Franco-German divergence spells trouble ahead

Although purchasing managers surveys for July, released earlier today, suggest that the economicrecovery in the euro-zone as a whole is regaining momentum, they also still show a large gap betweenthe performances of Germany and France. This could spell trouble for French government bonds andfor the debt of governments in the periphery of Europe, especially if differing priorities in Paris andBerlin hold back the adoption of policies such as more moves towards fiscal and banking union. What’smore, current euro strength is sowing the seeds of renewed weakness in the future.