In the last 24 hours there has been a perceptible shift in what the markets expect from EU officials.
Last week investors were on tenterhooks about whether the Irish government could settle a bailout package with the EU-IMF. The question then was whether that would assure investors that the bond crisis in Europe could be contained.
Since then though the markets have realised that bailing out one periphery member does not halt the escalating crises in other member states. Reports today indicate that bailouts for Portugal and Spain are all but inevitable.
Because of this attention has shifted from the consequences for the euro of individual bailouts. Instead attention has turned to the systemic consequences for the EU of bailing out the periphery members.
The European Central Bank for instance has the potential to become a European equivalent to the Fed. It has unlimited liquidity and could theoretically take on the debt of every EU member.
The trouble though is that the ECB was never intended to fulfil this function. Turning the bank into a European Fed would effectively centralise economic power in the euro zone giving it complete control over economic policy in indebted periphery nations.
The EU periphery nations don’t really have a choice about whether they want this. Spain and Portugal need rescuing: if economic circumstances demand and the markets stop investing in their government bonds then the ECB is the only lending source available.
Instead the question is whether the EU core states want this responsibility. Do relatively solvent nations such as Germany and France want the obligation of shouldering the debt of perhaps six insolvent nations? Do they want to transform the function of the ECB and effectively begin the process of euro zone political union?
Right now the markets don’t know. But until they do and a long term solution to the debt crisis is unveiled it looks as though confidence in the euro will remain low.
Elsewhere on the markets the situation is being determined more by short term economic data releases. Today’s release of the UK Purchasing Manager’s Index indicates that conditions for businesses have become more favourable this month in Britain, and this might bolster sterling.
In addition George Osborne’s newly created institution The Office for Budget Responsibility has predicted that his budget plans are likely to reduce UK debt against GDP by his target date of 2016. This isn’t an economic release per se but it indicates that Osborne’s plans are fiscally sound and could also bolster sterling.
Finally in the US this afternoon the November figures by the Institute of Supply Management are released. These account for business conditions in the US manufacturing sector and, though they are expected to indicate conditions are improving, they could be below market hopes.
However given the continuing uncertainty in the EU and the dollar’s status as a safe haven currency it is unlikely confidence in the US will be seriously dented.
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