Tags: Pimco | El-Erian | EU | Treaty

Pimco’s El-Erian: EU Treaty Good but Not Great

Monday, 12 Dec 2011 07:50 AM

The treaty signed by almost all European Union members to agree on greater fiscal coordination is a step in the right in the direction to ending the debt crisis there but not a leap in the right direction the continent needs, says Mohamed El-Erian, CEO of Pimco, the world's largest bond fund.

At a recent summit, 26 of 27 European Union countries pledged greater fiscal coordination, with Britain holding out on the argument the treaty was bad for its financial markets.

Now, policymakers are left with the task of turning treaty pledges into reality while creating jobs and growth at the same time, which the pact really doesn't address.
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"Additional tensions are likely to surface as leaders return to their domestic constituencies and, importantly, as the summit's broad agreements get translated into specifics. This is not only about stress between the 17 eurozone countries and the 10 other members of the European Union (such as Britain) that are not members of the zone. It is also about frictions within each group," El-Erian writes in a CNBC guest blog.

MohamedEl-Erian200ap-.jpg
Mohamed El-Erian
(Associated Press photo)
"European leaders still need to do a lot more, and quickly, if they are to catch up and get ahead of the crisis. Accordingly, and regrettably, the specter of volatility caused by European headlines will not recede for long. Investors need to continue to watch and worry about Europe,"
El-Erian writes.

The European Central Bank, meanwhile, has said it won't step up buying debt held but debt-ridden European countries such as Italy or Greece, in that such moves go against its mandate and only pressure inflation rates up by flooding the financial system with money.

While the treaty does address longer-term problems with the European economy, many want the ECB to step in an pout out the fire for now.

However, the ECB did recently cut benchmark lending rates to a record low 1.0 percent.

"One step forward, two steps back," says Alan Clarke, economist at Scotia Capital, according to Reuters.

"The ECB thought it was helping out by cutting interest rates and providing longer term liquidity measures. So far so good."

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The treaty signed by almost all European Union members to agree on greater fiscal coordination is a step in the right in the direction to ending the debt crisis there but not a leap in the right direction the continent needs, says Mohamed El-Erian, CEO of Pimco, the world's...
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