Germany's Merkel faces tough questions over EU summit

German Chancellor Angela Merkel faced tough questions on Wednesday over EU summit decisions to save the euro as growing scepticism weighed on financial markets and the euro. Merkel prepared to explain to the German Bundestag or lower parliamentary house why she believes the agreements reached at last week's EU summit are a success, despite fading market confidence with stocks falling across Europe and the euro sharply lower against the dollar. European Union leaders from 26 of the 27 member states agreed at a high-stakes Brussels summit last week to back a Franco-German drive for tighter budget policing in a bid to save the eurozone. After Britain, which does not use the euro, blocked changes to an EU-wide treaty, the other 26 EU states signalled their willingness to join a "new fiscal compact" imposing tougher budget rules. But while leaders had hoped the agreement, which would aim to eradicate their public deficits under close EU supervision, would reassure jittery financial markets, any respite proved brief. Ratings agency Moody's said that the crisis talks had failed to produce "decisive policy measures" and threatened to review the credit ratings of all EU states within the next three months. Adding to the negative sentiment were comments by Merkel herself, in which she ruled out an increase in the European Stability Mechanism, the eurozone's future bail-out fund. The lending limit of the EMS, which EU leaders agreed at last week's summit will be up and running a year earlier than planned, should remain at 500 billion euros ($650 billion), Merkel told deputies of her conservative CDU party late Tuesday. Her stance underscores a rift among some European leaders over boosting the fund's firepower and how best to tackle the eurozone's fiscal woes. With experts saying that the amount will not be enough to rescue a country such as Italy, analysts at Moneycorp saw the remark as "the latest in a series of psychological blows to confidence in euroland and its sovereign borrowers. "The German chancellor dropped another brick on the euro's foot," the analysts said in a daily investors' note. In Australia, deputy central bank chief Ric Battellino warned that markets appeared to be pricing in the possibility of a break-up of the eurozone, with wide divergences in interest rates paid by European banks beginning to resemble pre-euro levels. "The formation of the euro area brought convergence of interest rates towards the low levels previously enjoyed only by Germany, but pre-euro relativities are now re-asserting themselves," the Reserve Bank of Australia deputy said. "This suggests that markets are pricing in the possibility of a break-up of the euro area or a significant risk of default by some governments, or both." A "change in the composition of the euro area" could not be ruled out, Battellino warned. Greece's inability trouble to balance its books and the lingering fear that it could default on its huge debts have led many analyst to suggest the country could end up falling out of the euro club. Finally, another negative for investors came from the United States Federal Reserve which announced it would hold interest rates for some time to come, warning of severe headwinds for the global economy. But despite such concerns, the Fed did not unveil any fresh stimulus measures to kickstart growth, triggering a new sell-off on the markets, said Ralph Herre, analyst at LBBW. CMC Markets analyst Michael Hewson, agreed. "Against a backdrop of concerns about ratings downgrades, a lack of large scale European Central Bank intervention, and Angela Merkel's reiteration that there would be no increase in the new bailout fund, it was news out of the United States that really helped push things along," Hewson said. Ironically, German Finance Minister Wolfgang Schaeuble and Bundesbank President Jens Weidmann were set to mark the 10th anniversary of the euro later on Wednesday.