Search ForexCrunch

Expectations have risen towards the EU Summit, especially after non-European G-20 leaders told Europe that the issues should be sorted out in Brussels. All 27 EU leaders meet on June 28-29.  

Given past failures and a wide range of issues on the agenda, little can be expected from this event. Here are 4 reasons why we can expect another disappointment – another rise in risk towards the event and a downfall afterwards.

  1. Greece: the victory of pro-bailout parties in the Greek elections didn’t solve any problems. The new government made a long list of demands to ease the suffering of Greeks, and Germany was already quick to say no. While a compromise might be reached, Greece has no chance of getting close to the targets, and will require a third bailout or a euro-exit.
  2. ECB Help: Both large countries have basically begged the ECB for help in lowering their yields. The central bank was only willing to ease the collateral rules, and also this was heavily criticized by the German Bundesbank. France also supports more action from the ECB, but Germany isn’t expected to budge on this. A bailout for Italy is still denied, but Italy cannot hide too long behind Spain, as it also suffers from high yields.
  3. Growth: The leaders of Germany, France, Italy and Spain met in Rome and declared a growth package worth 130 billion euros. This is wonderful news, but it seems to have no content behind it. Where will the money come from? How will it be used? This growth friendly move will likely fade out.
  4. Fiscal Union: Everybody is talking about more Europe, but there are huge differences. Germany sees the fiscal compact as a necessary step to ensure that governments are responsible. Germany and France were the first countries to break the original rules when they saw it fit a decade ago. Others want a banking union and eurobonds to share the debt. The UK and some other countries aren’t too keen on more integration. A two-speed Europe seems to be the solution, but it will not be easy.

There are probably more issues. We can expect a statement declaring a commitment to work together to solve the issues – something similar to the G-20 statement – nice words without real content behind it.

The summit will have a strong impact on the euro, but also on other currencies. In the most probable scenario, optimism will rise towards the event, boosting the the euro, pound the commodity currencies (AUD, NZD, CAD) while the “safe haven” currencies will likely fall.

Upon a failure, the picture will reverse, with flows towards the “safe haven” camp. In the hopeful yet unlikely event of a success in the summit, the risk camp is expected to gain.

Further reading: EUR/USD Weekly Forecast.