Fitch downgrades five eurozone economies

US ratings agency Fitch has said it is downgrading the credit ratings of five countries that use the euro, including economic heavyweights Italy and Spain.

Fitch rating agency has downgraded the
debt ratings of five eurozone states including Spain and Italy,
pointing to the growing vulnerability of their economies.

Fitch said the downgraded countries - also including Belgium, Cyprus and Slovenia - faced financial and economic headwinds from the eurozone's debt crisis that could diminish their ability to sustain their own debt loads.

The downgrade was largely expected as Fitch had said it was reviewing the country's ratings. It comes on top of a downgrade of nine eurozone countries by another ratings agency, Standard & Poor's, on January 13.

The downgrade was another setback to European leaders' efforts to contain a crisis over too much government debt in some euro member countries. Ireland, Greece and Portugal have been cut off from bond market borrowing by fears that they might default and have had to take bailout loans from other eurozone governments and the International Monetary Fund.

Fitch cited the European Union's (EU) slow-moving approach to fundamental reform of how the euro currency is set up, as well as the lack in the interim of a credible financial firewall with enough money to keep countries that suddenly have trouble borrowing from defaulting.

The agency lowered ratings for the five by one notch and placed a negative outlook on all of them. Italy went down to A- credit rating while Spain was downgraded to A. Additionally, a sixth country, Ireland, saw its BBB+ rating affirmed but it also received a negative outlook.

Italian Prime Minister Mario Monti has implemented
a number of measures to strengthen Italy's finances

Fitch Ratings blamed the revisions on "the marked deterioration in the economic outlook" in Europe and "the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises".

It said that European leaders' "gradualist" approach to tackling the crisis meant that Europe will continue to face episodes of severe financial volatility that would erode governments' ability to repay debt.

It said those fears would be compounded by a shrinking economy, now that many economists expect at least a mild recession.

"The eurozone crisis will only be resolved as and when there is broad economic recovery," Fitch said. "It is evident that further substantial reforms of the governance of the eurozone will be required to secure economic and financial stability, including greater fiscal integration."

Copyright © 2012 The Press Association. All rights reserved.

EU and US economic leaders spar at Davos

EU and US economic leaders spar at Davos 

Key policy-makers from Europe and the United States thrashed out ideas for pulling the eurozone out of its debt crisis at the Davos forum on Friday, days ahead of a key European summit.

While cloistered in a snow-bound conference centre high in the Swiss Alps, the global political and business elite had one eye on Greece, hoping that a long-awaited deal to write down its debt might at last fall into place.

Greek Prime Minister Lucas Papademos is in talks with banks and insurers on a voluntary exchange of bonds that would wipe 100 billion euros ($130 billion) off the country's debt of 350 billion euros.

The deal under discussion would see private creditors take a "haircut" of at least 50 percent on 200 billion euros in debt. Previous talks stalled over the amount of interest to be paid on the remaining debt.

Any failure to strike a deal could trigger a messy default, which would be an economic disaster for Greece itself, a threat to banks holding too much sovereign debt and pile on the pressure on other eurozone state.

World markets and delegates in Davos have begun to show signs of cautious optimism that a deal is near, and that Monday's EU summit will draw a line under the debt crisis and allow governments to move on to pro-growth measures.

The finance ministers of Germany and France and the head of the European Central Bank were in Davos to debate strategy and defend the beleaguered single currency area after it was attacked by Britain's leader.

They will all then meet again on Monday in Brussels for the latest in a series of high stakes EU summits, the bloc's first since Standard & Poor's downgraded the credit rating of a slew of eurozone member states.

And US Treasury Secretary Timothy Geithner was to debate the outlook for world economy after the Obama administration acknowledged that the eurozone slump is undermining American growth ahead of the November election.

The annual forum has been marked by gloom about the state of the global economy, and in particular about Europe's struggle to cope with yawning public deficits while at the same time seeking growth and jobs.

