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Eurozone summit: Germany v Italy, Spain and France Eurozone summit: Germany v Italy, Spain and France
(about 2 hours later)
Let's be clear. The two day meeting of European heads of state that begins in Brussels on Thursday will not come up with a solution to the sovereign debt crisis. It won't even get close, so any investor going long of the euro in anticipation of a successful outcome had better have an exit strategy. Let's be clear. The two-day meeting of European heads of state that begins in Brussels on Thursday will not come up with a solution to the sovereign debt crisis. It won't even get close, so any investor going long on the euro in anticipation of a successful outcome had better ought to have an exit strategy.
The reason for pessimism about the summit's outcome is not just based on historical experience, although this is certainly part of it. Nor is that the big players have done their usual trick of generating unrealistic expectations in the run-up to the talks. In the past that has been the case, but not this time.The reason for pessimism about the summit's outcome is not just based on historical experience, although this is certainly part of it. Nor is that the big players have done their usual trick of generating unrealistic expectations in the run-up to the talks. In the past that has been the case, but not this time.
Instead, the issue this time is that there appear to be differences between Germany and the other three members of the Big Four - France, Italy and Spain that cannot be reconciled, at least for the moment. Instead, the issue this time is that there appears to be differences between Germany and the other three members of the Big Four – France, Italy and Spain – that cannot be reconciled, at least for the moment.
Paris, Madrid and Rome have forged what might be called, for shorthand purposes, a Latin bloc. They have a long list of suggestions for how the single currency could work more effectively - a banking union, commonly issued eurozone bonds, a willingness by the European Central Bank to intervene directly in financial markets to buy the bonds of troubled countries. Put simply, what they want is a Europe in which Germany continues to write the cheques but has no greater say than now in how sovereign countries raise their taxes or run their banks. Paris, Madrid and Rome have forged what might be called, for shorthand purposes, a Latin bloc. They have a long list of suggestions for how the single currency could work more effectively: a banking union, commonly issued eurozone bonds, a willingness by the European Central Bank to intervene directly in financial markets to buy the bonds of troubled countries. Put simply, what they want is a Europe in which Germany continues to write the cheques but has no greater say than now in how sovereign countries raise their taxes or run their banks.
The immediate demand is for help to Spain's banks to be provided directly rather than through Madrid. Why? Because this would mean assistance without the political guarantees demanded by Angela Merkel. The German chancellor knows that this would set a precedent and will therefore dig in her heels. This will mean the crisis gets worse, but that will strengthen Germany's bargaining position. The immediate demand is for help to Spain's banks to be provided directly rather than through Madrid. Why? Because this would mean assistance without the political guarantees demanded by Angela Merkel. The German chancellor knows that this would set a precedent and will therefore dig in her heels. This will mean the crisis gets worse but that will strengthen Germany's bargaining position.