As EU leaders step blithely aside, the ECB may be forced to act, experts say

Date: Thursday 24 May 2012

The experts all agree that last night’s informal EU summit dinner provided little to no improvement to the state of the European debt crisis and the weakening economy.

"Little conclusive progress" is the apt description given by Barclays to describe the results of yesterday’s discussions with European Council President Herman Van Rompuy nonchalantly leaving things lie until (maybe) “five weeks from now” at the official summit on June 28th and 29th.

EU leaders agree at least that something needs to be done, but oddly enough seem content to leave it at that. Greece and its possible exit from the euro is something that can wait until after the elections on June 17th and then “the new Greek government will make that choice,” said the leaders in the joint statement. The leaders have also come to an agreement on the eurobonds and that is simply that they have agreed to disagree. It’s an issue also left for the next summit where it will most likely once again be left unresolved.

In any case, what the experts have clear is the damage the lack of action is causing both on markets and the economy. “Rising economic uncertainty in Europe and the lack of a policy response are proving too much for the market to handle,” writes Barclays in one report, while Commerzbank proclaims that “the growing uncertainty is poison for the economy.”

And who’s to blame? NYU economics professor Thomas Cooley told CNBC that Europe is facing three simultaneous crisis: a debt crisis, a banking crisis and a political crisis. Yet perhaps the biggest danger of all is the manner in which EU leaders are trying to manage them. “The way they are approaching solutions to it is the one that’s going to cause the most possible pain and damage to the countries on the periphery,” Cooley said.

Yet Cooley hasn’t lost all hope. “I don’t think we’ll get all the way to the unraveling of the euro system,” he commented. Along the same lines, Commerzbank feels that the European Central Bank (ECB) will surely step in if things continue to deteriorate. “If the crisis threatens to escalate again, like in the autumn of last year, the ECB will probably follow up with more three-year tenders even if it rejects this at present,” the German broker says.

In any case, while the EU leaders have made it blatantly clear that they won’t make a move for the next “five weeks”, the ECB might find itself forced to step in as soon as their next policy meeting on June 6th. Currency strategists at FXmania believe that the monetary authority will have to act in the near-term due to the deterioration in the interbank lending market.

JM

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