The euro has been under pressure -- amid fears that Greece or even eventually a giant like Spain or Italy could default on its debts -- and the 17-nation bloc's economy in on the brink of renewed recession.

A fortnight after France was stripped of its triple A credit rating, Finance Minister Francois Baroin will join his German counterpart Wolfgang Schaeuble in a debate entitled: "How will the eurozone emerge from the euro crisis?"

After the Friday the 13th downgrade by Standard and Poor's, Baroin said the development was "not a catastrophe" and insisted that the government rather than the ratings agencies would decide French policy.

But the Davos meeting has reverberated with calls for eurozone nations to act decisively to restore confidence, Canada's leader Stephen Harper said that Europe's capitals have been guilty of complacency.

British Prime Minister David Cameron also piled on the pressure, reviving his simmering feud with the rest of Europe on Thursday by savaging France and Germany's plans for a new financial transactions tax.

"Even to be considering this at a time when we are struggling to get our economies growing is quite simply madness," he declared.

The eurozone has caused alarm far beyond the continent and Mexican President Felipe Calderon used his speech Thursday to urge Europe to "bring out the bazooka immediately" to prevent the problem from sinking Italy and Spain.

"It is necessary to bring out the bazooka immediately, before the gunpowder gets wet," said Calderon, who holds the rotating chair of G20 world powers.

"Don't forget that we are in the same boat. It is not just a question of a possible implosion of the euro, but a crisis across the world."

Geithner's address comes a day after the Federal Reserve cut its US growth forecast to 2.2-2.7 percent, about one-quarter percentage point below the previous forecasts, citing the eurozone crisis.

"We continue to see headwinds coming from Europe," Fed chairman Ben Bernanke said at a news conference.

The third day of the Davos gathering also focused on events in the Middle East and North Africa, with an address from Hamadi Jebali, the post-revolution Islamist premier of Tunisia, and a debate on Iran's nuclear ambitions.

Jebali's appearance is designed to imbue a rare spirit of optimism but he will speak just as eyes will be turned towards the head of the UN's atomic watchdog as he discusses the implications of Iran acquiring a nuclear bomb.

International Atomic Energy Agency chief Yukiya Amano will be joined at the debate by Ehud Barak, the defence minister of Iran's arch foe Israel.

Copyright © 2012 AFP. All rights reserved.

Bank inches towards more QE as global risks loom

Bank inches towards more QE as global risks loom

The Bank of England inched towards pumping more money into the faltering economy in January as the risks from the global economy still loomed large, minutes to the Bank's January 11-12 meeting showed on Wednesday.

The Bank of England is seen against
a blue sky in the City of London October 6, 2011.
REUTERS/Suzanne Plunkett

The central bank's minutes repeated the view that inflation was set to fall sharply in the coming months, though tensions in the Middle East carried the risk of a sharp rise in oil prices.

The 9-member monetary policy committee also noted that some positive developments moderated some of the most serious risks, pointing to the European Central Bank's generous provision of long-term liquidity.

The MPC voted unanimously to hold the target for asset purchases steady at 275 billion pounds and the key interest rate at the record-low of 0.5 percent, where it has been since March 2009.

"For some members, the risks of undershooting the (inflation) target meant that a further expansion of asset purchases was likely to be required," the minutes said in a slightly more assertive tone than last month.

Britain's economy has been moving closer to recession over the past few months though some less downbeat business surveys and retailers' strong Christmas sales raised hopes that the country may avoid another slump.

The Bank reiterated the view that output was likely to be broadly stagnant in the final quarter of 2011 and the first three months of 2012.

Most economists expect the central bank to announce another 50 billion pounds cash injection for the economy in February as the government's hands are tied by its pledge to erase the country's huge budget deficit over the next five years.

Bank governor Mervyn King said in his first key note speech of the year that falling inflation is providing the scope for further quantitative asset purchases if necessary.

