Last week’s EU leaders’ summit was a limited success, with 26 of the 27 nations signing up for closer integration. The only nation not to sign up was the UK.
The markets were initially pleased with the results but they later realised that the underlying funding pressures were not properly addressed. In particular, the markets were expecting, among other things, the setting up of firewalls around solvent countries that are experiencing funding difficulties, such as Italy and Spain, and some form of agreement for the joint issue of bonds by all EU countries, known as eurobonds.
The fact that the summit did not address these issues had a negative impact on equity prices and on the euro, which slipped close to its lowest point for the year against the US dollar.
In addition, yields on euro area peripheral government bonds were pushed higher, a clear message that the summit did not succeed in convincing market participants.
On a positive note, while other European countries struggle with the debt crisis, the German economy is showing signs of resilience.
The ZEW survey, an indicator of investors’ and analysts’ expectations, rose unexpectedly for the first time in 10 months in December. This may signal that Europe’s largest economy is weathering the euro debt crisis.
The index increased from -55.2 in November, a three-year low, to -53.8 in December. Economists polled by a Bloomberg News survey had forecast a drop to -55.8. The ZEW survey is a forward-looking indicator which aims to predict economic developments six months in advance.
Finally, in the US, the Federal Open Market Committee (FOMC) kept its benchmark interest rates on hold at record lows and did not announce a third round of bond buying to boost the economy (known as quantitative easing).
This was to be expected as there are signs of improvement in some US statistics that show that growth may be picking up in the world’s largest economy.
In its statement after the meeting, the FOMC said: “The economy has been expanding moderately, notwithstanding some apparent slowing in global growth”.
This article was compiled by Bank of Valletta plc for general information purposes only.