The press conference between Merkel and Sarkozy did mention Eurobonds, but not in the way that some people would have liked them to. Merkel seemed to reject them outright saying they wouldn't help with the current problems of the Eurozone (ie, reducing current debt levels), however, Sarkozy was slightly more sanguine saying that euro bonds would be the final stage of integration and could be on the table for negotiation one day - although not today....
The euro is slightly higher, but since European markets are closed we won't know the impact on stocks until tomorrow. The banking sector could be hit after it was announced that a new financial transaction tax would be proposed by France and Germany In September with strong backing from Germany in particular. This suggests that Germany and France won't help the banks' without charging them to do it.
Likewise, the two most important leaders of the currency bloc will not allow bailed out countries to get off scot free. It plans to standardise corporate tax rates - a blow to Ireland's low rate, which has been a major consternation for France and Germany in recent months.
Debt levels are going to be set in law and France and Germany will have a debt brake - whether or not this means that Germany and France will be able to control other countries' debt levels we don't know, but this conference is likely to increase chatter that there is increasingly becoming a two-tier political economy in the Eurozone with France and Germany firmly at the top.
Overall, today's meeting produced nothing. There are no Eurobonds and no increase in size of the EFS - which could be more negative for the markets in the short-term. Europe's leaders are heaping the pressure on the ECB to continue buying up sovereign debt. The markets are likely to be highly underwhelmed and this could heap pressure on the markets tomorrow.
The only thing we do know is that Sarkozy and Merkel aren't willing to ditch the Eurozone and let the peripheral nations drown just yet.
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Kathleen Brooks| Research Director UK EMEA | FOREX.com
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