Despite the fact that nothing major was accomplished, investors have lots to say about the meeting between German Chancellor Angela Merkel and French President Nicolas Sarkozy. World leaders have proved more tight-lipped.
Markets have demonstrated an ambiguous reaction to Merkozy’s proposals. After initially selling off, most European indices are now in the black.
Many investors were disappointed with Merkel and Sarkozy’s failure to enlarge the European Financial Stability Facility or discuss eurobonds, even though it was widely reported before the summit that common eurozone bonds would not be discussed.
Here’s a sampling of what’s being talked about so far:
– Mohamed El-Erian, CEO and CIO at PIMCO: From Reuters: Germany and France are stressing fiscal integration and discipline, and it’s surprising that France is so strongly backing up Germany. This will probably be good for Europe in the long run, but “peripheral economies will not be thrilled with this outcome. They must now press ahead even more forcefully with fiscal austerity, and they will be asked to adhere to a “golden rule” that would hardwire stronger fiscal discipline.”
– Werner Faymann, Chancellor of Austria: In the WSJ: “The financial transaction tax is an important means to ensure more fairness at the European level.” Tighter EU integration, however, could compromise countries’ attempts to rejuvenate their economies during crises.
– JP Morgan (from an investor note): “It will prove difficult to show that the measures represent much of a move forward in the governance of the region.” Eurobonds — though currently not on the table — appear a lot more feasible option than they did just a few weeks ago. Someone needs to specify more clearly what disciplinary measures will be enforced against countries that break the proposed “golden rule” on debt.
– James Hamilton, analyst at Numis: From ProactiveInvestors.co.uk: There is no way the UK will pass a financial transaction tax, which amounts to “a tax on the UK to help fund the failing Euro experiment.” He continued, “Were the UK government to adopt the tax, however, arbitrage channels would widen, markets would become less efficient and the volume of trade would diminish albeit only modestly.”
– Raoul Ruparel, from think tank Open Europe: Poor German GDP reports added to fears of escalating crisis. He told the Telegraph, “The ECB’s decision to raise interest rates twice this year now looks like a miscalculation. There were worries that the bank’s moves would stifle the recovery, particularly in Germany – and it looks like these concerns were right.”