Europe Economy

Should You Sell Into Euro Zone Summits?

As the euro zone gears up for yet more high-level meetings about its debt crisis, a fund manager advised investors to sell European shares in the wake of the series of planned summits.

European Union Flag
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“You should sell summits and wait for markets to go down again,” Stewart Richardson, partner at RMG Wealth Management, told CNBC Tuesday.

He believes that leaders should move their focus from austerity measures towards promoting growth.

German Chancellor Angela Merkel’s latest meeting with French President Nicolas Sarkozy focused on the problems facing Greece.

They put pressure on the euro zone’s most heavily indebted nation to make a deal with creditor banks on a bond swap and avoid defaulting on its debt repayments.

The Periphery Remains in a Vicious Circle of More Austerity and Lower Growth
The Periphery Remains in a Vicious Circle of More Austerity and Lower Growth

The lack of big announcements from the meeting highlighted how much there is still to be done to solve the euro zone debt crisis, analysts told CNBC.

“It’s really only now that people are starting to see how dangerous the first quarter of 2012 can be,” Simon Derrick, chief currency strategist, BNY Mellon, said. “Both the Greece and Italy stories are right on the agenda now.”

On Monday, yields on Italian 10-year debt, a key measure of market confidence in the country’s economic future, rose above the key 7 percent level which forced smaller euro zone countries to request bailouts.

Merkel Meets Lagarde

Merkel meets IMF head Christine Lagarde Tuesday, and Italian Prime Minister Mario Monti Wednesday.

Together with Sarkozy, Merkel warned Greece on Monday that it would not get any more bailout funds if it did not reach a deal soon.

“Merkel and Sarkozy cannot be confident enough to write a big check [to help out Greece] yet,” Christian Dreger, head of macroeconomics at the DIW (German Institute for Economic Research), told CNBC.

“What’s needed are ways to get out of the crisis.”

Some analysts had predicted that thenew lending facility launched by the European Central Bank (ECB) in December, known as a long-term refinancing operation (LTRO), might help solve the crisis by increasing liquidity in the banking system.

“All the liquidity created is a palliative to the banking system, not the solution,” Richardson said. “Virtually all the money from the LTRO is back in the ECB.”

There have been calls for the ECB to act as a lender of last resort and print money to prop up the euro zone, although ECB policymakers have so far resisted this.

Dreger believes that the ECB should continue to purchase bonds from countries in an emergency when necessary, as it did last year with Italy among other countries, although only in the secondary market.

“The macroeconomic imbalance has to be resolved, not only by the deficit countries but also by surplus countries,” he said.