Different countries, several ways, only one area
Read part I of the article
Chart: Timeline, the European debt crisis
Region Page: European Monetary Union
Leaving debt cost and banking union themes, let speak about challenges in specifics countries like Hollande's France, Monti's Italy and Samaras's Greece.
France will deal with the pro-growth measures that Francois Hollande has been signing since he became president on May 12. In opposition to Spain that has cut budget on citizens benefits and salaries but not on politics big expenses like lifetime pension for all presidents and members of congress and senate, Hollande has cut budget on politics expenses and it will invest in I+D programs.
His program on growth against austerity has been moderated after elections but market will be watching closely its costs and possible deficits as well as growth measures. At the moment, the 10 year debt cost has fallen to the lowest level in the euro era.
Italy is having a hot summer with political turmoil, unemployment at 10.1% and a GDP contracting of 1.4% in Q1. Market will pay attention to growth rates, budget cuts as well as debt cost. Italy is selling its 10 years bonds close to 6.0%.
One of the biggest issues Italians could face is the comeback of Silvio Berlusconi with a new version of his old party Forza Italia. Rumours say that “il cavalieri” is thinking to come to lead the right parties in a hypothetical election in early 2013. Berlusconi is speculating, according to some sources, about the fall of the Euro and him becoming the Italian savior. Another point of salt in the Italian story is Monti's commentaries about leaving government in 2013.
Greece will continue being the market focus on the back of its capacity to accomplish the troika “recommendations.” Market will pay attention on how the Hellenic country will deal with the current terms or a possible new agreement.
Certainly, “it will also be a challenge to keep the group of nations together despite tensions between nations that are chiefly debtors and those that are chiefly creditors,” as Ed Ponsi commented in a recent conversation on the eurozone.
When the problems also come from the neighborhood
Adam Narczewski, analyst at XTB trader, commented recently that in addition to all the problems the EZ has itself, “Eurozone will face in the second half of 2012” challenges that “are external and Europe can do little about them.”
“Mainly I mean external economic growth, in this case represented by China, so crucial to the debt crisis in Europe,” continues Narczewski. “If GDP growth in China exceeded 9% (as it used to), the Eurozone would have an easier time fighting the crisis. With a 7,6% growth, the task is much harder.”
But in the case of China, as Dee Woo, Economics Teacher at the Beijing Royal School wrote in a FXstreet.com article, “China's export growth clearly is decelerating recently as the major customers - EU and the US - are both fighting on the edge of double-dip.”
“Another external issue that can affect Europe is the so called “fiscal cliff” in the U.S.” underlines Narczewski. “All this will cause transfers of funds to society to decrease drastically and the U.S government will need to solve it.”
“A slowdown in the U.S, along with the China problem, can have great effects on the Eurozone and those will be the main challenges,” concluded Narczewski.
“EUR/USD: an interim bottom may be in place” by Valeria Bednarik.
By the beginning of the year, the euro crisis gathered all of the market attention, with Greece ready to leave the Eurozone, Italy and Spain joining the club of the intolerable high yields and bailout needs, and European authorities lost without an answer. Crossing the ocean, US monthly employment readings surprise strongly up 3 months in a row, and market started screaming growth!
The EUR/USD fell as low as 1.2161 in July. However, while the EU crisis continues, at last the EU authorities put themselves together and gave their first baby steps to fight the crisis, while in the US, the situation seems not so bright: disappointing news hit the wires on a daily basis for the past few months, while employment strong readings are now just a memory.
Could the EUR/USD be forming an interim bottom? Seems likely, according to the daily chart: the pair has been printing higher highs and higher lows daily basis since mentioned 1.2161 low, and is forming a round floor that may suggest an imminent recovery, at least in correction mode.
While indicators still lack upward momentum, they are steadily approaching their midlines, as price tests the neckline of the figure, around 1.2330/40: a daily close above should lead to a stronger advance of around 180 pips according to the figure, towards the 1.2520 area. Once above, 1.2745 seems the next target. I can’t see the pair reaching 1.30 anytime soon as the common currency will likely underperform compared to other currencies. Loss of 1.2161 however will deny the figure opening doors for further slides towards 1.1870 area as immediate target for this second half of 2012.
