Another European Summit and disagreement once more, but this time the UK was the thorn in Europe’s side. United Kingdom Prime Minister David Cameron refused to sign a new EU treaty that was drafted by Angela Merkel and Nicolas Sarkozy imposing strict budget and debt rules to not only the eurozone states, but also the other non-eurozone members in the EU. Britain, one of the countries that sits outside of the eurozone (thank goodness), led by Prime Minister David Cameron, refused to agree to the new treaty, saying he wanted guarantees protecting the UK’s financial services sector, which relates to one-tenth of the UK’s economy. Sarkozy said that Cameron’s demands were unacceptable and so the UK was left “out in the cold” as 26 of the 27 EU states agreed in principal to the new treaty. It has been many years since a UK Prime Minister has stood up to Europe to ensure that UK interests are not brushed under the carpet, but by taking this stance Cameron risks the Eurosceptics within his own Conservative Party of raising the issue that Britain should hold a referendum on whether the UK should leave the EU altogether, which it joined in 1973. Cameron has stated that this not an option, as the effects on the UK economy would be horrendous, but it will be interesting to see how he deals with both his own party and the issue of Europe in the coming months.
After the above events were digested, the meeting turned towards resolving the eurozone debt crisis, with many thinking that this was the last chance to save the euro from collapse and financial meltdown spreading across the global economy. Decisions were taken yesterday on the permanent bailout fund, the European Stability Mechanism, which is due to be in force by July 2012. However, once again promises that had been made before the meeting fell short of expectations. The ESM’s threshold will be set at €500 billion euros, far less than had been pledged before the meeting. Germany also opposed giving the fund a banking license, as had been originally suggested by Herman Van Rompuy, the President of the European Council. The license would have allowed the ESM to access cheap funds from the ECB, and by not agreeing to this Daniel Gros director of the Centre for European Policy Studies think tank in Brussels said, “This is a great leap sideways. We now have a framework that in 10 years’ time could restore a degree of fiscal order to the euro zone. The German view is that this is all that is needed to convince markets to buy Spanish and Italian debt. I have my doubts that it will be enough. I think the tensions continue.”
The eurozone was however given a boost yesterday when the European Central Bank cut interest rates by 0.25% to 1% to help combat the debt crisis that has engulfed the region. The euro was sold off on the back of this news and also lost more ground when news of the summit agreement hit the markets. However, despite all of the bad news that has been emanating from Europe over the past few weeks the euro has been very resilient, but the failure to get Britain to agree to the treaty and the view from many investors that the additional €200 billion euros being lent to the IMF to help bailout the weaker eurozone countries is not nearly enough, are all negative factors for the euro in the months ahead. The uncertainty about whether the eurozone will be able to halt the crisis and bring stability to the region forced investors to dump higher-risk assets and commodity driven currencies such as the Aussie and Kiwi dollar, for the safe haven of the U.S. dollar.
As the summit came to a close today we are still left wondering whether the meeting has been any more successful in dealing with the eurozone debt crisis, than the other dismal attempts in the past few months. Yes they have agreed a roadmap for greater economic integration between EU members in the future, but once again they have failed to deliver a credible solution to the debt crisis that is threatening to engulf Italy and Spain. A Reuter’s poll of 57 economists taken before the summit began showed that even though 33 of them felt that the eurozone would survive in its current state, 38 expected the summit would fail to deliver a resolution to the debt crisis. It seems they have been proved right.
