Sat, May 26, 2012 - Page 9 News List

EU meeting raises hope, but the euro keeps diving

By Ronald Ip

After former Greek prime minister Lucas Papademos warned that “the risk of Greece leaving the euro is real,” the euro rebound came to an end and once again fell to the 1.26 interval. The market is attaching even greater importance to the informal meeting on Wednesday in Belgium among EU leaders.

The original intent of this informal meeting was to prepare for the formal EU Summit on June 28-29. However, with extremely unsettling conditions in the financial market, together with the non-mainstream stance of new French President Francois Hollande, the meeting unavoidably touched on relevant topics and became the center of market attention.

While German Chancellor Angela Merkel has reiterated her strong opposition to a joint eurozone bond as suggested by Hollande, the new French president is not alone in his proposition. He could be able to gain support from the European Commission, Italian Prime Minister Mario Monti and Spanish Prime Minister Mariano Rayjoy.

In an open letter, EU Council President Herman Van Rompuy made a plea to European leaders, urging them to “have no taboos concerning the longer-term perspective” for the eurozone.

His remarks hinted that it might be happening despite no consensus having yet been reached. However, if any conclusion is drawn, the euro’s rate will gain a significant boost.

Other topics that can be more easily agreed upon include stimulating the economy and employment in the eurozone through injecting liquidity into the European Investment Bank, or making use of the untapped infrastructure capital. Feasible discussions also cover the issuance of a joint eurobond to support infrastructure projects.

Merkel might not be willing to give in too much in one single meeting and the matter about whether the European Financial Stability Facility/European Stability Mechanism should be expanded from its current capacity of lending to governments only to making direct loans to banks across Europe for capital restructuring was only briefly discussed. Chances for making progress on the discussions about establishment of a pan-European deposit insurance scheme to prevent the risk of bank runs are expected to be low.

While there are very different views on how to rescue Europe from its current crisis, this very informal meeting only focused on the proposals that could boost economic growth. Consensus on measures outside of this scope is not likely to be reached.

The ultimate conclusion could very possibly be that European nations would definitely support Greece in remaining in the eurozone, should it be able to keep its promises. There is also the possibility that certain flexibilities and incentives could be granted to Greece for its austerity measures, under the premise of simulating growth and employment within the eurozone. As such, we should not expect the meeting to help much in saving the euro’s dive.

Ronald Ip is director of the Wealth Solutions Group at HSBC Global Markets.

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