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December 2, 2014

French Economy Minister Macron and Germany's Economy Minister Gabriel arrive to attend a news conference to present the Franco-German report on economic reforms and investment in Paris

Germany’s finance and economy ministers and central bank chiefs meet in Berlin with plenty to discuss.

France has the threat of punishment hanging over it for failing again to meet EU budget rules while Germany, with a giant current account surplus, is turning a deaf ear to calls from Paris and other capitals for a looser fiscal approach to boost non-existent growth.

EU economics commissioner Pierre Moscovici will testify to a European Parliament committee on the 2015 EU budget drafts today. Last week, he said the three countries at risk of flouting the rules – France, Italy and Belgium – must use the interregnum to come up with plans to get their budgets back into shape.

For the Berlin meeting, there is also the looming possibility of the European Central Bank printing money. Bundesbank chief Jens Weidmann has made his opposition pretty plain, while his ECB colleagues are talking up a decision point in the first quarter of next year.

Germany’s balanced budget aim could be doing France one favour. With a diminishing supply of German Bunds, investors appear to have been piling into French bonds, maybe on the basis that no matter how bad the French economy looks, Germany will never let it fall apart. There is also the fact that France has a particularly deep and liquid bond market.

Whatever the thinking, France can now borrow for less than 1 percent for 10 years, almost zero in real terms. That should make its budget numbers look a little better.

Greek opposition leader Alexis Tsipras and Prime Minister Antonis Samaras are due to speak at a conference on Greek economy. Greece is running short of time to reach a deal on its final troika review by a Dec. 8 deadline after talks in Paris ended last week without a solution.

Athens has offered to raise value-added tax for hotels in an effort to appease its EU/IMF lenders and wrap up the review that has held up its plan to quit the unpopular aid programme.

Israeli Prime Minister Benjamin Netanyahu said last night he would call early elections unless rebellious ministers stopped attacking government policies. That looks increasingly likely.

The French National Assembly will hold a symbolic vote on Palestinian recognition following similar moves in Sweden, Britain, Ireland and Spain. After lawmakers debated it last week, Foreign Minister Laurent Fabius said Paris would recognise a Palestinian state if a final international effort to overcome the impasse between Israelis and Palestinians failed.

Sweden’s parliament votes on Prime Minister Stefan Lofven’s first budget on Wednesday with a chance that the minority government of Social Democrats and Greens will lose the vote. Lofven says he will quit if he loses. We will know more today.

The centre-right opposition has said it will present its own common budget and if wins more supported than the government’s, that is the one that will pass. The anti-immigration Sweden Democrats, who are shunned by all other parties in the Riksdag, hold the balance of power and have said they will announce today which way they will jump.

The idea that the west and Russia have reached some sort of uneasy standoff may be wishful thinking. Russia accused NATO on Monday of destabilising northern Europe and the Baltics by carrying out drills there and announced new military exercises of its own.

NATO responded by blaming Moscow for instability in the region, while British complained of “extremely aggressive” probing of Britain’s air space by Russian planes.

The government in Kiev said a convoy of 106 vehicles had entered its eastern territory from Russia and that Russian special forces were taking part in attacks on Donetsk airport. NATO foreign ministers meet in Brussels today and the presidents of the three Baltic states meet the Polish president in Tallinn.

Vladimir Putin is facing a dangerously weak economy now that OPEC has done nothing to raise the price of oil. Officials have already admitted the budget no longer adds up. Recent history shows that he is at his hardest to predict when in that sort of bind. The rouble has edged up in early trade having shed four percent on Monday, its biggest one-day loss in 16 years.

Russia has scrapped the South Stream pipeline project to supply gas to southern Europe without crossing Ukraine, citing EU objections, and instead named Turkey as its preferred partner for an alternative pipeline. How does the EU get gas to its central and eastern members now?

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