Why expectations for the E.U. summit are low

Expectations for the latest euro zone summit in Brussels on Thursday range from low to very low. No one expects it to solve Europe's problems. And perhaps that's because everyone's seen what happened at previous euro summits.

Joe Weisenthal brings us this grim chart from JPMorgan, which shows that the bond markets tend to get jubilant going into big euro zone summits — and then, once the meeting's over and it's clear that nothing's been resolved, the markets panic again:

That line shows the change in the difference in borrowing costs between the troubled "periphery countries" — Greece, Portugal, Ireland, Italy, Spain — and Germany. When it goes up, it means that those countries are paying even more to borrow money than Germany is, a key sign that the euro zone is threatening to rip apart. As we can see, the spread calms down in the days leading up to the important European summits and then quickly climbs higher and higher afterward.

And it'll be interesting to see how the graph responds to this week's summit. As the FT's Peter Siegel reports, one key question at Brussels will be whether euro zone leaders should deal with this short-term issue of borrowing costs — focus on that worrisome graph above, basically — or focus on longer-term structural changes. There's a real split among European leaders.

Italian Prime Minister Mario Monti wants to use the euro zone's $624 billion rescue fund to buy up bonds in countries like, well, Italy and calm the markets. (If Italy suddenly finds itself unable to borrow money, after all, it's too big to save and could drag all of Europe down.) Similarly, French Prime Minister Francois Hollande wants to use the rescue money to prop up Spain's rickety banks. The hope is that these moves could lower borrowing costs for Italy and Spain, stem the immediate panic, and give the euro zone more time to fix its long-standing structural problems.

German Chancellor Angela Merkel, meanwhile, tends to oppose short-term fixes. Germany, after all, contributes most of the money to that bailout fund, and Merkel is tired of throwing money at failing banks or struggling countries unless Germany gets more of a say in how countries like Spain and Italy and Portugal and Greece rack up debt.

And those divisions could bring the summit to a stalemate. "Intellectually, it makes sense to put a structural horse in front of the spending cart," Spiegel notes. "After all, an entire single currency was established without such structures, and look where that got us. But, in a panic, people panic. Many argue that, without short-term solutions, a euro may just not be left for all the well-intentioned structures to govern."

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Sarah Kliff · June 27, 2012