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Wednesday, March 23, 2011

Kicking the euro while it’s down

Eurozone leaders seem intent on making their crisis resolution as messy as possible. According to draft summit conclusions, seen by Reuters, the decision on how the EFSF will increase its lending effective lending capacity to €440bn will be delayed until June.

Clearly the months of pitching this week’s EU summit as the defining moment in solving the eurozone crisis were not well thought through or just wishful thinking. The markets' reaction to what is now destined to be a seriously underwhelming agreement is likely to be painful for the peripheral eurozone economies.

Discussions will now focus on the ESM, which is not due to come into force until 2013. Crisis management 101 (for the EU officials out there) – handle the problems on your plate first, then deal with the ones coming down the line. Not that an agreement has been finalised on the ESM either, with German Chancellor Angela Merkel looking to score a more gradual timeline for Germany’s contributions to the fund, probably given the increasing pressures her party is facing in this year's local elections.

Not one to be topped, Portuguese Prime Minister, Jose Socrates walked out of Parliament in the middle of possibly the most important vote in the country's recent history. According to Portuguese press reports, he left without saying a word and no-one knows if or when he will be coming back.

Well, at least its shaping up to be an eventful summit…


john parfitt said...

The Vienna convention (as well as the sleeping beauty called the Luxembourg compromise)allows us to withdraw from any treaty obligation by giving notice, which actually applies to the entire EU set-up. Here we seem to have agreed to underwrite a vast blank cheque at a time when our national fnances are in a terrible state so we are now in effect borrowing to (inter alia)give it to the EU. If it is in our national interest to support the Portuguese well and good but I doubt it. The 1911 Parliament Act makes the House of Commons the sole arbiter of the raising and spoending of public money so why not have pulling out as an option?

value said...

I think the ECB will raise the rate once, however it is diffcult to argue that a series of rate hikes will follow given the current market environment.