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Fundamental Afternoon Wrap: EU Framework under question while EU leaders look for growth

FXstreet.com (Barcelona) - While the EU Summit takes place and leaders try to find solutions for the rising unemployment hitting the economy and countries under bailout deals as well as an agreement to bailout Cyprus, the EU institutional framework comes into question once again.

An Inadequate Institutional Framework?

Goldman Sachs analysts acknowledge that the Euro crisis is proof that the original institutional set-up for the currency union was inadequate. Where there is less agreement is on the kind of institutional change needed to achieve long-term stability for the Euro area. According to the Economics Research Team at Goldman Sachs, “One school of thought argues that only further fiscal and political integration, which would also include permanent risk-sharing and fiscal transfers between countries, can guarantee the long-term survival of the monetary union”. However, significant political and legal hurdles in Germany would surge as the fiscal union deepens. Backing the view against fiscal union is the risk of moral hazard that deeper union would present: “if a country can rely on financial support from others, it may be more cavalier about its own fiscal position or about other risks that may weaken its fiscal position at a future date.”

EU Summit getting somewhere, Portugal gets relief

In the meantime, EU leaders seem to have offered some flexibility on budgets, saying there should be an appropriate mix of expenditure and revenue measures, including short-term targeted measures to boost growth. Francois Hollande said that "We need flexibility if we want to ensure that growth is the priority," adding that while he was committed to gradual budget consolidation, that did not mean that there was no room for maneuver. Merkel wants the growth pact passed by EU leaders last year to be filled with life to allow young people in Europe get jobs.

Regarding Portugal, one of the Eurozone countries under assistance, the Troika concluded their seventh review of the programme and granted an additional year to implement spending cuts required by the bailout program and gave the go-ahead for releasing the next 2 billion euro tranche of aid for the country. Due to the recent deterioration of the country's economic outlook, the deadline for implementing spending cuts should be extended, according to them, allowing Portugal to implement spending cuts until 2015.

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