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12 May, 2010 05:57

Eurozone rescue package brings long term questions

The bold $1 trillion rescue mechanism agreed by the European Union has halted the euro slide and sent markets soaring. But euphoria has given way to longer term concerns.

After weeks of indecision that hammered the euro and sent world markets plunging, the approval of the long-awaited aid package brings more questions than answers.  On fears that Europe's debt contagion could spread beyond Greece, most investors expect a volatile summer ahead according to Chris Weafer, Chief Strategist at Uralsib.

“We could generally expect to see the euro continuing weak through this summer because partly a trillion dollars even if it's not all used certainly will add inflationary pressures in the euro region because of the massive amount of issuances involved. And at the same time the ECB will not be able to raise interest rates as quickly as they might have been planning because the economic growth in Europe is very weak, raising rates too soon could even reverse the growth rate.”

Even if it stabilizes the debt market, Europeans know this crisis is not just financial, but political. While the ECB effectively becomes Europe's Treasury, Chris Weafer says it's unclear who will enforce tight borrowing and spending controls on governments that have already shown themselves to be poor housekeepers.

“A lot of people are fearful as it could fracture Europe and cause the division between core Northern Europe and then the Mediterranean Europe where the economies are weaker and where there are more debt problems.”

However there's an optimistic scenario which sees Europe strengthening its institutions, the ECB taking a stronger role, and helping to integrate the eurozone. Right now, analysts say the chances of success and failure are closely balanced. It could be a long, hot summer for Europe.