Eurozone Watch

With the euro having jumped above the mark of 1.60 $ for the first time in history, recent macroeconomic data shows that the strong currency is taking its toll on the continental European economy. The advance manufacturing PMI for the euro-area for April published today fell by 1.2 points to 50.8 points and thus is only marginally above the 50-points-mark the fall below which would signal a contraction of the manufacturing sector. This is the lowest level since August 2005.

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The French Finance Minister Christine Lagarde last week announced that Paris would use its Presidency of the European Council starting on July 1, 2008 to push for a common corporate tax base. Despite its looks, this is yet not another brand new initiative by Nicolas Sarkozy – in addition to the other French EU Presidency priorities in the fields of European Security and Defence, Environment/Climate Change, Energy, Immigration and the Union for the Mediterranean.

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Reading today's newspapers, one could get the impression that the 1970s are back in Germany. "9 percent more for the public sector" writes FT Deutschland. Wolfgang Munchau and Susanne Mundschenk in their Eurointelligence news briefing sound similarly gloomy when they title "The second round effect arrived yesterday" and write about a "8% pay rise stretched over two years".

However, looking more in detail into the wage agreement (available in German at the public sector's union's website) shows that these numbers look much more impressive than they are. In fact, if this pay deal were to be applied to the whole economy, unit labour costs would not increase by more than 2 percent (the ECB's inflation target) annually for the period 2008 and 2009.

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