New EU Plan Fails To Inspire Confidence

All the EU member states, other than Britain, agreed at a summit in
Brussels to give the EU greater control over their national budgets.

But for most investors the summit also ended in an anti-climax because
no radical, immediate solution to the current crisis was found.

The tighter fiscal unit agreed upon will mean stricter regulation on
how much debt countries can incur. Even smaller countries will no
longer be able to get away with excessive government debt.

But Britain refused to grant the EU such power over its affairs and
refused to assent to the agreement without guarantees to protect its
financial services sector. President Nicolas Sarkozy of France
declared these demands “unacceptable”.

Germany and France wanted to incorporate the new regulations in the
pact upon which the EU is based, but without Britain’s cooperation
they had to be satisfied with mere agreement between the governments
of the other member states.

UK Premier David Cameron moreover hinted that Britain might prevent
the other EU members using the European Commission – an institution he
claims is intended for all member states – to enforce fiscal
discipline.

German Chancellor Dr Angela Merkel said she was nevertheless satisfied
with the outcome of the summit. She said she hoped that Britain would
accept the agreement in time.

Investors had expected that a fiscal agreement would encourage the
European Central Bank (ECB) to buy more debt from beleaguered European
countries. However ECB president Mario Draghi on Thursday afternoon
dashed any such hopes.

On Friday the ECB also said that the new agreement would not affect
its plans to buy more than €20bn worth of government bonds each week.

The ECB has for some time intervened in equity markets, buying
government bonds from countries like Italy and Spain. Investors are
hesitant to buy bonds from these countries and consequently demand
particularly high rates of return for holding the bonds, which means
that Italy and Spain will have to pay such high interest rates on
their debts that it will be impossible for them to pay them off.

EU leaders also agreed that in July next year the European Stability
Mechanism (ESM), the EU’s permanent financial rescue fund, will
replace the temporary European Stability Facility.

This fund’s firepower will be increased to €500bn and, owing to
opposition from Germany, will not be operated like a bank.

Further, member states will provide €200bn worth of loans to the
International Monetary Fund (IMF).

These loans will enable the IMF to render increased aid to the eurozone.

Some analysts reckon this amount is too little to rescue heavily
indebted countries, but it can certainly bring temporary relief.

Markets mull EU plan

The outcome of the European Union (EU) summit did not initially
impress global markets much on Friday.

The news that the EU would increase its rescue package however pushed
markets into positive territory by Friday afternoon.

On Friday the JSE opened almost 1% down, but recovered somewhat later
and closed only 0.39% off at 32 632 points.

The exchange closed 0.07% down for the week.

On Friday morning at one point the rand pulled back to R8.34 against
the dollar, but strengthened to R8.17 by late afternoon.

European markets also began the day shakily, but eventually ended
positive. – Sake24