Euro Summit Disappoints

FOR IMMEDIATE RELEASE
(Free-Press-Release.com) August 30, 2011 --

France on Wednesday released a letter sent to European Council President Herman Van Rompuy detailing its joint proposals with Germany on ramping up economic governance of the euro zone. In it, French President Nicolas Sarkozy and German Chancellor Angela Merkel say they wanted to freeze European Union structural funds for euro zone members that do not respect EU recommendations on deficit-reduction. The two leaders called on Tuesday night for "true economic governance" for the eurozone in response to the debt crisis. They also agreed to press for closer economic integration within the eurozone, but have not announced any specific measures to tackle the crisis. Merkel and Sarkozy said they also plan to propose in September a tax on financial transactions and a new measure to require all 17 members of the euro zone to balance their public finances before summer of 2012. However, the leaders rejected issuing euro-zone bonds, noting that the bonds will not resolve Europe’s problems nor help to restore confidence. The idea of euro bonds had gained traction in the financial markets as a possible weapon to tackle the euro-zone debt woes. Support for a common bond has been growing as it is increasingly seen as a way to allow highly indebted euro zone countries to regain access to commercial markets while providing investors a safeguard through joint liability.

They are increasing the pressure on their euro-zone peers to improve fiscal discipline in the bloc by proposing to cut the region's wayward spenders off from key European Union transfer funds. The proposal marks an effort to boost fiscal discipline across the euro zone by incentivizing countries to rein in spending and cut their budget gaps. However, the idea is controversial and could have difficulty being enforced, if history is any guide. The euro zone has repeatedly failed to impose financial penalties on profligate members and is still in the process of debating more automatic sanctions for deficit-breaching nations.

World stocks ticked lower while top-rated government bonds rallied as investors grew concerned that French and German plans for closer fiscal integration may be insufficient to stop the regional debt crisis from spreading further. The euro spiked higher against the U.S. dollar EURUSD +0.30% to trade at $1.4449 as Merkel and Sarkozy spoke at the press conference following the summit. But the rally lost steam and the euro surrendered all of its gains to trade at $1.4408 in recent activity. U.S. stocks briefly trimmed gains and then reached their lows of the session after the comments. The Dow Jones Industrial Average DJIA -0.17%, which had been falling after a report on weak German economic growth, fell more than 180 points and recently traded down 76 points at 11,407. Frankfurt's Dax and London's FTSE 100 indexes fell about 1%, while the Cac 40 in Paris lost about 0.2%. The gold price also hit a new a record high, reflecting continued uncertainty; after falling back towards the end of last week, the price hit $1,795 an ounce in early trading.

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