EU Summit: Two Big Issues

The EU is holding a two day summit. There are two issues that are of interest to the foreign exchange market.

First, the German-France condominium reached an agreement about tightening up the deficit rule and the stick that would be used. The absence of automaticity has been criticized. It will be recalled that in 2003 France and Germany had breached the deficit rules for three consecutive years, but managed to block the imposition of sanctions.

The Franco-German agreement requires a smaller majority needed to impose sanctions. The nature of the sanctions are fines and some loss of voting rights. The ECB and Eurogroup head Juncker called for a less political process that can be gamed. Ironically, some leaders from countries with large deficits seem also supportive of for automatic sanctions, apparently on grounds that it would help them enact fiscal austerity.

On the other hand, some have objected to the loss of voting power as a sanction. Key point is that this issue appears to be an exception to the rule that when the two pillars of Europe (Germany and France) are in agreement, they get what they want.

Second, with member countries seeking to reduce deficit, there is some objection, led by the British government, that the EU plans a 6% increase in its budget, which is financed of course by the individual members.

Separately, in recent days peripheral European bond spreads have widened, especially in Greece and Ireland. The European central banks are believed to have stepped up their purchases in recent days, with some suggesting the large amount has been bought in several months. The market will be able to interpolate the amount by the size of the ECB's draining operation announced early next week. The thinness of the market and large price action may lead the market to exaggerate the amount the officials bought.
EU Summit: Two Big Issues EU Summit: Two Big Issues Reviewed by Marc Chandler on October 28, 2010 Rating: 5
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