EU summit: who knows what tomorrow holds?

Monday, June 25, 2012 - 18:02

 

This week the currency market is looking ahead of the crucial EU summit that will take place on June 28-29 in Brussels. We have already heard a lot about the questions on top of the agenda: closer fiscal integration within the currency block, a cross-border banking union and the issue of joint EU bonds. Will the EU leaders manage to reach any final agreements on these key issues? The general analyst’s sentiment is negative: there is lack of confidence and consensus for more aggressive and innovative actions.

At the moment the euro zone’s banking system triggers the biggest concern, that is why the idea of Eurobonds is seen as an emergency exit for the debt-stricken region. However, the German Chancellor Angela Merkel last week resisted the attempts by the leaders of France, Italy and Spain to persuade Germany to agree to joint euro-bloc bonds or bills.

Specialists at RBS expect Germany to remain adamant about rejecting debt mutualization or any sort of common bond. UBS analysts, however, are slightly more optimistic: in their view, Merkel will not give her consent to joint bonds until she gets enough control on how the EU governments conduct the fiscal policy. Analysts add that the German support of the EU members in hot water will weaken as fast as the election in Germany in October 2013 will be nearing.

Specialists at ING expect that the ECB will be bound to take the heat if the summit will bring no solutions: in their view, expectations for further rate cuts at the 5 July meeting are high. However, it’s obvious that the dovish monetary measures cannot support the region’s economy forever. According to analysts at Standard Chartered, a full breakup of the euro zone is not a myth and may happen if the political will for the union is lost. Never the less, they believe that it can be avoided if the currency block quickly moves towards a tighter integration.

It seems the investors can’t put up with the never-ending uncertainty in Europe any longer. As a result, the common currency is likely to weaken further if the EU summit will not make strong progress on core questions.