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Week Ahead: ways the eurozone could be fixed

We preview the main financial events of the coming week, when a key European leaders' summit is being held.

Week Ahead: ways the eurozone could be fixed

There are so many things that could be done to fix Europe. Ahead of the summit of European leaders on Thursday and Friday – the talking shop that has raised so many hopes for a resolution to the eurozone crisis – here is a run-down of the options on the table:

1. Banking union (creating of a centralised regulator, joint deposit guarantee fund, and unified liquidation scheme).

Is it likely? Concrete commitment is not expected; but long-term pledges are possible. There is uncertainty about whether EU treaties would need to be changed. Some of German chancellor Angela Merkel’s allies have rejected the idea.

2. The launch of eurobonds, communising nations’ debt, AKA fiscal union.

Is it likely? Likely to be discussed and popular with the French, Italians and Spanish. But German opposition to this idea has been strong.

3. A watered down version of eurobonds: eurobills or a ‘European Redemption Fund’

Is it likely? Merkel is said to have dropped her earlier opposition to the plan for a ‘Redemption Fund’ for eurozone members to mutualise debt over 60% of GDP – and jointly guarantee it. ‘Crucially, both eurobills and the ERF may get round the requirement for European treaty change and be acceptable to Germany’s constitutional court,’ wrote Steven Major of HSBC recently. Societe Generale analysts say this could be a ‘game-changer’.

4. The use of the ESFS/ESM rescue funds (the latter of which is yet to be actually ratified by all eurozone members – a German court may stand in the way) to buy government bonds from Spain and Italy, keeping yields down

Is it likely? This was proposed at the G20 summit of leaders in Mexico this week. But there are doubts over whether the plan will get support from leaders including Merkel, or whether the bailout funds are even big enough to carry out the plan. EU commission spokesman Amadeu Altafaj Tardio has described the plan as ‘financial paracetamol’, not tackling the root problems.

5. More growth measures to offset the strict austerity diet

Is it likely? This is the most likely outcome of the summit. Press reports suggest leaders will sign ‘a compact for growth and jobs’. Italian PM Mario Monti said on Friday afternoon, after a meeting with his German, Spanish and French counterparts, that the four want a growth package worth €130 billion. And Greece’s new coalition government may try its hand at starting re-negotiations over its bailout programme.

6. Serious action from the European Central Bank (ECB) to re-launch LTRO (the cheap long-term bank lending scheme), renew sovereign bond purchases through its SMP scheme, or become a lender of last resort. Or at least cut rates.

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19 comments so far. Why not have your say?


Jun 22, 2012 at 18:10

and the dance in the burning building continues. Bance macabre?

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Jun 22, 2012 at 18:11

Oops, Bance = Dance

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Jun 22, 2012 at 18:32

I think the Spike Milligan poem is more appropriate:

"The boy stood on the burning deck

Whence all but he had fled

.... Twit

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Robert Court

Jun 24, 2012 at 10:33

'All the world's a stage and the bankers merely players.' (producers? directors?)

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Robert Court

Jun 24, 2012 at 10:46

It's just a game of 'pass the parcel' musical chair style..... when the music stops and you're left holding the parcel you're out of the game/euro/whatever!

Or is it just a game of creating and consuming wealth?

Is the secret is to always persuade others to consume the wealth you've created while you let your little pot of gold grow and grow so that you can benefit in the future?

I believe massive inflation is the only possible outcome; those who have nothing lose nothing. Those who have wealth but can't keep pace with inflation shall see their wealth eroded and redistributed (even if they make use of tax avoidance schemes).

Printing money when wealth has NOT been created can only lead to inflation and that is what is happening in the USA and the UK and would be happening more in the EU to reduce the value of debt if only they could find a way to devalue any wealth ordinary hard working people have saved over a lifetime.

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Geoff Downs

Jun 24, 2012 at 13:36

Sorry but I can't see inflation. To create inflation Bankers would have to lend more to borrowers, I don't think that can continue forever. Secondly any free money given to the public would be used to repay existing debt in most cases.

With spending constrained prices cannot rise.

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Jun 24, 2012 at 17:28

Geoff Downs

Britain already has a trade deficit c £100bn a year. Inflaton comes when our trading partners won't give us $1.55 for each pound we sell to pay for imports - say they will only give us $1.00 - so what still costs $1 we will have to pay £1 for instead of the 65p it costs us at present. Most of the Med Euro countrise are in the same position and Investors won't end them money except at high interest rates.They cannot devalue - to make their exports more competitive and their imports more expensive to balance their trade - so investors, who see the need for devaluation , sell Spanish, etc euros before they drop out of the system - unless Germany gives/guarantees to give them lots of money.

Strange - the hard working and saving German people don't want to do that!

