Is federalism in Europe possible?

Is federalism in Europe possible?

Good morning and welcome to today’s foreign exchange market commentary on Thursday, the 6th of September.

As the ECB gets ready for more monetary and banking union, the question being asked is whether the Eurozone is heading towards a Unites States of Europe and voyaging into uncharted territory? Or are the member nations drifting apart?

The USA has long been a model for the EU’s founders, most importantly for the creation of a single currency and a unified market. The other benefits of federalism including closely integrated markets for labour and capital, a federal budget that compensates economic stress of member states automatically, a federal govt. that assumes all major risks and not just those emanating from the banking sector, were pushed to the back-burner. This is where the trouble begun.

In the absence of a federal budget, the EU’s budget never really grew and continues to be at a level it was 30 years ago; i.e. at one percent of GDP. In the US, federal public spending grew in the twentieth century whereas national spending was already high when Europe started to integrate. Federal spending could have succeeded through national transfer programs, which unfortunately, were resisted through out Europe.

Unlike in America, national parliaments are increasingly calling the shots in Europe. Because there’s no federal government with own resources and assistance depends on pooling of resources by the member states, creditor states demand more authority over their neighbours, curtailing sovereignty in exchange for solidarity. Rather than bringing the members closer, currency unification has thus pushed members apart.

CURRENCY RATES OVERVIEW

GBP/EURO – 1.2608
GBP/US$ – 1.5896
GBP/CHF – 1.5191
GBP/CAN$ – 1.5749
GBP/AUS$ – 1.5546
GBP/ZAR – 13.3472
GBP/JPY – 124.70
GBP/HKD – 12.3391
GBP/NZD – 1.9961
GBP/SEK – 10.6871

EUR: The single currency continued its forward march yesterday after a Bloomberg report quoted a senior European Central Bank member saying Mario Draghi is due to announce plans to embark on an unlimited sovereign bond purchase program. The EUR/USD breached the 1.2600 handle to hit an intraday high of 1.2670, but gave away much of its gains to finish the day at 1.2608. The central bank will embark on a bond buying spree with maturities in the 1-3 year area that will be sterilised later. Sterilisation is the process of reducing monetary reserve from other areas of the financial system to control excess money supply. The single-currency’s movement will depend after the details of the program are announced officially. The ECB may also announce a policy rate cut to 0.5 percent from the current 0.75 percent, providing further boost to the euro. The GBP/EUR pair opens at 1.2613 this morning.

USD: The greenback slumped to a 3-1/2 month low against the pound yesterday following media reports that the ECB is due to announce an open-ended bond purchase program today to cap Spanish and Italian borrowing costs. Cable rose to 1.5933 against the USD, its highest since middle of May, despite the lack of any tier 1 economic data yesterday. Markets will stay focused on today’s ECB Governing Council meeting and the associated press conference and the Bank of England’s MPC meeting may well turn out to be a non-event. The BoE is unlikely to announce any policy shift today, especially after the strong services PMI reading earlier this week. The GBP/USD pair may rally further in the event of Draghi’s favourable announcement today. We also have the ADP report for US jobs number today along with the non-manufacturing ISM data to look forward to. The GBP/USD pair opens at 1.5905 this morning.

Have a great day!

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