European crisis management and EU summit meetings have become increasingly significant during the financial crisis. Dieter Smeets examines whether crisis meetings of European heads of state had a significant impact on Europe’s financial markets. He assesses their effect on member states’ sovereign bond yields, stock market indices and the exchange rate of the common currency, but finds limited impact. He concludes that market investors appear to be unconvinced by Europe’s economic and political crisis management.
After the demise of Lehman Brothers in autumn 2008, the financial crisis spread extensively to Europe. It was notably followed by a deceleration in economic activity in 2009 and negative growth rates, which in many countries were the largest since the great depression in the 1930s. The third stage of the crisis began early in 2010 when Greece – later followed by Ireland and Portugal, and more recently Italy and Spain – came under pressure from rising sovereign debt, persistent instability of their financial sectors, and a further deceleration in economic activity. In an effort to avoid contagion and to reduce uncertainty in the markets, European heads of state and government agreed to provide financial assistance of approximately 800 billion euros, to establish stricter rules for national budgets, and to enhance the conditions for growth and structural reforms.
President of the European Council, Herman Van Rompuy (Credit: EPP, CC-BY-SA-3.0)
Against this background, summit meetings can be interpreted as ‘events’ whose impact can be assessed by analysing the reaction of financial market participants to this news. I have carried out an empirical event study of this impact based on daily data for seven Eurozone states: France, Germany, Greece, Ireland, Italy, Portugal and Spain, starting in autumn 2008 and running until April 2012. This period is, in turn, split into the overall crisis period as defined above, and the government debt crisis from January 2010 to April 2012.
First, detailed results show that only France and Germany exhibit significant effects from summit meetings on general stock prices (national benchmark indices) for both periods. For all other countries there are rarely any significant results that show an increase in stock prices, independent of the applied test criterion and the sample period. However, further tests reveal that this result is due to a decrease in the excess returns after summits, which are directional opposites compared with the defined success criterion. This is particularly the case for Greece and Ireland during the time period covering the sovereign debt crisis.