The policymakers judged that there was no compelling reason to think that the impact of the current bout of quantitative easing would be materially different from the first round, the minutes showed.

The minutes reiterated the Bank's forecast that inflation would fall sharply in the near-term as one-off effects such as last year's increase in sales tax fell away, though the policymakers also noted the uncertainty in the medium-term.

"There was greater uncertainty about the speed and extent of the fall in inflation thereafter," the minutes said.

Mervyn King predict lower inflation

Some members continued to argue that risks to inflation were overall more finely balanced and it was less clear that it would fall below the target in the medium term.

In particular Bank chief economist Spencer Dale has indicated that he would want to see clearer signs that inflation was coming down as expected before voting for further asset purchases.

Inflation has eased to 4.2 percent in December, down from the three-year high of 5.2 percent hit in September, though still more than twice the central bank's target.

The Bank forecast inflation to fall below 2 percent towards the end of this year. The Britain's large utility companies announced to cut gas and energy prices over the past couple of weeks.


©Reuters 2012

IMF Warns Debt-Crisis Inaction May Mean Steep EU Recession

IMF Warns Debt-Crisis Inaction 

May Mean Steep EU Recession.

The global economy is slowing this year, the International Monetary Fund said Tuesday, cutting its forecasts for growth and warning of a deeper downturn if Europe doesn't take stronger action to stem its debt crisis.

The global economy will expand 3.3%, this year, down from 3.8% last year, said the IMF, which in September had forecast 4% growth in 2012.

Europe is likely to experience at least a mild recession this year, but the outcome could be far worse if euro-zone leaders fail to halt the rise of state borrowing costs and growing squeeze on bank credit, the world's emergency lender said in an update of its World Economic Outlook. Inaction could cause the euro-zone economy to shrink by 4% on average in each of the next two years, and lop two percentage points off global output this year, the fund said.

The World Recovery is in danger of stalling - IMF Chief Economist Oliver Blanchard

"The world recovery, which was weak in the first place, is in danger of stalling," IMF chief economist Olivier Blanchard said. "But there is an even greater danger, namely that the European crisis intensifies. In this case, the world could be plunged into another recession," he said.

Funding costs for some of the region's biggest economies are hitting levels not seen since the launch of the European Economic and Monetary Union. Combined with thinning credit in financial markets and governments tightening their fiscal belts, Europe is likely to face at the very least a mild recession this year.

If Europe quickly follows IMF recommendations, the fund expects the euro area to face a 0.5% contraction this year. The fund shaved off 1.6 percentage points from its last forecast for 2012 in September--reflecting its worst-case scenario--after risks escalated sharply in the last quarter of the year, when the debt crisis "entered a perilous new phase." Under its optimistic scenario, the IMF expects growth to return to the region next year.

IMF warn that debt inaction may
result in a steep recession in the EU

Economists increasingly expect Greece to default within weeks. Even more worryingly, the markets are now targeting Spain and Italy, pushing up the cost for Rome and Madrid to borrow to cover the risk of default. The IMF slashed its 2012 forecasts for both countries, saying Italy faces a 2.2% contraction and Spain, a 1.7% fall. Both are expected to continue to be in recession through 2013.

The IMF praised the efforts of many euro-zone members to reduce their massive debt burdens and bloated budgets, but it warned against further near-term cuts that could worsen their economic woes.

"Given the large adjustment already in train this year, governments should avoid responding to any unexpected downturn in growth by further tightening policies," IMF staff said.

Advanced economies, including the U.S., Japan, the U.K and the euro zone, are expected to expand by only 1.5% on average through 2013, a growth rate too sluggish to make a major dent in high unemployment levels.

Growth in emerging and developing economies has slowed as European banks spend less abroad and euro-area demand contracts. The IMF forecasts those countries will expand as a bloc by 5.4% this year and 5.9% next year, shaving more than half a percentage point off their growth estimates. The fund lowered China's growth by nearly a percentage point to 8.2% for the year, down from a previous forecast of 9%.

