A Big Week In Europe Begins; Here's The Latest on Plans To Resolve the Crisis

Europe’s sovereign debt crisis remains front-and-center at the present time with EU leaders scrambling to come up with a plan to put a halt to the credit contagion that is sweeping through the region.

It is now widely expected that the ECB will follow through on recent hints and step up its response to the Eurozone sovereign debt crisis this week. The FT said Monday that the central bank is likely to announce new measures to prevent a deepening of the current credit crunch at Thursday's meeting.

In addition, the London Times reported Sunday that ECB President Mario Draghi is said to be working on a plan which could pave the way for a major market intervention in European sovereign bonds.

In keeping with market rumors and expectations, the Times report indicates the plan would be executed only in the event that Europe’s leaders reach agreement this week on fiscal reforms such as strict budget controls as well as enforcement measures for states breaking budget rules.

According to a Times source, the details of an expanded role for the ECB in controlling the crisis could be unveiled at its regularly scheduled policy meeting set for Thursday.

In a separate report out of Germany, Die Welt wrote that sources indicate that the U.S. Federal Reserve, along the 17 euro zone national central banks, may provide the IMF with funds that could be used to aid debt-ridden states.

Die Welt cited sources close to the negotiations as saying the euro zone central banks could pay at least €100 Billion into a special fund that could be used for programs for nations struggling to control their debts.

However, Bloomberg reported Monday that Eurozone central banks may channel as much as € 200 Billion through the IMF to help combat the debt crisis. The report indicates that Eurozone finance ministers gave the go-ahead for the plan at their recent meeting.

The key to the ECB taking on a larger role in the crisis is the creation of a “fiscal compact.” However, leaders of France and Germany remain divided on how best to accomplish the new agreement. French President Nicolas Sarkozy and German Chancellor Angela Merkel are meeting Monday in an effort to agree on a plan to impose greater budgetary discipline in the Eurozone.

The WSJ reports that recent speeches by Merkel and Sarkozy showed how divided the German and France plans remain. The article noted that while Germany and France agree on the inadequacy of the EU's current governance structure and the need for treaty changes to help enforce new fiscal discipline, they remain far apart on how this should be achieved.

Merkel has reiterated Germany's position that oversight of fiscal rules should be handed over to a governing body such as the European Commission, which would have the power to veto any budget expenditures for states that violate EU rules.

Meanwhile, Sarkozy, who is just five months away from a presidential election, has argued that fiscal discipline should be enforced by intergovernmental arrangements and that Germany’s plan would erode the sovereignty of member states.

The markets will obviously be listening intently for any and all comments made by “Team Merkozy” today and hoping for a quick resolution.

 

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