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smoking gun

Jun 24, 2012 at 19:33

I've been arguing for months that procrastination isn't only the thief of time it is also going to cripple several economies and all for the sake of pride (At least I'll give it the benefit of the doubt that it is not something more sinister). This whole concept of Europe was thought up years ago to safeguard German and French Industries, then it chose to introduce the Common Market (the only thing that British citizens have ever had a say in) and then European Union and then the Euro and now talk of Fiscal Unification. Do Germany and France still want to rule all of Europe or do they just not realise that different people in different countries have different attitudes to life and would be better off outside all this Euro nonsense and let those who can afford to be in the Euro be in it and release the rest from the cumbersome meess they are in because they hoped by joining the European Union and the Euro they would be getting big handouts from others. Greece, Spain Italy, Portugal and lets not forget Ireland should get out now and Britain should keep keeping its nose clean by staying out or even getting out altogether.

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Graham Barlow

Jun 25, 2012 at 09:47

I think another way out of the Euro debacle is for Germany to go back to the Deutch Mark and let the Euro float down in value against the Dollar pound y en etc , The D mark would then become another strong currency making Germany more expensive to manufacture in and would get capital flows to readjust in Europe. After all capital follows the lowest cost of production as long as production standards are high enough. German businesses would accelerate overseas(European) investment seeking the lower cost of production. In addition the lower value Euro would be a trade stimulus right across Europe and right across all businesses from Tourism to services and manufacturing, and would make Europe more competetive with China and the far east.

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Robert Court

Jun 25, 2012 at 10:14

Good comment, Graham Barlow.

Although the euro has gone down in value it is still worth far more than when introduced.

Sterling was worth > 1.50 euro compared with about 1.24 euro now.

The USD was worth more than a euro.

All long before the crisis in the eurozone over the last few years.

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an elder one

Jun 25, 2012 at 11:15

The Brits don't want the euro to work if the only solution is for Germany to rule the roost; we fought two wars to prevent that. And it can't work unless Germany is prepared to pay the cost of a Mediteranean empire; which they won't. Eventually all must come to their senses (including our own politicians); but how bad does it have to get first?

Get the book Enoch (Powell) at 100, he explains it all better than I, a mere mortal.

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an elder one

Jun 25, 2012 at 11:34

I should have added 'nor the EU either'

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Geoff Downs

Jun 25, 2012 at 12:52

Firstly Bankers and Politicians cannot buck the market. Look at Japan ( I,m repeating myself) where experts tried everything and all policies failed. Remember their stock market was at 38000 and now is under 9000. They also are still in a deflationary cycle. The real problem, virtually everywhere is debt, and that is not being dealt with.

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Jun 25, 2012 at 14:21

The European Politicians could have a thouand meetings and still not agree on a solution to this mess. It this level of procrastination that is the problem.

There should be a European wide referendum on the future of :

A. The Euro.

B. The European Parliament.

We would then have what is sadly lacking, a decision.

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an elder one

Jun 25, 2012 at 15:13

sorry! nor; neither

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smoking gun

Jun 26, 2012 at 00:26

I have to agree in principle with Graham Barlow. This is an other way to sort out the mess but irrespective of whether Germany controls the Euro or reverts to the deutch mark, there has to be at least two (three if you count sterling) different currencies as the richer countries can't keep propping up the poorer ones and as he says countries with low value currencies can more easily adapt to the economies prevailing in their own countries. After all, isn't getting a bailout with extortionate conditions (and sadly political as well as financial) very similar to getting loans with even greater conditions attached.

One thing that springs to mind is if Germany had the main power over over the Northern European currency, how would France react....? I shudder to think.

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Robert Court

Jun 26, 2012 at 07:10

smoking gun; it seems to work in the UK but if Scotland becomes independent and wants to retain the pound sterling as its currency then independence would surely be a waste of time?

Labour and living costs are lower in Wales compared with England and having a different currency just speeds up the process of identifying weakness and strength by exchange rate fluctuations; if we were all paid in gold it would worth the same universally but in poorer countries you'd pay less gold for labour and some locally produced goods.

There is nothing wrong with a common currency (whether sterling, euro, US dollar etc) as long as individuals and individual countries create the wealth to obtain it; being able to borrow 'gold' at high interest rates when your economy is up the creek and you are in no position to repay your borrowed 'gold' is a recipe for disaster.

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an elder one

Jun 26, 2012 at 20:38

If Scotland became independent and retained the pound sterling surely we would behold something like the dichotomy twix Germany and Greece. When I said Brits earlier, in fact I meant English.

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smoking gun

Jun 28, 2012 at 23:43

Where did the Scottish Independence issue creep in to this debate? I can't say whether Scotland will vote one way or the other and only once that is over can will it become an issue. What is concerning is the state of the Euro and how it is affecting not only the European Euro using countries but many others as well, including UK, at the present time ad the sooner they get it sorted out the better for everyone concerned. The initial question asked was related to how the Euro could be fixed and there have been several solutions proposed. They may not be the right solutions but they are proposals which is more than can be said for the procrastinating politicians and other clever dicks in the European government(s) who can't even agree among themselves -- and the good people of Europe including the British are paying their extortionate wages and expenses. And now we see the banks are at it again. God help us.

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