Hopes that the entire 27 member nations of the European Union could be convinced to ratify the treaty changes proposed by German Chancellor Angela Merkel and French President Nicolas Sarkozy were dashed Friday when Great Britain refused to sign on. However, news that the member states of the eurozone intended to press forward with the pact helped markets make gains today.
Britain Uses Veto
European leaders went through marathon negotiations that lasted through the night in hopes of finding a compromise that would allow the European Union to move forward with a new fiscal pact that would bolster the confidence of lenders. The initial plan to amend the EU treaty to include stricter new rules on budgetary discipline and require member nations to cede some sovereignty to a central European authority was nixed after British Prime Minister David Cameron refused to sign on to the deal and exercised Britain’s right to veto any potential changes. The deal, though, will still be implemented through an agreement by the 17 eurozone member nations. Tensions ran high, with Sarkozy expressing his dissatisfaction with Cameron’s hold-out and veto. “If you want to be able to opt-out, to not be in the euro but participate in all decisions of the euro . . . and on top of that criticize it, that’s not possible,” Sarkozy said. Cameron, though, was unapologetic for acting in what he saw as Britain’s interests. “We’re not in the euro and I’m glad we’re not in the euro,” said Cameron to reporters early Friday morning. “We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.”
New Framework Provides Path Forward, Markets React
The new deal calls for all eurozone members to run balanced budgets, with nations running annual “structural” deficits of no more than 0.5 percent of GDP with a concession for a temporary increase to 3 percent of GDP during tough economic times. What’s more, leaders agreed to make another $267 billion in funds available to the IMF through bilateral loans to lend out to troubled members of the eurozone. European nations are trying to avoid a financial meltdown that would most likely send the continent’s economy into a downward spiral of recession. Taken all together, markets responded positively to the new agreement despite nagging questions about some of its details. The Dow Jones was up almost 1.5 percent in early trading, with the S&P and Nasdaq both up over 1.6 percent. While the jump showed optimism, the relatively modest gains may indicate that investors are optimistic but still measured in their decisions as yields on Italian and Spanish bonds rose and the cost for insuring that debt also increased. The euro rose to $1.3389 in midday trading from $1.3340 late Thursday.
Leading the charge were the usual suspects: major financial institutions. Only yesterday most of the major European banks were on the decline after Mario Draghi made comments that the European Central Bank (ECB) would not be engaging in an aggressive bond-buying program. Well, with an easing of tensions caused by the new agreement, many of the very same banks saw gains that offset most of yesterday’s losses. Royal Bank of Scotland (RBS) gained just over 6.3 percent. Barclays (BCS) was up almost 6.75 percent, Lloyds Banking Group (LYG) jumped almost 6.5 percent, Deutsche Bank (DB) leapt about 6.5 percent, and Credit Suisse (CS) gained over 4.25 percent. American lenders with exposure to European debt were also beneficiaries of the framework for a new agreement. Morgan Stanley (MS) gained over 3.25 percent, Citigroup (C) was up over 4.5 percent, and embattled Bank of America (BAC) gained almost 3 percent.
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