Tags: euro | crisis | bailout | merkel | spain

European Leaders to Tackle Bailout Fund at Summit

Sunday, 25 March 2012 03:18 PM

European politics can move like a waltz, though rarely as gracefully. Leaders take one step forward, one sideways and the occasional twist as they make gradual progress toward resolving the eurozone sovereign debt crisis.

The next date on their dance card is at the end of this week in Copenhagen, where European Union leaders will meet to discuss increasing the size of Europe's new bailout fund.

With recent data showing the fragility of the European economy and debt yields rising in Spain and Italy, EU leaders can ill afford to stumble.

Fellow Group of 20 members are insisting the EU build a fund that is large enough to prevent contagion from spreading to more eurozone countries. But Germany is balking.

Agreement is far from assured in Copenhagen, though a senior German lawmaker has said Chancellor Angela Merkel, facing difficult regional elections, may offer a short-term increase in the European Stability Mechanism's 500-billion-euro war chest. Investors at the least want to see movement.

"Failure to increase the resources, or to make some progress, would be a reminder of Europe's political inability to get ahead of this crisis," said David Mann, head of research at Standard Bank in New York.

That would prove damaging, especially after a Purchasing Managers Index for March showed manufacturing contracted unexpectedly in Germany and France - the euro zone's two biggest economies - oil prices climbed to new highs, and Spain's debt problems deepened.

"We are in a volatile environment and things could change very quickly, either in the good sense or the bad sense," said Marco Valli, chief euro-zone economist for UniCredit.

The batch of weak data from the Germany and France was a reminder that the wave of optimism that has washed over financial markets recently was largely a reflection that risks from Greece have abated, not a vote of confidence in the economic outlook, said Marc Chandler, global strategist at Brown Brothers Harriman, in a client note.

Warnings of Europe's continued fragility came from Spain last week, when yields on its 10-year debt touched 5.5 percent for the first time since early January. They climbed after Prime Minister Mariano Rajoy announced a grimmer fiscal outlook and cut a deal with Brussels to relax budget targets.

A general strike called for Thursday by Spanish unions will be the first major street test for Rajoy's austerity plans and economic reforms, which have weakened union influence over wages and work conditions. Opinion polls show most Spaniards oppose the general strike, believing it will only worsen the country's economic crisis when unemployment is around 23 percent. Rajoy will face close scrutiny of his budget released on Friday.

Italy's 10-year yields also rose above 5 percent last week for the first time in two weeks as the government forges ahead on labor market reforms. Its cabinet late Friday backed sweeping measures, viewed as critical to reviving its economic prospects. Prime Minister Mario Monti still faces a battle in parliament, but ministers are talking tough, using "back us or sack us" rhetoric, and none of the parties has a vested interest in collapsing the government.

A vulnerable Europe and a weakened China, where the factory sector shrank for a fifth straight month in March, leave the United States the main driver of global growth. But its performance is far from impressive, trending around 2 percent in the first quarter.

Durable goods orders for February, due out on Wednesday, are seen rising by 2.0 percent excluding the volatile components of air and defense, which would be a welcome relief after January's decline of 3.9 percent.

If personal spending for February comes in at 0.6 percent on Friday as analysts are forecasting and incomes adjusted for inflation rise, it would signal the U.S. economy is poised to gain momentum.

Job growth, debt paydown and low interest rates have strengthened the American consumer, the backbone of its economy. But a 17 percent rise in gasoline prices this year is hurting American budgets and gnawing at consumer confidence.

Against this backdrop, no one wants the music to stop.

"If we get dragged back toward the abyss in Europe and slowing growth in China, we could be set up for a rocky period ahead," said Mann.

© 2018 Thomson/Reuters. All rights reserved.

1Like our page
Sunday, 25 March 2012 03:18 PM
Newsmax Media, Inc.

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

© Newsmax Media, Inc.
All Rights Reserved