Saying that he has “no problem with austerity”, European Central Bank President Jean-Claude Trichet yesterday poured cold water on the euro’s mini rally. Despite the pledge to balance stimulus spending with deficit reduction made by the attending nation’s at the recent G8 / G20 summit meeting in Toronto, the markets clearly believe that a move towards belt-tightening in Europe, will slow the pace of recovery for the global economy.
Trichet’s comments had an immediate impact on the euro and brought to an end, the string of three consecutive days of gains. The euro fell 0.3 percent to $1.2532 by early afternoon trading in London; the yen and the Swiss franc also gained 0.3 and 0.2 percent respectively against the euro.
New York University economist Nouriel Roubini suggested that as stimulus spending slows, credit availability will tighten and will drag stock markets down even further. For this reason, government bonds in countries such as Canada, the U.S., and Germany could provide a safe harbor for investors looking to avoid the uncertainty of global equity markets during the second half of the year.