Easing Ukraine Tensions Inspire European Confidence

August 18, 2014Marketsby EW News Desk Team

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European stocks began the weak with a strong rally in Monday morning trading on news that Ukraine and Russia governments have begun high-level talks.

In recent weeks, EU officials have said Ukrainian tensions have been a macroeconomic headwind for the eurozone, causing core nations such as Germany to suffer economic setbacks. With Germany and France reporting surprisingly disappointing GDP figures for the second quarter and Italy showing signs of a new recession, analysts have worried that the region was on track for a reversal of its recent recovery.

Ukraine Talks

Ukraine Foreign Minister Pavlo Klimkin met with Russian Foreign Minister Sergei Lavrov to discuss a way to ease tensions. Meeting in Berlin, the two were accompanied by France’s Foreign Minister Laurent Fabius and Germany’s Foreign Minister, Frank-Walter Steinmeier, who told reporters that they had made progress in the first day of talks.

However, Steinmeier also said that the negotiations were in their earliest stages and talks remained difficult. The talks come on the heels of recent confrontations in eastern Ukraine, where the Ukrainian military approached Luhansk, a rebel-controlled city in the region. According to the Ukrainian military, separatists destroyed a fighter jet that had been patrolling the area, although the pilot escaped safely.

Although the Russians claim they are merely delivering humanitarian aid to eastern Ukraine, others have accused them of delivering weapons and munitions to the rebels. Ukrainian separatists themselves have said Russia has supplied them with weapons and armored vehicles, but Russia has denied that report as a lie.

As part of the agreement, the Red Cross will begin overseeing Russian delivery of supplies to Ukraine’s eastern territories.

Room for Monetary Policy Decisions

Recent unrest in the Ukraine has put greater focus on the European Central Bank’s relatively tight monetary policy. ECB president Mario Draghi has recently said the bank will begin a program of extremely cheap liquidity to European banks that will encourage those banks in turn to lend to small businesses and individuals throughout the eurozone. The theory is that, with looser lending standards, an injection of easier cash will jolt-start the European economy.

Recent European data has raised concerns that cheap loans may not be enough for the European economy. Economists have begun to question whether cheap loans are sufficient, with a growing number in Europe suggesting that a U.S. Federal Reserve style quantitative easing program may be more effective. “Quantitative easing has worked well in the United States,” said Pier Carlo Padoan, Italian Finance Minister, in an interview on the BBC yesterday. “But of course,” he added, “the underlying economic structure of the U.S. economy is largely different from the still-fragmented euro area.”

Economists disagree on the effectiveness of a QE program in Europe, because of the different structure of the euro currency and the divergent fiscal policies and economic makeups of the European economies.

However, most are in agreement that fundamental weakness has threatened the entire region. The German Bundesbank has recently announced its expectations of a stronger second half for Germany’s economy are“called into question by current data” and Mario Draghi has admitted geopolitical risks have not finished weakening European economic performance.