But major emerging economies face a risk of a major shock to growth. Should real estate and credit markets unwind, "the impact on economic activity could be very damaging," the IMF said.

Overall, the IMF sees global growth slowing but not collapsing, and many advanced economies avoiding a second recession.

The European Stability Fund

"However, this is predicated on the assumption that in the euro area, policy makers intensify efforts to address the crisis," the IMF said.

The IMF wants the euro zone to double the size of its emergency bailout fund, called the European Financial Stability Fund, which it said Tuesday wasn't big enough to address any new major debt emergency. 


The fund said that financing for the bailout fund is in question following its rating downgrade and the higher cost of financing it.

It is also urging the Group of 20 industrial and developing countries to boost the IMF's lending resources to more than $1 trillion. 


That way, Europe could use its bailout fund to help boost banks' cash levels and keep its euro-zone financing costs down while the IMF helps bail out ailing economies. The fund also wants the European Central Bank to continue its bond-buying program, maintain ample credit in the financial system and ease policy interest rates.

However, there are major political hurdles for Europe to follow through on the IMF's recommendations. In particular, Germany has so far resisted bulking up the bailout fund beyond what has already been promised and the ECB has publicly rejected a bailout role.

The IMF also reiterated its concerns that the U.S. and Japan hadn't made enough progress developing a medium-term plan to slim their budgets and pay down massive debt overhangs. In the absence of action, "there is the possibility of turmoil in global bond and currency markets," it said.

-By Ian Talley, Dow Jones Newswires
Edited by PoliticsUK

Pressure grows over RBS bonuses

Deputy Prime Minister Nick Clegg has insisted there should be no big, million pound-plus bonus payout for the boss of the mainly state-owned Royal Bank of Scotland.

Mr Clegg dismissed reports that RBS chief executive Stephen Hester was in line for an award of £1.5 million or more as "pure speculation".

"You are asking me about a hypothetical outcome that I don't believe will arise," he told BBC1's The Andrew Marr Show.

Royal Bank of Scotland chief executive Stephen Hester
received a two million pound bonus last year

He said the Government's ability to influence bonus payments at RBS - which is 83%-owned by the taxpayer - was "constrained" as a result of contractual arrangements entered into by the last Labour government.

However he made clear that ministers expected the overall bonus pool at the bank to be "considerably lower" than it was last year.

"We have been very, very clear that in RBS - and for that matter in other banks - the bonus pool has got to be considerably lower than it was last year," he told BBC1's The Andrew Marr Show.

"The Bank of England, the Financial Services Authority, are saying exactly the same thing because any money that is spare should be where possible be used to repair the banks' balance sheets."

Mr Clegg stressed no decisions had been taken yet on the bonuses at RBS. But after David Cameron said last week that Mr Hester's bonus would be "a lot less" than the £2 million award he received last year, Labour leader Ed Miliband said the Prime Minister had to ensure the awards were kept in check.

And Mr Miliband later went further, calling for Mr Hester to be stripped of his bonus altogether. "Taxpayers are still footing the bill for what's happening at the Royal Bank of Scotland," he told BBC Radio 5 Live's Pienaar's Politics.

"If responsibility means anything I don't think he should be getting his bonus. And the Prime Minister, if he's true to his word, would exercise his responsibility to do something about that."

Jobless total hits 17-year high

Unemployment reached a 17-year high today after a 118,000 increase in the jobless total, which saw a record number of young people out of work.

The figure jumped to 2.68 million in the three months to November, the worst since the summer of 1994, giving the UK a jobless rate of 8.4%.

The number of unemployed 16 to 24-year-olds increased by 52,000 over the quarter to 1.04 million, the highest since records began in 1992.

And the number of people claiming jobseeker’s allowance in December increased by 1,200 to 1.6 million, the highest for a year after the 10th consecutive monthly rise.

Other figures showed that almost a million working days were lost in November as a result of the public sector pensions strike, the highest figure since 1989.

