It's a crucial week for the european single currency. Photo credit: mammal http://flic.kr/p/6gkb8F
In advance of Friday’s crucial European Summit, France and Germany have reaffirmed their commitment to reform the struggling eurozone. But German Chancellor Angela Merkel and French President Nicolas Sarkozy’s best efforts to reassure the markets (and their voters) have been overshadowed by US credit ratings agency Standard and Poor’s Monday announcement that it had placed its “long-term sovereign ratings” on 15 eurozone nations on credit watch “with negative implications.”
S&P’s move means six countries with top AAA ratings would have a 50% chance of seeing their ratings downgraded, reported the BBC. The agency said the decision was prompted “by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole.”
S&P’s gloomy announcement came just hours after Merkel and Sarkozy announced proposals they hoped would begin to restore confidence in the eurozone. At their joint press conference on Monday afternoon, Sarkozy said things in Europe “cannot continue as they are” and that the Franco-German wish was for “a forced march toward re-establishing confidence in the eurozone.”
The BBC‘s Chris Morris reported from Brussels that there was “widespread anger at the timing of the agency’s decision, which raises the stakes another notch ahead of an EU summit on Friday that is being seen as crucial for the future of the single currency.”
Tactless yet no great surprise. BBC Business Editor Robert Peston argued that S&P’s warning was “tactless” but “uncontroversial.” He argued that observers have known for some time that eurozone economies are in bother and there is a significant risk of recession. That said, Peston said the “controversial” timing could see S&P’s “accused of destabilising attempts to reform the eurozone in an orderly way.” Turning to the “limited” reaction from the markets, Peston expressed little surprise: “This limited reaction is what you would expect: S&P’s analysis is backward-looking, identifying the structural weaknesses in the currency union that have been conspicuous to investors for months and which the eurozone’s leaders are trying to solve.”
“S&P cannot make or break the eurozone; only eurozone governments can do that. And we’ll have a better idea by the end of the week whether those governments will go down in history as redeemers or destroyers”, said the BBC’s Robert Peston.
Potentially game-changing. BBC Economics Editor Stephanie Flanders was reasonably upbeat about the Merkozy proposals. She reminded that, before the S&P’s announcement, “the bond markets seemed to believe that Chancellor Merkel had ceded some important ground in her summit with President Sarkozy, declaring that private investors would not be asked to contribute to future eurozone bailouts.” Flanders suggested that Merkel’s comments about private sector involvement are potentially a “game-changer” so long as you “believe that she is saying, in a roundabout way, that all eurozone sovereign debt will be collectively guaranteed by member governments.”
The only two countries not put on credit watch on Monday were Cyprus, which is already under review, and Greece, whose rating has already been severely downgraded.
Franco-German coup cartel on a roll. Writing at The Daily Mail’s Right Minds comment hub, Mary Ellen Synon insisted that “Merkozy” are attempting a “coup” and that their proposals are designed to “destroy the veto power of small states.” “Certainly this Merkel-Sarkozy plan amounts to a whole new constitutional settlement for eurozone member states: taxation without representation, the end of the power of the democratically-elected representatives of the nation to decide what tax to levy, and what spending to do”, warned Synon, who insisted you “you ought to be outraged.” “What we have now is a German and French-led EU cartel which has so far pulled off coups in Greece and Italy. Each of those states is now ruled by unelected governments dropped into office by Berlin, Paris, the European Commission and the European Central Bank. These successful coups have made Germany and France confident of further success. They are on a roll: next target, a coup of the entire system of EU treaty law covering fiscal powers.” Synon closed by urging British Prime Minister David Cameron to do all he can to stop Merkozy’s “drive to destroy democracy across 17 European states.”
Occupy Brussels? A self-confessed “confused and skeptical” Matt Miller at The Washington Post’s Post Partisan opinion section was underwhelmed by the French-German proposals: “I thought the euro zone already had agreements that member countries couldn’t run deficits in excess of 3 percent of GDP. Is the new agreement a way of saying “we really mean it this time?” So much so that you’ll have to put a “golden rule” in the union’s constitution to enshrine the principle? And there will now be more “automaticity” in fining a country who violates the pledge? Is that really an effective new mechanism?” He suggested that the proposals designed to ensure banks that Europe is a safe place to invest are, in fact, a “virtual guarantee” that “big banks and other investors” will again “recklessly” buy sovereign debt “without exercising any actual judgment as to the country’s creditworthiness.” “Isn’t this whole “don’t worry, we’ll bail you out if things go bad” phenomenon a big piece of what has driven the global banking system into recurring collapses in the first place? … And if this bailout of banks’ bond portfolios will again pad the bonuses of bankers who made the failed bets, won’t it be time to Occupy Brussels?”
