Can Martin Schulz accelerate eurozone reform?


German Social Democrat leader Martin Schulz called on for accelerated reforms to the eurozone, and the basis of a strengthened currency union to be agreed by the time Britain leaves the European Union in 2019.

In a speech in Paris, Schulz said he favored an investment budget for the eurozone and a finance minister for the bloc with a mission to tackle tax competition and tax evasion.

“Reform of the economic and monetary union must not be further delayed,” Schulz said, according to the text of his speech to the Sciences Po university.

He said Germany must be ready to do more for Europe, including with contributions to the EU budget. Schulz later met French President Emmanuel Macron, a pro-European reformer.

Schulz, the former European Parliament president, is hoping to beat Chancellor Angela Merkel in a Sept. 24 election but his center-left Social Democrats (SPD) have lost momentum in the polls after initial gains following his nomination in January.

An opinion poll on Wednesday put support for Merkel’s conservative bloc at 40 percent, with the SPD on 22 percent.

Merkel has said she wants to breathe new life into Franco-German relations, promising closer cooperation between the two EU heavyweights with the aim of reforming the bloc.

Changes in the air

The euro jetted to an almost two-year high on Thursday after European Central Bank chief Mario Draghi said officials would discuss possible changes to its bond-buying scheme this autumn.

Though Draghi set no date for changes to the scheme and said rate-setters had been unanimous in their decision not to change their guidance on monetary policy, investors reckoned the discussions would lead to monetary tightening next year.

That drove an initial rise for the euro to around $1.1570 EUR=, a move analysts said was fuelled by the fact that Draghi did not dwell on the currency’s strength.

“In all probability tapering will occur as we head into 2018 and we have seen no substantive challenge to that expectation in today’s meeting. Hence the currency has received some support,” Richard McGuire, a senior strategist at Rabobank, said.

He added that the euro was also rising probably due to the fact that Draghi noted the single currency’s appreciation had received attention but “provided no pushback to this strengthening despite having the perfect opportunity to do so”.

The euro gained almost another cent against the dollar in the hour that followed the meeting – helped by a report of a widening inquiry into President Donald Trump’s business affairs – taking it to its highest since August 2015 at $1.1659.

“The first leg was about Draghi but the second leg up in the euro has been US-related, given that we’ve had reports of more probes into Trump,” said Lisa Scott-Smith, co-head of portfolio management with currency fund Millennium Global in London.

Against sterling, the euro climbed 1.4 percent to an eight-month high of 89.76 pence EURGBP=D3.

Germany’s 10-year bond yield – the bloc’s benchmark – climbed 2 basis points to a day’s high of 0.56 percent after Draghi’s comments but by 1530 GMT was flat at 0.54 percent. Euro zone stocks were a touch lower on the day.

“I think a positive outlook of the economy and expectations of stimulus withdrawal in the autumn, and perhaps confirmation of the fact that we will have more explicit tightening then, is driving the euro and bond yields higher,” said Alexandra Russell-Oliver, an FX strategist at Caxton FX in London.

Markets still expect the ECB to raise rates next year, though they now bet that a hike could come later than initially anticipated.

Eurozone money markets price in roughly a 70 percent chance of a 10-basis-point hike in rates by next July, having fully priced in a move a week ago. A rise by October is fully priced in by markets ECBWATCH.