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How close is the Eurozone to a fiscal compact

How close is the Eurozone to a fiscal compact

Futures contracts show European bourses opening higher this morning, but we suspect that confidence is fragile after Asian markets sold-off overnight. Markets are ignoring much better than expected US data to concentrate on the ongoing Eurozone sovereign debt crisis.

The Euro spent much of Friday on the back foot but managed a small rally this morning despite comments from Czech Central Bank Governor Singer that Greece should leave the Eurozone and devalue its own currency unless the Eurozone is prepared to provide much larger levels of funding then at present.

Friday‟s 4.8% fall in German factory orders suggest that the consensus call for a 0.5% dip in industrial production could prove way too optimistic. Of course, the milder winter could have boosted construction activity in November, but excluding production we would expect at least a 2% fall on the month, which would see annual growth also slow to a similar pace. It is doubtful that there will be a significant market reaction to a weaker than expected outturn, as markets instead will be focusing on the Sarkozy-Merkel summit in Berlin this morning. A press conference is due to be held at 12:30 (GMT).

The two leaders are expected to agree how the „fiscal compact‟ agreed by Eurozone member states on 9th December will actually be interpreted. Guidelines will be needed by March. They are also expected to discuss the possibility of a financial transactions tax within the Eurozone itself, although UK objections suggest that EU-wide agreement is still some way off. It is relatively easy to agree on common points at bilateral summits but getting the rest of the Eurozone to sign up could prove much more difficult. German lawmakers have already made it clear that they are resisting increasing the ceiling for the European Stability Mechanism from €500 billion, which implies a greater IMF role in providing funding for periphery countries.

Merkel is also due to meet with Italian PM Monti on Wednesday, where is expected to state that the austerity package remains on track and that further measures are not needed. The olive branch extended to Italy looks to be an attempt to calm market nerves that the Eurozone‟s third largest economy is about to default on its debt. By shoring-up Monti politically, the hope is that the current austerity program will be fully implemented.

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