European Budgetary Union: Illusion or Way Out Of Debt Crisis?
Sat, 04 Feb 2012 15:20:00 +0400
EU leaders held another summit in Brussels on Jan 30th. It was attended by mixed sentiments and forecasts. Luckily, the EU and the eurozone managed to avoid disintegration. However, they didn’t find the cure for all the economic problems in the union either.
Germany and France, 2 economic locomotives of the debt-ridden eurozone, didn’t quit the currency union despite expectations but made another (the last) warning to the other eurozone members, thus reminding them to maintain budgetary discipline and forcing them to sing a “fiscal plan”.
December’s EU Summit
There was another EU summit held in December. The goals were the same – to save the eurozone and the EU from the escalating debt crisis. As a result, the participants approved several budgetary and tax reforms within the union.
The essence of these reforms: The EU’s new budget and tax policies should correspond to the French –German plan, according to which:
·All the eurozone members should accept and never violate the budget deficit limit.
·The Euro Commission gets the right to introduce tough sanctions against violators.
·All the 17 eurozone countries should have common corporate and other tax rates.
·In future, no eurozone country can accept private financial support (as it was done by Greece).
The “split’ of the EU: The plan offered by Germany and France was supported by all the 17 eurozone members. However, David Cameron, the UK’s Prime Minister, blocked the idea of spreading the plan over the entire EU. Therefore, a demarcation line between the eurozone and non-eurozone members of the EU started to emerge. The latter are dissatisfied that the former want to make decisions for them.
January’s emergency summit
The EU entered 2012 without a new financial charter even though during December’s summit it was agreed to prepare a new version of the Lisbon Treaty (including the budgetary changes) by March 2012. So far, those changes have been accepted only by eurozone members.
During the January summit Angela Merkel offered all the 27 EU members to sign a financial pact, which suggested:
·Fines for violating the budget deficit limit.
·These fines will contribute to the European Stability Mechanism (ESM).
·The only exception is a force-majeure like natural disasters or sharp economic decline.
As the result, 17 eurozone and 8 non-eurozone members signed the budgetary pact offered by Germany, even though it was sufficient to get 12 votes. Therefore, 25 of 27 EU countries approved the introduction of new fiscal and budgetary rules. Only the UK and Czech Republic denied them. Poland, Hungary and Sweden hesitated for some time.
A couple of days ago Angela Merkel expressed confidence that the EU would manage to overcome the crisis and to restore the confidence of financial markets.
On Jan 31st, after the EU summit, European stock indexes rallied after a 2-days decline. Stoxx Europe 600 increased by 0,5% up to 253,68. Dow Jones Euro Stoxx 50 gained 0,53%, thus reaching 2417,30. The UK’s FTSE 100 rallied 0,68% up to 5709,75. France’s CAC 40 increased by 28,59 (+0,88%), thus reaching 3294,23. Germany’s DAX gained 26,18 (+0,41%) thus hitting 6470,63. However, later on, the markets got disappointed by the fact that the EU authorities decided to postpone the Greek issue till March. The rally stopped.
Investors realize that the new fiscal pact aimed at strengthening the budgetary disciple within the EU is good, but the results will be visible only in long-term perspective. The legal mechanism of fining is not specified yet. There is no guarantee that weak eurozone economies will maintain the budgetary discipline. Now there is one more union within the EU: the fiscal union of 25 countries, apart from the EU itself (27 members) and the eurozone (17 EU members). This complicated structure may scare away numerous foreign investors.
What can inspire investors?
The very fact that Europe supported Germany’s initiative hints that it unofficially accepted its leadership in the union. The German authorities definitely like this fact and will probably allocate some funds to support Greece, Portugal and Ireland because now they probably assume that European borrowers will be more disciplined.
The supporters of the new fiscal union are sure that the Czech Republic will soon join it while David Cameron’s successor will probably be more complaisant.
According to the Department of Masterforex-V Trading System , EURUSD is flattish in mid-term perspective. A break above the local high 1.3217 will trigger sub-wave C(C ). The closest levels of resistance are 1.3233, 1.3242, 1.3375, 1.3434. A break below 1.3031 will probably complete the rally, this initiating a downswing – wave A/B.
Market Leader and Masterforex-V Academy would appreciate if you could participate in a survey. Please, visit the Academy’s forum for traders and investors and answer the following question:
Will the new budgetary agreement be efficient enough to help the eurozone come out the debt crisis?
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