Confidence that EU leaders would do the right thing

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Eurozone in limbo
Considering the uncertainty surrounding southern Euroland's debt crisis the single European currency has been remarkably robust in the last couple of weeks. Its support came from investors who believed an agreement was close for a resolution of Greece's problems. The expectation was fed by comments from G20 finance ministers after their meeting last weekend in Paris, especially the one from US treasury secretary Tim Geithner, who expressed confidence that EU leaders would do the right thing.

The first impression was that a final agreement would come on this weekend at an EU summit meeting in Brussels. However, hopes for a decisive breakthrough have collapsed as France and Germany failed to agree on the purpose of the European Financial Stability Fund (EFSF) yesterday. One side wants it to be capitalised and operated as a bank that would lend to member nations on demand, the other wants the fund to be an insurance scheme, an emergency pot to be raided only at times of dire need. There is also disagreement about the pace of bank recapitalisation and the percentage loss bondholders should suffer when Greece defaults.

The latest story is that there will be little or nothing from this weekend's meeting. A further meeting will be necessary on Wednesday, at which point there may or may not be agreement between France and Germany.

Stream-of-consciousness reporting of the developments (or the lack of them) in Europe overshadowed almost everything else in financial markets during the week. Just two newsworthy items from the UK made it through the blanket coverage of what might or might not be announced by EU leaders this weekend. Consumer price index inflation hit 5.2% in September, matching its record high three years ago, and the minutes of October's monetary policy committee meeting showed unanimous approval of the decision to buy another £75bn of assets kin the quantitative easing programme. Both were something of a surprise but neither was seen as any reason to cheer or panic.

The fate of the euro during the week ahead will depend entirely on what the EU leaders tell us about their plan to manage the default of Greece and stop the rot in southern Europe. If it sounds plausible and includes some numbers it might be enough to restore faith in the government bonds of Italy and Spain and in the euro itself. If it is woolly and vague, as every previous version has been, investors will be unimpressed and that faith will be eroded even more.

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Confidence that EU leaders would do the right thing

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