By: Barbara Zigah

As markets and analysts had been expecting, earlier today the European Central Bank announced another 25 basis point reduction to its benchmark interest rates, bringing the new rate to a record low 1%. Mario Draghi, the newly installed head of the ECB who assumed the role less than two months ago, appears to have set a fairly aggressive goal to reverse the previous administration’s tight monetary policy. Given the inherent and prolonged weakness of the Eurozone economy, and the urgency of the situation at hand, the timing couldn’t be better.

Nonetheless, as far as markets and analysts are concerned, this welcome move is seen as only a short-lived fillip and not the enduring response they want to the ongoing Eurozone crisis. Specifically, markets are anxious for the central bank to acknowledge that they will continue to use the resources at their disposal to ensure that the Eurozone’s bond markets, and in turn the Eurozone’s financial system, remain stable. Currently and over the past several months, the ECB has been reluctantly stepping in and buying the sovereign debt of the Eurozone’s fiscally troubled nations, as and when needed.

To agree to continue in this vein, essentially as the Eurozone’s lender of last resort, goes against the tenets of the Eurozone treaty and the ECB’s mandate. But, with the very vocal exception of the German leadership, other E.U. governments, including France and Ireland, have called for the ECB to take on a much more proactive role. Steadfast, the ECB has vowed they would not. However, there is a possibility that they may soften that stance, provided the outcome of the E.U. summit is positive.

Potential Outcomes of the EU Summit

Investors and some analysts are optimistic that the EU summit’s positive outcome will restore market confidence and potentially mitigate some of the negative effects of the Eurozone crisis, though pessimism has begun to creep into the overall sentiment. That is because not all of the E.U.’s members are behind France’s and Germany’s proposed E.U. treaty amendment, which would call for stricter adherence to budget targets and sanctions against those countries which breach them. The United Kingdom, for one, has specifically said they would veto any treaty amendment that did not also afford them with some concessionary protections. In other words, without a quid pro quo, the U.K. won’t help the E.U. to save itself.

Normally, the ECB rate decision would be a market mover, but today’s rally is likely to be a blip, as the investors are looking past it to tomorrow’s EU summit. Clearly, the markets’ focus is on the bigger picture.