The Office for National Statistics reported that the number of people in full-time employment fell by 57,000 in the latest three months, but there was a 75,000 increase in part-time workers.

There was a 44,000 rise in the number of people working part-time or for themselves because they could not find a full-time job, taking the total to 1.3 million, the highest since comparable records began in 1992.

Employment increased by 18,000 to 29.12 million, while the number of people classed as economically inactive fell by 61,000 to 9.29 million, a rate of 23.1%.

The fall was mainly due to fewer women looking after a family or home, and fewer retired people under the age of 65.

Unemployment increased evenly among men and women in the latest quarter, while the number of people out of work for longer than two years increased by 1,000 to 424,000.

There was a 10,000 fall in the number out of work for more than a year to 857,000.

Average earnings increased by 1.9% in the year to November, down by 0.2 percentage points on the previous month.

John Salt, director at recruitment firm totaljobs.com, said: “Whether or not the UK is technically in recession, for those out of work the situation is already dire enough.

“Today’s figures merely confirm what our barometer has been telling us for three months now, that applications per job are at an all-time high of 23, with not enough growth in the labour market to absorb the numbers being laid off. What’s more, the signs for 2012 just aren’t good.

“The eurozone crisis threatens not only jobs reliant on exports but also in the financial services industries. With retail already struggling following a lacklustre Christmas, it is difficult to see sectors in which we’re going to see significant increases in available jobs.”

Paul Kenny, general secretary of the GMB union, said: “This rise in unemployment was made in Downing Street. The truth is that jobs are haemorrhaging in the public and private sectors and no one in the Government seems to know what to do to stop this.

“There are parts of the country in such despair that more than a quarter of households with people of working age have no one in work.

“The number one political priority has to be securing a reduction in unemployment.”

Employment Minister Chris Grayling said: “The overall level of unemployment is, and will remain, a major concern for the Government.

“The latest figures reflect the current challenging economic climate but also show more women entering the workforce and more students looking to supplement their income through work.

“When you take into account our welfare reforms, the number of jobseeker allowance claimants has actually fallen.

“Despite the exceptionally difficult economic circumstances, finding work for the unemployed will remain top of the Government’s agenda.”

Eurozone must focus on growth: Britain

Eurozone countries must concentrate on boosting growth and cutting regulation following the downgrading of several nations in the bloc, British Foreign Secretary William Hague said Sunday.

Hague said the decision on Friday by ratings agency Standard and Poor's to downgrade more than half of the members of the debt-ridden eurozone -- including stripping France of its triple-A rating -- was "serious".

"It underlines the fact that the eurozone is not through its problems... Across Europe, including in the UK, we need to redouble our efforts to get growth going," Hague said.

"That means in Europe more free trade agreements with the rest of the world, it means really pushing for the single market, it means stopping passing regulations who've made life more difficult for businesses."

Hague: European countries need growth

Britain, which is not a member of the eurozone, was the only EU member to reject a Franco-German proposal in December for a treaty across the bloc on implementing stricter fiscal discipline.

Prime Minister David Cameron said he did so to protect the City of London from moves to introduce a financial services tax.

Britain was also involved in a slanging match with France last month after the French central bank governor and senior ministers said rating agencies should be mulling a debt downgrade of Britain rather than France.

Britain's AAA rating remains intact.

Hague said it was in Britain's interest for the eurozone, its biggest export market, to recover.

"We want the eurozone countries to recover. They can best do so through that kind of financial actions and to really setting a course for growth. No more time wasting bureaucratic directives, real emphasis on free trade."

AFP 2012

Balls to outline Labour alternative

Labour faces "a big task" to regain economic credibility and win back public trust, Ed Balls is set to admit in a speech.

In a high-profile speech setting out what he terms the "economic alternative" to the coalition Government, the shadow chancellor will acknowledge that Labour should have been "clearer" before the 2010 general election that it would impose spending cuts and tax rises if re-elected.

