Eurozone
FX
Yet, if a new crisis erupts, depositors in larger periphery economies might well remind themselves that the EU was willing to sacrifice those principles for the relatively small amount necessary to bail out Cyprus depositors. At least they will suspect a potential freezing of accounts, a threat which is sufficient to provoke a pre-emptive bank run.
Dormant Europe needs a wake- up call
subject to considerable restrictions. Large deposits are virtually blocked. Such “administrative” measures are allowed on “grounds of public policy or public security” under article 65 of the EU treaty. Yet, they de facto imply the constitution of a secondary league “frozen” euro alongside the primary league “freely circulating” euro. Te bail-out agreement explicitly justifies them in light of the “present unique
and exceptional situation of Cyprus financial sector” and stresses their temporary character. I am afraid some of these measures will remain in place for the next coming years. Over the past years bank deposits have already suffered significant erosion in Greece and Spain. It is true that the new bail- out agreement now explicitly stresses that the safeguarding of small deposits is “in accordance with EU principles”.
Growth in Europe has been lagging growth in the United States. Over the last months we have also seen a growing divergence between the confidence and growth indicators of Europe and the United States. Lately the crucial German IFO confidence stopped its upward trend.
indicator
A too complacent Europe should now remedy against this negative growth trajectory and immediately act against a further and massive erosion of confidence in the periphery economies. Tere are two ways to do that. First, it should somehow relax the austerity targets under the Fiscal Compact, something that is already happening. Second, it should accelerate the constitution of an effective banking union, with fully-fledged common bank resolution and depositary insurance schemes. Alas, further meaningful steps in this direction are unlikely to be taken before the German elections in September, exposing the continent to a risky game, and potentially higher future bail-out costs. In the meanwhile I remain bullish on the US dollar.
Sourse: Thomson Reuters Datastream Luciano Jannelli FX TRADER MAGAZINE April - June 2013 11
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