By: Dr. Mike Campbell

The EU summit meeting last week was more about the future than shoring up the single currency in the short term. By moving towards tighter fiscal union and agreeing on automatic penalties for states which fall foul of deficit requirements, the EU (minus Britain) sought to ensure that a future financial crisis could be avoided. The take-away message for the investment community was that the block is committed to the future of the Euro and will take measures to secure its long term future. With the exception of the UK, European partners showed an unparalleled level of agreement and dynamic decision making over the issue. EU negotiations normally take many months and often many years to come to fruition, so agreement at the summit with an expectation that the charter will be in force by March is little short of miraculous. It shows that leaders are taking the issue seriously (even the UK gave strong backing to the idea of a strong and successful Euro).

However, the summit did nothing to address the immediate crisis in the Eurozone: sovereign debt. This was why Moody’s and Standard and Poor’s rating agencies are signalling that the credit ratings of all Eurozone nations (not already downgraded) may be subject to review in the coming months. This has led the Euro to fall back to its lowest level of the year against the Dollar. It is trading below the $1.31 level (currently 1.3046); a level not seen since January in the aftermath of the Irish bailout. In the absence of further bad news, it is likely to stage a recovery as it has after each sovereign debt/bailout shock.

Indeed, evidence that the market has priced the current crisis into its calculations comes from the fact that the stock markets have retained much of their recent gains, falling back only slightly. Also, Spain managed to borrow €4.94 billion in short term bonds at a lower rate of interest than has been seen recently which implies that investors have regained some of their confidence (a highly relative term!) in sovereign debt. What is needed now is decisive action from the ECB to support borrowing costs and the Euro roller-coaster will be heading uphill again. The only question is how much longer the ride will last?