And he will repeat his message that the party cannot make any commitments now to reverse coalition cuts or tax hikes if it returns to power.

Ed Ball want to regain trust with the electorate

Chancellor George Osborne's economic policy threatens Britain with "a decade of stagnation", Mr Balls will warn in a speech to the Fabian Society in London. Labour must offer an economic alternative which meets the twin challenges of boosting growth now through temporary tax cuts and investment in jobs and delivering reform over the longer term to build "responsible capitalism".

But he will caution: "To make that alternative work and be credible, it must be underpinned by a clear commitment to balanced but tough spending and budget discipline now and into the medium term.

"However difficult it is for me, for some of my colleagues and for our wider supporters, we cannot make any commitments now that the next Labour government will reverse tax rises or spending cuts. And we will not."

Labour's five-point plan for a temporary VAT cut and investment in jobs is needed to "stop a decade of slow growth and higher debts becoming a self-fulfilling prophecy", Mr Balls will say.

"Action now for growth, jobs and reform does not conflict with the need for a credible medium-term plan on the deficit, it reinforces it," he will argue.

This must be coupled with "long-term reform to ... build a stronger and fairer economic model for the future - what Ed Miliband has called a more responsible capitalism - which can, even in tougher times, meet our aspirations for social justice and strong public services", he will say.

But he will acknowledge that setting out an alternative to the coalition's economic policy is not enough, and that Labour must also overcome the electorate's doubts over its economic credentials.

RATINGS CUT THREAT TO EURO STATES

Several euro countries, including Italy, could see their credit ratings downgraded by the end of this month as they struggle to cope with too much debt.

Fitch Ratings head of sovereign ratings David Riley said the agency will give its verdict on several countries by the end of January. It currently has Italy, Spain, Belgium, Ireland, Slovenia and Cyprus on so-called "ratings watch negative" and Riley said the reductions could be up to two notches.

Much interest in the markets centres on Italy, the third-largest eurozone economy and considered too expensive to bail out. Mr Riley said it is the "front line" of Europe's debt crisis.

"The future of the euro will be decided at the gates of Rome," he said.

Although Italy has a relatively low budget deficit in comparison to its economy, the country is saddled with massive amounts of debt and will have to raise a large chunk of cash in the markets this year.

It has found itself in financial trouble in recent months, with investors demanding increasingly high interest rates to lend it more money. Former prime minister Silvio Berlusconi was forced to resign late last year as the economic backdrop darkened, making room for a caretaker government under well-respected economist Mario Monti.

Mr Riley said the challenge for Mr Monti's government is to convince investors it has a proper strategy to keep a lid on spending but also that it has a strategy for economic growth. An expanding economy helps keep a country's debt to GDP ratio under control.

Mr Riley said France, the eurozone's second-largest economy, is also facing difficulties because of its debt burden, which is over 80% of GDP, although its cherished triple A rating is not one of those facing an imminent cut by Fitch.

Mr Riley also said that Greece will remain at the heart of the crisis over the coming months as it seeks to negotiate a deal with private creditors on reducing the value their holdings of Greek debt. He said even that deal would fail to materially lighten Greece's debt load, though he was confident Greece would still be a member of the eurozone this time next year.

©Press Association

WE MUST STICK TOGETHER, WARNS CLEGG

Nick Clegg warned today that Europe could only overcome the economic crisis by sticking together and avoiding "needless rivalry and isolation".

Seeking to re-engage with European leaders in the wake of David Cameron's treaty veto, the Deputy Prime Minister insisted: "We will not sort out this crisis by falling apart."

He was speaking to fellow liberals from across Europe at a Whitehall summit to address the economic challenges facing the continent.

It comes after the Prime Minister sent shockwaves through the coalition and Britain's relations with Europe by vetoing a new European Union treaty designed to tackle the problems facing the eurozone.

Mr Clegg, a staunch pro-European, sought to reassure his allies in Europe as they gathered in Admiralty House today.

