Mohamed El-Erian, chief executive and co-chief investment officer at PIMCO, briefly responds to Tuesday’s news out of Paris.
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Judging from the press conference, France has now aligned itself with a Germany that is increasingly, and effectively, asserting itself on the Eurozone. Assuming full implementation of this joint agreement, and that is far from certain, the Eurozone that emerges down the road will be better integrated, more fiscally disciplined and, possibly, smaller in size.
The message from Germany and France is clear: progress towards budget balance and better economic governance must come before additional cheque writings, Eurobonds and other financial engineering aimed at bailing out profligate peripheral economies.
It is not surprising that Germany is pushing this line. The fact that France is endorsing it so strongly is much more of a surprise. I suspect it reflects the loud alarm bells associated with last week’s market debacle.
Peripheral economies will not be thrilled with this outcome. They must now press ahead even more forcefully with fiscal austerity, and they will be asked to adhere to a “golden rule” that would hardwire stronger fiscal discipline.
With so many markets having priced in more German cheque writing, equity markets will likely come under immediate pressure, German and US bonds will likely rally initially, and peripheral credit spreads will likely widen.
Related link:
Eurobonds – not now but not never – FT Alphaville