EU Summit Meeting Ends With New Agreement – Stricter Budget Rules: But How Will They Be Enforced?
Enforcing the old fiscal policy EU rules was difficult.
The highly anticipated EU Summit December 2011 is over and news is hitting outlets that they have reached a new agreement. The new plan from the Europe Union Summit is for a deeper integration of the 26 nations and it excludes Britain. The new plan has been formalized but there is some controversy as to how different the new plan is from the old one which had similar mechanisms for integration. Traders took the headlines coming out of the EU as positive and bets that the euro would dissolve were temporarily taken off the table. The crisis in the euro zone isn’t over but after the joint central bank actions last week and today’s meeting, the cohesion of the group seems very much in tact.
The problem facing the EU is one of political and cultural differences as well as enforcement mechanisms. If a country spends more than 3 percent of GDP, what happens? Sanctions have a deleterious effect on all nations in a group so it’s difficult to imagine how enforcement mechanisms will be utilized to make sure the differences between PIIGS and ‘core’ EU nations aren’t exacerbated. Short term, the news about the EU integration still needs time to play out and investors may need to look at volatility as well as dollar/euro relationships for the next few weeks to see if market participants are satisfied with the EU outlook. Questions still remain regarding a potential downgrade from the S&P for some EU nations.