"We can only address these problems by pulling together," he said.

"The one lesson we have learnt over and over again in Europe, to our cost, is that we are stronger when we are together and weaker when we are apart.

"It is immensely important to work as liberals, in all our different countries, in all our different ways, to promote unity over disunity and to promote co-operation rather than needless rivalry and isolation."

The Liberal Democrat Deputy Prime Minister also warned that fiscal austerity was not enough and had to be accompanied by economic growth.

"We will not solve this economic crisis through economic austerity alone. Fiscal discipline, fiscal austerity is an absolutely necessary condition in order to move forward, but it isn't a sufficient condition for the European economy," he said.

Among those joining Mr Clegg for today's lunch and roundtable discussions were Olli Rehn, the European Commissioner for economic and monetary affairs, Dutch prime minister Mark Rutte and German economy minister Philipp Roesler.

Mr Clegg said: "Unity will get us through this crisis better than disunity, and growth will get us through this crisis where fiscal austerity alone cannot."

Nick Clegg: Euro Leaders must stick together

Mr Clegg said any EU efforts to tackle the eurozone crisis - and excluding the UK after the veto - should be "limited" and focused on dealing with the fiscal problems facing the single currency.

At a press conference after talks between the European liberal democrat leaders, he said: "We don't think it should be broadened to include economic governance in a sweeping way.

"It would be a mistake, in our view, if it was to seek to reinvent, duplicate or usurp the single market. We don't need a whole battery of new instruments, articles and agreements to do what we can do already."

He added: "We all agree that this new agreement should be limited in scope, it should be temporary as a stand-alone instrument, and should not in any way cut across the basic cohesion and unity within the EU."

But he also indicated that the new measures could eventually be incorporated into the treaties of the EU.

"What we would like to see is a new instrument which is narrow, which doesn't usurp or disrupt the single market, doesn't challenge the rights of the United Kingdom or those of any other member state of the EU, and is over time absorbed into the EU treaties."

The European liberal democrat leaders gathered in London as German chancellor Angela Merkel and French president Nicolas Sarkozy met to discuss boosting growth in the eurozone.

Mrs Merkel and Mr Sarkozy urged a quick conclusion to negotiations on a new agreement meant to enshrine tougher fiscal discipline.

The German leader said negotiations were "progressing well", and the pact could be signed as early as the end of this month, and at the beginning of March at the latest.

Asked whether he had a New Year message for Tory eurosceptics, Mr Clegg said: "We are at our best when we lead. We are not at our best when we are isolated."

He said it would be "disastrous" if the coalition was to break up but said differences between himself and Mr Cameron on the EU were nothing new.

"It would be disastrous for this country, given the really, really difficult and controversial rescue mission that we are implementing as a coalition to the British economy, for the Government to fall apart.

"Of course we have our differences, of course David Cameron and I don't see eye to eye on the EU. What's new?

"It's one of the big differences between our parties, but like so many big issues in the coalition, we try to resolve our differences in the national interest and we will continue to do so."

Mr Cameron and Mr Rutte agreed during talks at Downing Street that "concrete action" to boost growth must be priority at the next EU summit.

A No 10 spokeswoman said: "They discussed the European economy and agreed that urgent action is required to find a sustainable financing solution to the current debt crisis in the eurozone.

"They also agreed that improving competitiveness across Europe is the long-term priority to tackle the causes of the crisis and that concrete action to boost growth should be agreed by EU leaders when they meet in Brussels at the end of January.

"They agreed to explore specific elements of a pro-competitiveness agenda, including completing EU trade deals with other countries; extending the single market in the areas of services, energy, IT and telecoms; and reducing regulation which stifles business and jobs.

"The Prime Minister also raised the situation in Somalia ahead of the international conference that he will chair in February.

"The leaders agreed that the international community should step up efforts to tackle the problems of state failure, terrorism and piracy in Somalia."


©AP 2012