. The economy has not sustained a higher rate for consecutive three quarters since the second third and fourth quarters of 2003. The baseline for the Fed Governors is straightforward-without an inflation threat there is simply no reason to inflict higher rates on a weak though recovering economy.

Joseph Trevisani Chief Market Analyst FX Solutions