European stock market outlook august 22 2011

European stock market outlook august 22 2011 : European shares have fallen after talks between French and German leaders did little to calm investors’ fears that the debt crisis could spread further.



The two leaders agreed to press for closer economic integration within the euro zone, but did not announce any specific measures to tackle the crisis.



Shares opened sharply lower before recovering, with Frankfurt’s Dax index down 0.5% and London’s FTSE 100 flat. The gold price also hit a new a record high, reflecting continued uncertainty.



A proposed tax on financial transactions also hit bank shares.



Deutsche Bank, BNP Paribas and Barclays all fell by about 3%. Shares in the London Stock Exchange and Deutsche Boerse also fell by a similar amount.



The tax could be used to raise money to help bolster any future bailout funds, but the proposal has already met with opposition from one member state.



German Chancellor Angela Merkel and French President Nicolas Sarkozy called on Tuesday night for “true economic governance” for the euro zone in response to the debt crisis.



The leaders called for much closer economic policy in the euro zone, but said that this could only be achieved by a “step-by-step” process.



Merkel also stressed that issuing so-called Eurobonds, IOUs issued to investors backed by the euro zone as a whole rather than individual countries, would not be on the agenda until closer economic union had been achieved.



“Eurobonds can be imagined one day, but at the end of the European integration process, not at the beginning,” said Sarkozy. He added that the fund’s size is “sufficient”.



“It is often said that eurobonds are a last resort for the euro zone but I don’t think the euro zone is dependent on last resorts,” said Merkel. “I don’t think eurobonds help us.”



The leaders’ reluctance to discuss eurobonds reflects deep hostility in



Germany and other northern countries, such as the Netherlands and Finland, towards what they see as helping financially undisciplined countries without firm guarantees in return.



Some policymakers and investors have argued that issuing these bonds would go a long way to calming volatile stock markets and resolving the debt crisis.



Both the Italian Finance Minister, Giulio Tremonti, and billionaire investor George Soros have backed the idea.



To tackle concerns about high levels of debt among euro zone governments in general, Merkel and Sarkozy proposed that a requirement for member states to balance their budgets should be enshrined in each of their constitutions by the summer of 2012.



In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency.



The two leaders also said they wanted bi-annual meetings of the 17 heads of the euro zone governments, chaired by Herman van Rompuy, the current president of the European Council.



As well as proposals for the euro zone as a whole, the meeting also came up with some bilateral plans between Germany and France.



These included plans for a joint proposal on a financial transactions tax and meetings to exchange views about economic and budgetary policies.



In addition, French and German finance ministers are to come up with ideas to increase the convergence and competitiveness of the two economies, in particular a proposal for a joint business tax.



Chancellor Merkel and President Sarkozy were meeting in Paris in the wake of recent turmoil on the financial markets, which came amid fears of a renewed global recession and concerns that Spain and Italy may be dragged into the debt crisis.



European Commission President Jose Manuel Barroso hailed the “important” agreement reached by German Chancellor Angela Merkel and French President Nicolas Sarkozy on the way forward for the crisis-hit euro zone.



Barroso said plans including a permanent governorship of the euro zone’s combined economy “represent an important political contribution by the leaders of the two largest euro area economies”.



“A regular format and frequency for the euro area summits, with a permanent chair, contributes to a more stable and stronger political leadership,” Barroso said of the call for European Union President Herman Van Rompuy to become the focal point of new, cross-border economic governance.



In a joint statement issued alongside his commissioner for economic affairs, Olli Rehn, Barroso also said a demand that all 17 euro zone governments adopt similar laws to Berlin enshrining balanced budgets, as well as a move to introduce a financial transactions tax, together amounted to a “welcome step forward”.



They said: “The call to enshrine the principle of a debt brake in national constitutional law is a further strong political commitment to the long-term sustainability of public finances.”



Meanwhile, “a financial transaction tax will be a key instrument to ensure that the financial sector makes a fairer contribution to public accounts”, they said, promising new legislative plans in this area.



But others dismissed it as too little. “The Franco-German meeting has not produced anything particularly new or useful,” said Sony Kapoor, managing director of Re-Define, an economic policy thinktank.



The European Central Bank last week spent a record €22bn buying euro zone government bonds in a bid to prevent the euro zone debt crisis spreading.



The buying spree represented the most the central bank has spent since it first began bond-buying in May last year in response to the Greek debt crisis.



It also shows the scale of the challenge faced by the bank in keeping down the borrowing costs of Italy and Spain, the euro zone’s third and fourth largest economies.



The bond buyback programme, supposed to be a temporary measure while politicians attempt to solve the euro zone’s problems, is controversial among ECB policy-makers.



It is most strongly opposed by Jens Weidmann and Juergen Stark, German members of the bank’s governing council, who feel the bank is moving into political territory.



However, the bank has felt itself compelled to move as various agreements by EU politicians over recent months have failed to draw a line under the crisis.



A July deal to allow the euro zone rescue fund to buy bonds – which the ECB keenly wants to come into force – has first to be ratified by member states.