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UK German talks


Jan 7 2015, 10.49am GMT


Merkel and Cameron meet today to discuss the European economy.

Photograph: Andrew Winning/AFP/Getty Images

The two strongest economies in the European Union are both slowing in growth as their leaders meet today. Speculation is afoot as to the agenda for the meeting, but top of the list is the economy, immigration and EU treaties.

The German chancellor is up against both financial and political problems with the EURUSD falling to 9-year lows, Eurozone deflation just announced, and the risk of Greece exiting the Eurozone along with its massive EU debt, if the anti-bailout party Syriza wins the January Greek snap election.

German data released yesterday also showed a slowdown in the economy. Unemployment change was at -27k, negative to the forecast of -6k providing a bearish scenario for the euro. Retail sales were also down to 1.0% from previous of 2% but above expectation level. Year on year retail sales have fallen by 2.9%. PMI figures yesterday however told a positive story with services up to 52.1 from forecast of 51.4, whilst composite PMI climbed to 52.0 from expectations and previous of 51.4, all above the contraction level of 50.0.

In the UK, elections are due in May this year and David Cameron’s conservative party that has led the country through austerity measures will be facing the Eurosceptics. Renegotiation for the UK’s relationship with the European Union regarding immigration will definitely be on today’s agenda. The two leaders agree on curbs to migrant benefits but the UK’s call for EU treaty amendments on member country immigration is not a plan that Merkel will support.

Cameron is also facing sterling losses against the strong US dollar, as the last highs of 1.719 seen in July 2014 are now reduced to today’s 1.510. In just one week since new year the GBPUSD has fallen from 1.554.

Slow growth across the Eurozone is causing the European central bank to prepare for its next stage of quantitative easing. Data released today has seen CPI (YoY) (Dec) fall to -0.2%, below expectations of -0.1% and November’s figure of 0.3%, marking the first year on year fall since 2009 and the 22nd month where inflation stands below the central bank’s target of 2.0%. With only the option of the sovereign bond buying scheme on the ECB table to battle with the latest deflation figures, Merkel and Cameron have a significant meeting in front of them to prepare the German chancellor for her presentation at the G7 summit in Bavaria in June this year.

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