Yesterday evening, German Chancellor Angela Merkel and French President Nicolas Sarkozy announced plans to strengthen economic governance across the Eurozone.
This follows a widely-anticipated summit earlier in the day, in response to the ongoing turbulence across European bond markets.
Inevitably, the details of what they agreed are sketchy so far, and much will depend on the contents of the small print, which is likely to be released in the coming weeks. Markets are likely to focus in particular on the proposals for an EU-wide tax on financial transactions - a so-called "Tobin tax" - attractive to governments looking to raise revenue and dampen down market speculation, but potentially reducing Europe's competitiveness versus other global financial centres.
It was disappointing to see that there were no pledges to reinforce the European Financial Stability Fund, or to consider the introduction of Eurozone bonds. This is what markets were really hoping to hear, although investors may have been a little optimistic in expecting progress on this issue to be rapid. One point of interest is that President Sarkozy did not rule Eurozone bonds out entirely, but "at the end of the process of integration of the Eurozone, not at the beginning".
Plans to facilitate fiscal integration across the Eurozone will need to be studied once the full details have been released. A requirement to make balanced budgets a constitutional requirement could have teeth, but any changes would need to be agreed by the other Eurozone members, and investors are likely to be sceptical given the problems which have come to light with application of the Maastricht criteria when the Eurozone was formed.
While there are some areas of interest, the Sarkozy-Merkel plan still leaves us cautious on the prospects for European sovereign bonds. It is perhaps a step forward, but less than the market was looking for.
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