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Angela Merkel and Nicolas Sarkozy face new Euro battles

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Angela Merkel and Nicolas Sarkozy face new Euro battles

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Europe's leaders are gearing up for a fresh round of frantic summiteering in 2012 as they battle to safeguard the future of the single currency, amid predictions that the deal struck in December will rapidly be overwhelmed by events.

Angela Merkel, the German chancellor, will meet Nicolas Sarkozy, the French president, on 9 January, kicking off a race to seal a new inter-governmental agreement among all members of the EU apart from the UK, enshrining stricter tax and spending rules and closer economic co-operation.

David Cameron brandished Britain's veto at December's Brussels meeting to prevent this "fiscal compact" being enshrined in a new European treaty.

But the 26 governments involved must still obtain parliamentary agreement for the new rules, and some – perhaps including Ireland – could be forced to put the issue to a referendum. Finance ministers will start discussing the details of the pact at a eurozone summit on 23 January.

At the same time, Europe's leaders hope that the IMF, with the help of developing nations such as Brazil, will reassure financial markets by offering more resources to back future bailouts of indebted member countries.

The single currency lost almost 3% of its value against the dollar in 2011, and hit a 10-year low against the yen at the close of trading on Friday, amid persistent concerns about its future. Merkel used a new year television message to tell German voters: "The path to overcoming this won't be without setbacks, but at the end of this path Europe will emerge stronger from the crisis than before."

But eurozone negotiations are taking place against the background of a darkening economic outlook. Spain's new government unveiled drastic spending cuts on Friday, making its contribution to a bout of collective belt-tightening that will squeeze growth across Europe. Many City economists are expecting a recession in the eurozone in 2012. Citigroup, for example, expects GDP across the 17-member area to contract by 1.2%, with much sharper falls in the hardest-hit countries.

Sony Kapoor, director of the Brussels-based thinktank Re-Define, said: "Reality is going to catch up, and dramatically. The agreement they're angling for is going to be much harder to implement than they have anticipated or than they let on; and even if things go smoothly, the agreement is tangential to the problems: it's almost irrelevant."

With Greece still mired in a painful recession and the Italian government expecting a sharp downturn, he predicted that a Europe-wide recession would expose the shortcomings in the strategy of collective austerity at the heart of December's agreement.

"The deep flaws in the whole approach will be glaringly obvious in a matter of weeks, as growth figures come in, and as we see that the whole dynamic of deficit reducing is proving to be far harder than anticipated, and austerity is actually resulting in a loss of GDP, worsening indebtedness."

Erik Britton, director of City consultancy Fathom, characterised the current approach as "muddling through". "This strategy , the muddling through strategy, is one that can buy another few months, maybe even a year, but it's not a solution."

He predicted that eurozone governments would eventually have to write off a large proportion of the debts of several countries, including Greece and Italy, and bail out their crisis-hit banks.

Angela Merkel and Nicolas Sarkozy face new Euro battles | Business | The Observer

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Last Updated on January 1, 2012

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