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Why 'final chance' to save euro may end in another flop

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'Don't get your hopes up' How many "last chances" are there to save the troubled euro zone? At least one more from the market's point of view.

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There's no question this is a crucial week in the two-year-old debt crisis, as France's Nicolas Sarkozy and Germany's Angela Merkel meet today in the run-up to an EU summit at the end of the week. The markets have their hopes up that Europe's leaders will take definitive steps, but, as many observers warn, don't bet on it.

We've been here so many times before in the past two years, and there's every reason to expect the same result. Still, markets are rallying today, and euro bond yields falling, as leaders make all the right noises.

"This week has been billed as the final chance to save the euro, with time running out for the single currency," said Chris Beauchamp of IG Index in London.

"Markets have gained ground ahead of a Franco-German summit which is supposed to resolve some long-standing issues between the two continental titans, and also on news that both Ireland and Italy are knuckling down to even more strenuous fiscal consolidation efforts," Mr. Beauchamp said in a research report.

As Eric Reguly reports from Rome in today's Report on Business, Italy's new Prime Minister Mario Monti unveiled a round of fresh austerity measures, worth €30-billion, to show the markets just how serious he is.

Like other observers, Mr. Beauchamp warned of a market let-down, and how this concern continues to weigh on the minds of investors.

"At present everything seems to be pointing in the right direction, and investors can be forgiven for hoping that politicians finally grasp the seriousness of the problem, he said. "And yet, a feeling of déjà vu permeates markets at the moment. Too many times before, euro zone leaders have pledged their determination to end the crisis, but end up merely fudging the issue and delaying any decision until later. The fear now is that this week will turn out the same way, with fine words but little action."

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Mr. Sarkozy, Ms. Merkel and officials of the European Central Bank want much tighter fiscal controls in place in the 17-member monetary union. What Ms. Merkel doesn't want, despite many suggesting that it's the only way to ease the crisis, are a eurobond and greater intervention by the ECB under its new chief Mario Draghi.

"Merkel is right to describe the process as a marathon that will take years, just as steps toward more effective but still imperfect currency unions in the United States and Canada evolved very slowly within their respective systems," said Derek Holt of Scotia Capital. "Thus, I think optimism toward some grand immediate solution emanating from this weekend's summit is misplaced."

So much is at stake here. Not only have the euro zone's borrowing costs been pushed up dramatically, but indicators released as recently as today suggest another recession. There are big political concerns, as well, as Germany takes the lead in the crisis amid sovereignty questions in other countries.

"Chancellor Merkel has called for countries to relinquish economic sovereignty with closer oversight on national budgets with sanctions against budget transgressors enforceable by the European Court of Justice, while France remains opposed to such severe policing on the basis of concerns about sovereignty issues," said CMC Markets analyst Michael Hewson.

"This could well be a problem for President Sarkozy, given France's recent history and the nation's suspicion about sovereignty erosion by Brussels, which was starkly illustrated when they vetoed the European constitution in 2005. If Sarkozy is even perceived to be conceding ground on sovereignty issues then he could well find himself under severe pressure, especially with an election looming in four months."

Like others, Mr. Hewson said it wouldn't be surprising if the "reality" of this week's developments fell short of hopes.

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"Talk of fiscal union is one thing, being able to deliver even a framework for it is another," he said. "While politicians could well agree on a plan, as Greece has shown us in the past few months, actually delivering it can be rather more difficult. Bottom line – don't get your hopes up!"

Markets rally Against this backdrop, global markets are rising today.

Tokyo's Nikkei climbed 0.6 per cent, and Hong Kong's Hang Seng 0.7 per cent. In Europe, London's FTSE 100, Germany's DAX and the Paris CAC 40 were up by between 0.8 per cent and 1.5 per cent by about 9 a.m. ET. Dow Jones industrial average and futures also rose.

"The market's mood is mostly positive to start the week as German Chancellor Angela Merkel and French President Nicolas Sarkozy began a week of European talks and Italy's new government gets set to present a €30-billion austerity plan," said Carl Campus of BMO Nesbitt Burns.

"Also helping sentiment was a German news report that the Federal Reserve, along with the 17 euro zone central banks, are considering a plan to fund a large-scale strengthening of the IMF, so that it could provide additional support to debt-laden countries in the region. Meanwhile, on the other side of the coin, officials in China tried to play down expectations that their vast financial reserves will be used to help ease the crisis."

Goldcorp boosts dividend Goldcorp Inc. today hiked its annual dividend by 32 per cent to 54 cents (U.S.) a share.

The company noted it's the third time in the past 13 months that it has boosted the payout.

"This action underscores Goldcorp's unique ability to generate the cash flows necessary to both invest significantly in the strongest growth profile in the gold sector and to provide regular dividend growth for the benefit of our shareholders," chief executive officer Chuck Jeannes said in a statement. "We will continue to review dividend levels at regular intervals in the future."

RIM outlook dims UBS Securities Canada today slashed its 12-month price target on shares of Research In Motion Ltd. in the wake of the BlackBerry maker's ugly profit warning on Friday.

Analysts Phillip Huang and Amitabh Pass cut their target to $18 (U.S.) from $26, though left their rating unchanged at "neutral" as they reduced their earnings and revenue estimates for RIM's 2013 fiscal year. They cited "no respite to RIM's ongoing challenges."

On Friday, RIM announced a huge hit related to the weak performance of its PlayBook tablet, and said its earnings this year would be lower than forecast.

What to watch for this week Bank of Canada Governor Mark Carney returns to the stage tomorrow, when he's certain to again stand pat on interest rates.

"The U.S. data has looked a touch better of late but Canada's job recovery and inflation have cooled and Europe's problems if anything have worsened since the last time out," said Peter Buchanan of CIBC World Markets.

"The message, echoing recent statements from Carney, should once again be that Canadian rates remain on hold for the foreseeable future."

In the markets this week, Bank of Montreal and National Bank of Canada will close out the fourth-quarter earnings season for the country's major banks. Toronto-Dominion Bank, Royal Bank of Canada, Canadian Imperial Bank of Commerce and Bank of Nova Scotia all reported this week.

In Economy Lab Miles Corak describes a five-point plan that's about including all sources of income in the tax base, and about targeting tax rate increases where they cause the least pain.

In International Business Which EU country will be next to sue for a bailout? If you guessed Italy or Spain, you might be wrong. It's likely to be Cyprus, Eric Reguly writes.

In Globe Careers Severance deals that give big cash payouts to outgoing chief executives can not only outrage shareholders, they can clobber a company's performance for years, according to a new study. Wallace Immen reports.

From today's Report on Business

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About the Author
Report on Business News Editor

Michael Babad is a Report on Business editor and co-author of three business books. He has been with Report on Business for several years, and has also been a reporter and editor at The Toronto Star, The Financial Post and United Press International. His articles have appeared in major newspapers around the world. More

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