How Much Longer Can Europe Kick the Can Down the Road?

By Paul Quintaro
Benzinga Staff Writer

The European Summit—which had been anticipated all week—concluded early Friday.

Given expectations, the results seemed to be underwhelming. Yet, US equity futures were trading up Friday morning, perhaps evidence of the fact that investors had bought into the deal enough so as to calm concerns.

On Monday, France’s Nicolas Sarkozy and Germany’s Angela Merkel drafted proposals that would form the basis of the summit. Merkel and Sarkozy (dubbed ‘Merkozy’ in the press) were to set to unveil measures that would limit spending in profligate countries in the Eurozone and set strict limits to punish violators.

Although the summit may have been seen to be an effort to save the euro currency, all 27 members of the European Union (EU) participated, including the 10 who do not officially use the euro.

Given the events of the summit, further agreements over the fate of the euro may be decided solely by the members actually using the currency.

During the summit, the UK’s Prime Minister David Cameron clashed with “Merkozy,” asking for concessions that the European diplomats were unable to agree to.

Those expecting Friday’s summit to produce a new treaty for the Eurozone may have been disappointed. Rather, what came out of the summit is the same as what has come out of previous European summits—more promises and plans for the future.

Now, European officials will attempt to negotiate bilateral agreements between countries to alter the rules of their union. Although comments were made stating that Europe would do its best to continue to function as a unit of 27 member states, given the UK’s resistance, a “two-track” Europe may emerge from the crisis.

One thing helping to split the Eurozone may have been a proposed financial transactions tax. Given that the UK is home to the City of London, the resistance to any taxes on financial transactions would presumably be tremendous.

The EUR/USD pair traded lower on Friday, dropping below $1.332 price level.

As the summit failed to produce anything definitive, traders may be expecting the European Central Bank to step in with more bond purchase programs.

Yet, yesterday, the ECB appeared to squash that theory, when the ECB’s Mario Draghi made comments in a press conference following the ECB’s rate decision.

Draghi stated that current EU treaties prevented the ECB from monetizing debt (purchasing bonds of indebted countries to pay for their governments’ spending). Thus, expectations of further bond purchases may be unrealistic.

While Friday’s summit failed to produce anything truly definitive, the euro lives on. Yet, the question dominating the minds of investors may remain: how much longer can Europe kick the can down the road?

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