What's going on?
The leaders of major European countries met on Friday for a weekend of high-stakes negotiations over an almost $900 billion eurozone rescue package.
What does this mean?
Ever since the European Union (EU) first floated the idea of raising $850 billion to invest in the hardest-hit eurozone industries and countries, investors in the region have been pretty optimistic. Two key European stock indexes have risen 9% and 16%, and investors have bought up even the riskiest of European countries’ bonds.
But they may have overplayed their hands: as of Friday, the EU still hadn’t decided exactly how much to borrow, how and where to distribute the cash, and precisely who’s on the hook to repay it. In fact, the Dutch prime minister said there’s a 50% chance no deal will be struck anytime soon, and the German and French leaders think a deal by the end of the month is more likely than one this week.
Why should I care?
The bigger picture: EU are not alone.
The US government has been caught up in its own negotiations across the pond. It now seems likely to go ahead with an economic support package worth at least $1 trillion, but not everyone’s convinced that including a mooted payroll tax cut would particularly benefit the economy. Paying less tax on your salary is great, sure, but it won’t do much to help the 40 million jobless Americans who don’t have a salary any more…
For markets: Do something. Anything.
The European Central Bank (ECB) decided against increasing its economic support for the eurozone last week, but it encouraged the EU to move forward with steps of its own. An ECB survey of eurozone banks found that most were planning to reduce their loans to companies over the summer because they were worried government loan guarantee schemes would be coming to an end. The EU, then, might need to support the region in another way: by buying shares in small firms to give them a cash injection without interest payments weighing on their profits.