The morning started with abysmal growth numbers coming out of Western Europe. But, there was a hint of hope as Germany and France sat down to work on solidifying an approach to dealing with the European sovereign crisis.
Nicolas Sarkozy and Angela Merkel emerged from their meeting this afternoon… and the markets saw their shadow.
The new initiatives they announced were poorly accepted, by banks in particular. Below is a summary of their conclusions:
- There will be no immediate plans to issue joint Euro bonds. Merkel called the idea of a Euro bond the “last resort.” The market was hoping for greater acceptance of the Euro bond idea, and the lack of support was a source of disappointment.
- They announced that the EFSF bailout fund (44o billion Euro) was sufficient to handle Europe’s sovereign debt problems. They may be the only two people on the planet who believe that.
- They floated the idea of a financial transaction tax to help raise “revenue.” A new tax… how very European.
- They promoted the idea of a common Economic Governance Institution. Huh?
It seems the decision-makers in Europe remain content tinkering on the margin until things escalate to the point where emergency action is required. This pattern has dominated since the sovereign crisis began. Hopefully the crisis won’t spread to the banking system while we wait.
In the short-term, the idea of a financial transaction tax could have a very negative impact on their markets. Historically (and logically) transaction taxes are met with market sell-offs. Another example of the “Law of Unintended Consequences” being applied.