About Europe, Valeria Bednarik thoughts are:
Although there is a long list of challenges for Europe to face, I believe that the first one will be to restore the international credibility, in the Euro and in the nations that form the EU. The strategic challenges include reduce unemployment and work towards a stronger political integration and a better financial regulation.
Other experts opinions
Ed Ponsi, FXEducator LLC: 
The biggest challenge for the Eurozone in the second half of this year Will be the movement toward a fiscal union as opposed to just a monetary union. It will also be a challenge to keep the group of nations together despite tensions between nations that are chiefly debtors and those that are chiefly creditors.
Adam Narczewski, XTB Hungary:
The biggest challenges the Eurozone will face in the second half of 2012 are external and Europe can do little about them. Mainly I mean external economic growth, in this case represented by China, so crucial to the debt crisis in Europe. If GDP growth in China exceeded 9% (as it used to), the Eurozone would have an easier time fighting the crisis. With a 7,6% growth, the task is much harder. Politicians need to restore faith in Europe, something that they were unable to achieve despite all kinds of actions including the creation of bailout funds, a banking union or the fiscal path. Another external issue that can affect Europe is the so called “fiscal cliff” in the U.S. The introduced over the years (started by president George W. Bush) fiscal stimulus was working but now is set to expire and the amounts are not small: the expiration of the “Bush tax cuts” (280 bln USD), the expiration of the Obama payroll tax holiday (125 bln USD), the expiration of higher employment benefits (40 bln USD) and spending cuts connected to the Budget Control Act of 2011 (100 bln USD). All this will cause transfers of funds to society to decrease drastically and the U.S government will need to solve it. A slowdown in the U.S, along with the China problem, can have great effects on the Eurozone and those will be the main challenges.
In the first half of 2012 emerging markets exhibited a strong rally, often ignoring bad news from the Eurozone and the world. The main challenge for these countries would be to maintain this pace of growth. Poland’s yields on 10y Treasuries declined below 5%, for the first time since 2006. Yields on Hungarian debt are below 8% - still high but well below the 11%, at which they were at the beginning of this year. Credit spreads narrowed as investors searched for investments with higher rates of return. They can’t be treated as “safe heaven” instruments though. Because of the expected turbulent times (hard times coming up for the Eurozone, U.S and China), volatility will increase and emerging markets will be affected. Of course, many emerging economies will have to deal with local issues: Poland with inflation (although slightly declining recently) and a possible economic slowdowown (because of external factors) or Hungary with the IMF negotiations (critical to Hungary’s finances). The core issue will be no to lose too much if the storm begins. So far emerging markets have been doing well, becoming the investment place of choice for many and in the second half of 2012 they will try to keep it that way.
John Kicklighter, DailyFX.com
The Eurozone’s fundamental troubles through the second half of 2012 will be very much the same as they were in the first half: implementation of stimulus and integration programs. The EU Summit in June implied very ambitious programs that could put a serious dent in crisis concerns if they are fully realized. That said, there are issues with all of those big ticket items. The Common Banking Supervisor is expected to hash out sometime between September and the end of the year. This overseer is a noted prerequisite of allowing the ESM to directly bailout banks. Then there an issue with the suggestion that the ESM program could be used to provide support to sovereigns to prevent the conditions of a regular bailout reaction – it still seems to require the agreement of all the members. Officials managed to once again buy time without putting into action critical fixes. They are no doubt hoping that investor confidence recovers on its own so that some of these more complicated and controversial programs can be given more time for a happy solution. If underlying risk appetite fades though, we could very well find ourselves in the position that European policy officials have to follow through on one of these bigger program moves or face a spread of the Euro-area’s financial crisis beyond the region’s boarders. And, realistically, that could happen in the second quarter regardless of their efforts.
