That's when EU leaders meet for their next big summit in Brussels. Investors and journalists appear convinced that this meeting will be a make-it-or-break-it moment for the euro area, and for three good reasons:
- Rising German bond yields
- The fragility of France's credit rating
- The impending disbursement of the next tranche of Greek aid
- If EU leaders are going to embrace radical action now is the time to do it.
The eurozone crisis is clearly infecting the core, with Germany, France, and Belgium feeling the heat of rising bond yields. That was probably some of the biggest news to come out lately; it suggests that the crisis is putting even German credit at risk.
We're continuing to see positive German economic data—like the drop in unemployment to 5.5% in October. But even the slight effect the crisis has had on rising sovereign yields (not to mention common sense) suggests that if euro area economy continues to deteriorate it's really just a matter of time until data beats become misses.
Next, speculation that France's sovereign credit rating is up in the air has turned into a real threat. In the last week, all three of the major ratings agencies have reiterated warnings that the country's AAA is on shaky ground and, again, it's only a matter of time before this fear materializes. If they lose the triple A, then the euro area may no longer be able to bail itself out.
The next $11 billion in troika aid waits for a vote in the Greek Parliament on the country's 2012 budget. Likely, disbursement wouldn't take place until after the summit, so this is essentially EU leaders' last chance to throw Greece to the dogs. If their fiscal compact entails kicking a country or two out of the currency (Greece and Portugal would probably top that list), this is their last chance not to waste taxpayer money on another round of aid for Greece.
Even so, expectations that EU leaders will live up to the kind of endgame that investors are talking about is probably overblown. German Chancellor Angela Merkel spat on those hopes today when she likened the crisis to a marathon, saying that will come after "years of difficulties," not a "single effective blow." Germany has time and again opposed ECB intervention or eurobonds without substantial change—the kind of change that would only come with revisions to its Constitution, and at the end of the day any decision in the EU will require Germany to be on board.
More than anything, markets are looking for a long-term commitment to fixing the crisis and tackling the problems at its core. Instead of a quick fix, we'll probably see a long-term outline of the measures leaders are going to pass and the criteria for an expansion of the ECB's powers in the medium term. Markets will gauge their reaction upon how credible this plan is, and how far it goes towards truly resolving the problems of the EU currency union.
