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We’ve had a fair few days that have been characterised as ‘key’ or structurally important’ but no day in the past few years compares to how important today is for the fabric of the Eurozone. Never have I seen so many people agreed on one thing; urgent reform is needed in the Eurozone or we risk the breakup of Europe as we know it.

The meeting between EU leaders must lead to some sort of agreement today, and it is being widely reported that Merkel and Sarkozy have agreed on something overnight, or the immediate future of the euro is in dire jeopardy. While there has been some progress in the past week or so as far as different plans for the Greeks I believe the markets are glad that EU politicians have had a bit of a rocket fired up them as this has gone on long enough. You could argue that we have already seen the effect on the core that the IMF warned of, with the yields on Italian debt rising close to the 6% level. For a problem that was said to be confined to the periphery it is having a dramatic effect elsewhere.

There is talk this morning that the EU are starting to narrow options ahead of the meeting, something that should have taken place months ago, but it finally looks like the penny has dropped. It takes a lot of guts to grip the third rail, but for EU politicians, that’s where all the power is. We have heard plans about bank levies, Eurobonds, default and more. We suspect that we will hear a fair few leaks over the course of the next few hours as we move closer to the 1pm meeting.

On the news that German Chancellor Merkel and French President Sarkozy will reportedly take a joint position on issues at today’s Eurozone leader’s summit, following lengthy preliminary talks in Berlin the euro has surged higher in the Asian session however equities remained flat as traders will prefer to wait and see given the risks associated with today’s events.

While GBPEUR has fallen as we’ve moved through the week as we expected it was not as a result of the Bank of England minutes yesterday that were not as dovish as had been expected. There was no further mention of an extension to the quantitative easing plan but instead a reiteration that inflation in the UK remains elevated and that CPI is likely to push through the 5% level if commodity prices remain buoyant. This did give GBP some backbone but the European exuberance has seen GBPEUR fall lower.

This may continue today if we see a poor retail sales number from the UK at 09.30. Overnight consumer confidence was shown to have risen in the UK but we doubt this will have fed through to the retail sector as tough trading conditions remain on the High St. We are of the belief that we will see a bounce-back to positive figures from the 1.4% fall seen in May but only by 0.4% and not the 0.7% the market is hoping for.

As for the European Summit, European Commission President Barroso said it best as to what is needed from the assembled leaders today. Clarity is needed on 1) measures to ensure the sustainability of Greek public finances, 2) the feasibility and limits of private sector involvement, 3) the scope for more flexible action through the European Financial Stability Fund, 4) repair of the banking sector, and 5) measures to ensure liquidity provision to the banks. Without these we have containment and not cure and a cure is what is needed for Europe. Rome wasn’t built in a  day and unfortunately we doubt that Europe will be rebuilt in an afternoon.   

Latest exchange rates at time of writing