German chancellor Angela Merkel and French president Nicolas Sarkozy concluded their summit in Paris with many ideas, but they strictly rejected the idea of eurobonds – a solution that many hoped for. EUR/USD challenged resistance before the summit and is now falling back.
What did the leaders announce? The idea of a euro-area of government was on the agenda. In Trichet’s vision, there is a European finance ministry. This will definitely take time. A more practical proposal is a financial transactions tax. Proposals will be be set next month.
Regarding long term deficit reduciton, Sarkozy and Merkel discussed putting it in the constitutions of member countries. This is also somewhat futuristic.
In the short and medium terms, the ECB is the only factor that has the means to act. It already spent 22 billion euros on a successful stabilization of Italy and Spain. More will probably be needed, and perhaps the ECB will not be able to drain the money out of the markets.
In the long run, plans to cut deficits but to allow for growth are essential. Currently, even Germany is hardly growing. France saw 0% growth in Q2 2011.
EUR/USD is now around the 1.44 line. Just before the leaders came out to the press, it managed to rise above the strong line of 1.4450, for the second time this week. Yet again, this proved to be false break. Support is at 1.4325, followed by 1.4282. Resistance above 1.4450 is at 1.4550.
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