Stage set for Hollande-Merkel showdown

European leaders will try to breathe life into their stricken economies at a summit over dinner on Wednesday, but disagreement over a plan for mutual bond issuance and other measures to alleviate two years of debt turmoil has already been laid bare.

For the first time in more than two years of debt-crisis meetings, the leaders of France and Germany have not huddled beforehand to agree positions, marking a significant shift in the Franco-German axis which has traditionally driven European policymaking.

Instead, new French President Francois Hollande will meet Spanish Prime Minister Mariano Rajoy in Paris to discuss policy, before the pair travel to Brussels for the 1800 GMT summit, where minds will be focused by the prospect of Greece exiting the currency area.

Germany’s Bundesbank said the situation in Greece was “extremely worrying” and it was jeopardizing any further financial aid by threatening not to implement reforms agreed as part of its two bailouts.

It said a euro exit would pose “considerable but manageable” challenges for its European partners.

Despite fears Greeks could open the exit door if they vote for anti-bailout parties at a June 17 election, Spain, where the economy is in recession and the banking system is in need of restructuring, is at the frontline of the crisis, with concerns growing that it too could need bailing out.

Hollande’s election victory has significantly changed the terms of the debate in Europe, with his call for greater emphasis on growth rather than debt-cutting now a rallying cry for other leaders.

That has set up a showdown with German Chancellor Angela Merkel, who supports growth but whose primary objective is budget austerity and structural reform. While she and former French president Nicolas Sarkozy did not always see eye-to-eye, in Hollande she is faced by someone with a different vision.

Reuters

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell