Tuesday, June 5, 2012

Germany Trying to Have its Cake and Eat it too?

Its funny how quickly things change when we talk about money.  For months, mention of fiscal integration or Euro Bonds was quickly met with a “yeah right, we aren’t guaranteeing anyone’s loans” from Germany.  Their stance made sense as they had already committed billions towards EU bailouts and funding and the last thing they wanted to do was guarantee debt for their fellow spend happy EU brothers.  Just the thought of backing it would probably end German Chancellor Angela Merkel’s leadership, along with many in her ruling party.

But along comes Spain, whose banks are falling apart and gets rejected from the ECB in its recapitalization hopes.  This leads the EU commission to form a banking union imitative where the biggest banks in the EU would be governed by an overall EU body to ensure their balance sheets are up to speed. After a central oversight committee was in place, EU countries would than work together to offer guarantees on deposits to prevent bank runs and raise investor ease. This initiative was then backed by ECB President Mario Draghi in his Speech to the EU Parliament.  However, Draghi didn’t go as far to say that the bolstered Banking Union would than be able to count on the ECB for future funding.  As expected, Spain was quick to back the EU Commissions plans.  But the real surprise has been Germany.

Since last week, Angela Merkel has stated publically that she would welcome an integrated Banking Union that would set policy for the EU’s top banks.  On the surface, Germany’s remarks fit with their previous statements that they want to see the region apply further budget cuts and fiscal responsibility.  On this note, greater oversight on the EU’s banks would fit Germany’s desires.  However, by pushing ahead positive comments towards the endeavor, Germany is also realizing that it will need to be involved with the insuring of cross border deposits.  So far though, Merkel and her government have been careful not to commit any financial pledges as of yet.

As such, the question now is whether Germany will really play along with the EU Comission’s plan or are they simply using it to enforce sweeping changes on the rest of the EU’s financial system.  When Merkel stated to reporters "We will discuss to what extent we need to put systemically relevant banks under a specific European supervisory authority so that national interests do not play such a large role," did she mean to include Greek, Spanish and Italian banks as relevant or not?

Depending on how these questions get answered, after sifting through Germany’s seemingly pro-banking union statements, it appears that they really just want to “Have their Cake and Eat it too.”

For Forex traders, the proposed banking union and upcoming EU Summit in late June is expected to be the leading driver of the Euro.  As such, if the understandings and positive initial discussions between German and Spanish leaders fail to lead to anything concrete focus among traders will be expected to move away from hope of an EU solution and back towards Spain and Italy.  Such a scenario could lead the EURUSD back towards 1.2000 and the past few days of Euro gains will become a distant memory.

On the other hand, as seen by how quickly Forex traders were willing to jump back into the EURUSD on any positive EU developments, if the market gets the feeling that this month’s Summit will actually lead to a policy to save Spanish banks and likewise Italy’s in the future, we could very easily see a meaningful flow of funds back into the EURUSD and an end of its three month downtrend.

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