The boost to the financial market from the measures outlined at last week’s EU summit to strengthen the region’s budget discipline did not last long.
With investors worried it would be of only limited value in resolving the euro zone debt crisis, Europe’s bourses posted their biggest fall in three weeks on Monday and the euro slumped against the dollar.
The financial markets are not convinced the politicians can deliver as Justin Urquhart Stewart of Seven Investment Management in London explained: “One of the first issues that has to be addressed is will all of those current members of the euro zone in reality be able to come along with them and obey the rules. And the markets looking at it are saying ‘actually, probably not.’”
Initial market enthusiasm over the plan on Friday faded due to legal uncertainty surrounding the pact, as well as the absence of a sufficiently strong financial backstop for the euro zone single currency. The ratings agencies remain sceptical and expect an economic downturn for the region.
Euronews spoke to Caroline Newhouse, an economist with BNP Paribas in Paris, and said to her it looks like we have quite a way to go before we’re out of this crisis.
“I don’t know if we can actually say that we’ve got a long way to go with this crisis. Certainly the markets were disappointed with the outcome of the EU summit, however there was big progress on two key points. Firstly there will be reform for greater fiscal discipline in the eurozone and secondly, that fiscal discipline will come from greater solidarity among eurozone countries.”
euronews: “You say “solidarity” but Britain’s decision to stay out of this process leaves some questions on the future of the euro as a currency. Two thirds of the world’s financial dealings with Europe pass through the London Stock Exchange.”
“It is true that Britain came to the negotiating table with demands that were of particular importance to it: including to ensure that the London market’s “offshore” status continues. Reading the headlines in the British newspapers, it seems that although the anti-Europeans are happy with Mr Cameron’s stance, the financial sector in the UK is concerned about what has been decided, which effectively excludes any forward movement by Britain on its commitments to the eurozone and the European Union.”
euronews: “Moody’s sent a chill through the markets by saying the summit has left the eurozone exposed to new shocks. The agency says it that it will review the ratings of EU countries early next year. And as early as this week Standard and Poor’s could lower the ratings of many countries, particularly France and Germany.”
“Well, it will be another three months before this intergovernmental treaty is finalised, and I think it’s probably going to be during that time there will be the greatest uncertainty. After that we have to trust that each government will, at the very least, make changes in its constitution and bring in the so-called “golden rule” – that is constitutional limits on deficits – with the measures being voted through directly by their national parliaments and without the need for a referendum.”
euronews: “But you think it’s possible considering the major austerity plans underway and social problems being seen in many countries?”
“What do countries like Greece, Italy, Spain and Portugal do if the eurozone breaks up? Does it make sense for them to return to the currencies they had 10 years ago? I think we’d face currency devaluation, inflation, a loss of competitiveness, and then we’d have a core group that remained in the eurozone. That is not in anybody’s interest. We are now being asked to do more: to go to a situation where we pool the debt, followed by economic and political federalism.”
euronews: “The main question that the Brussels summit has not addressed is the role of the European Central Bank. We’ve moved towards a more important role for the IMF but the ECB is still somewhat distanced from the solution to the crisis.”
“ECB President Mario Draghi has a different style compared with Jean-Claude Trichet. He is involving the European Central Bank as a lender of last resort for banks, and I think last Thursday’s meeting of the ECB shows that. By contrast the European Central Bank is not the lender of last resort for governments.”