The leaders of France and Germany announced that they have reached an agreement regarding more means to resolve the debt crisis.
The agreement requires EU Treaty changes that should be ratified in March 2012. Is this realistic? And even if so, will the markets wait that long?
Here are the highlights from the announcement:
- No euro bonds.
- Deal to be pushed for all the 27 EU countries, but a deal only for the existing 17 euro-area members is also OK for the leaders.
- Advisory role for European Court of Justice regarding regarding implementation of debt rules.
- Permanent bailout mechanism (ESM) to be brought forward from 2013 to 2012. This includes a default option.
- Automatic sanctions for members that fail to meet 3% deficit rule.
Note that these are general declarations and not the full agreement. Angela Merkel and Nicolas Sarkozy announced that the agreement will be sent to EU President Van Rompuy on Wednesday.
The last item might in the list might hint about an agreement about a mechanism for exiting the euro-zone. Will Greece be shown the way out?
In the meantime, the euro and other risk currencies ticked up on these news, but a  rally wasn’t really seen.
What’s missing in the announcement?
- Details: The full agreement isn’t available. Declarations are nice, but without seeing the full picture, the markets are not going to rally.
- A role for the ECB: In order to stabilize the situation, ECB money is needed. This is not mentioned here.
- Italy: A long term solution is needed for the euro-zone’s third largest economy.
EUR/USD rose above 1.3480 for a short time and is now retreating once again. It is in the 1.3420 to 1.3480 range. More clarity and more movement will be seen on towards the end of the week.
For more on EUR/USD, see the euro dollar forecast.
On Thursday, the ECB will make its rate decision. It is widely expected to cut the rate once again and fully reverse the hikes made earlier in the year. Mario Draghi might also introduce new measures for banks.
There is also a small chance of beefing up the bond buying plan and launching QE. A report about spending 1 trillion is floating. Will we see Quantitative Easing from the ECB?
In the meantime, it bought less bonds.
