Eurobonds Coming, EU Nations To Give Up Sovereignty: Will The People Accept?
The political economy of the euro is changing.
News from overseas has changed market sentiment drastically in the last several weeks. A new notion that has been passed around as a possible solution to the European financial crisis is the issuance of the eurobond which Germany has been against. The eurobond would spread the credit risk among euro-zone countries but it may not be favored by the people because a eurobond may take away some individual nations’ ability to spend or balance their own budgets. We told our readers last week after the G7 emergency call that all options would be on the table from QE3 to LTRO3 and eurobonds.
In essence, a eurobond or joint-bond would require EU nations to give up their sovereignty and would need a central authority or a Ben Bernanke equivalent for the whole region. Leaders in the EU have been switching based on the popular vote and its possible the “man on the street” might be against such measures as they see themselves less able to shift government policy at the ballot box.
Would a Eurobond work?
An auction of eurobonds may be difficult to sell to investors because it’s become clear these nations can’t agree on monetary policy and issuing more debt may not excite bond buyers who can take their capital elsewhere.
The euro as a common currency is already considered by many to be a bad idea and eurobonds may be difficult to implement because incentives to ‘cheat’ or not play by the rules when a common bond is offered, may increase with surprise budget imbalances possible. The U.S. hasn’t had a balanced budget for years now so how can 17 nations balance one budget together?
What we are watching?
We continue to watch financials, technology and small cap stocks but we will also be monitoring the euro as well as the dollar to see if investors are excited about the possibility of a eurobond. In our opinion, the EU needs to breakup and the common currency should be reconsidered since any value less than parity to the dollar cannot be absorbed by the region. Individual sovereignty may not seem important at the moment, but it will become a more defining issue within the next few weeks as more elections results from the EU come in.
A strong move by the euro upward could indicate market participants are fond of this new plan and a jump in U.S. equities may follow. The dollar will be important to watch against major currencies. A 6-month view of the Powershares bearish dollar fund shows the dollar at critical levels. Breaking through these levels to the downside would suggest a significant move occurring that favors the introduction of a new monetary instrument abroad. Downward momentum could be over in the short run after several weeks of bearishness. We would stay on the sidelines and allow the breakout to occur in either direction first.