While recent market focus has been centred around the growing trade wars between the US and China and the US and Europe, there are other key events taking place which require consideration. The leaders of the European Union will meet later this week with the European Council meeting on Thursday and the EU summit on Friday to discuss financial reform within the eurozone.
Thursday’s European Council meeting will be primarily focused on discussing EU policy towards refugees. Migration policy has become a contentious point within the eurozone this year as member countries have been voicing their dissatisfaction with current policies. Indeed, the debate over this matter has reached such a point that Angela Merkel is seeing her leadership under threat in Germany as the CSU has given her an ultimatum over agreeing a new pan-European solution on migration by June 29th or the CSU will break the alliance with Merkel’s CDU party and leave the grand coalition.
Joint Eurozone Budget
In terms of economic issues, the most important item on the agenda is the proposed eurozone budget being floated by France and Germany. Speaking on Monday Mario Centeno, president of the Eurogroup, said that “the question is no longer if, or how we will complete the economic and monetary union. The question is when?”.
Centeno’s statement has drawn a lot of attention and much criticism from those opposed to further EU integration. Germany and France are looking to restructure public debt within the eurozone which has been labelled a “bombshell in the making” by the director general at the Treasury Department of the Italian Ministry of Economy.
In a letter addressed to Donald Tusk, head of the European Council, ahead of the June 28th – 29th summit, Centeno said “Subject to guidance from the leaders, we may work further on a possible introduction of single-limb CACs for new issuances to prevent hold-outs”.
Collective Action Clauses
CAGs refer to “collective action clauses” in sovereign bond contracts which are designed to make it simpler for government’s override any minority of investors in opposition to a proposed debt restructuring. These CAGs have been included in bonds issued in the eurozone since 2013. However, the introduction of “single limb” measures, proposed by Centeno, who simplify the process allowing for a single restricting decision to encompass all bonds.
The initial news of such an agreement was met with nerves by the market given the high level of debt in some member countries specifically the two most indebted countries, Greece and Italy, who both have public debt above 130% GDP.
The German-Franco plan calls for a crisis fighting budget for the 19 members of the single currency union aimed at reinvigorating the EU following the debt crisis and the economic shock from Brexit and the surge of support for populism across the eurozone.
Beyond these discussions the next key item on the agenda will be how the EU leaders address the escalation in trade tension between the US and the EU. Following the imposition of tariffs on steel and aluminium exports to the US, the EU responded by raising its own tariffs on a list of US goods. Subsequently, markets have been further spooked as Trump took to twitter to announce that he is considering a 20% tariff on all EU cars exported to the US. In light of this the market will be keen to hear any discussion on how the EU plans to respond to such a move.