Reply #15: Structural reforms and budget austerity remain a key attention point [View All]

[Ghost Dog]

Notably, the euro failed to join in the party as an early surge back above the $1.30 level faded away. Inter-bank lending rate risk also did not diminish, with the 3-month US Libor spread remaining elevated at 42bp.

“The EU package will have a lasting positive impact on risk appetite, but will do no more than pad the euro downside against a sharp collapse, rather than turn it around,” warned Alan Ruskin, chief currency strategist at RBS.

“This is a monetary union that looks hopelessly compromised by real divergences that will give long-term players, notably foreign central banks and sovereign wealth funds, pause for thought when considering reserve alternatives to the dollar.”

Elwin de Groot, economist at Rabobank, said the measures failed to address the heart of the eurozone’s problems: high government deficits and debt.

“Neither do they solve the underlying long-term problem of insufficient competitiveness in certain member states,” he said.

“This implies that structural reforms and budget austerity will remain a key attention point. Additional austerity measures will only add to uncertainty with respect to the economic outlook.”

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Germany backs euro package as markets sober up

By Andreas Rinke and George Matlock

BERLIN/LONDON, May 11 (Reuters) - Germany's cabinet approved the biggest national contribution to a $1 trillion emergency rescue package intended to stabilise the euro as global markets sobered up after Monday's euphoria.

Relief at the European Union's bold move to restore investor confidence gave way on Tuesday to doubts about whether weaker euro zone economies can meet their part of the bargain and deliver drastic debt cuts, driving the euro and stocks lower.

The 16-nation single currency, which surged above $1.30 early on Monday, slipped below $1.27 as traders weighed debt worries and a perceived blow to the European Central Bank's independence in its weekend policy reversal to start buying euro zone government bonds.

The emergency plan -- the biggest since G20 leaders threw money at the global economy following the collapse of Lehman Brothers in 2008 -- wowed markets with its sheer size and sparked a spectacular rally in world stocks and the euro.

Yet stock and bond markets turned cautious when they reopened for business in Asia and Europe on Tuesday, with investors concerned that the plan was not a long-term solution to problems plaguing the 11-year old single currency area.

EU Economic and Monetary Affairs Commissioner Olli Rehn raised pressure on Italy, which has the euro zone's highest debt after Greece as a proportion of national output, and France, which has a heavy structural budget deficit, to do more quickly to improve their public finances.

/.. http://www.finanznachrichten.de/nachrichten-2010-05/16868121-topwrap-2-germany-backs-euro-package-as-markets-sober-up-020.htm