European stocks advanced yesterday, lifted by Italy’s new draconian austerity measures and Franco-German reform proposals at the start of a critical week for the European single currency.
French President Nicolas Sarkozy and German Chancellor Angela Merkel called for a new treaty to tighten controls on spending including automatic sanctions for countries whose deficits exceed the EU limit of three per cent of GDP, ahead of a crucial EU summit in Brussels at the end of the week.
European stocks held on to strong gains following the speech, with London’s FTSE 100 index up 0.67 per cent to 5,599.74 points, Frankfurt’s DAX 30 climbing 1.01 per cent to 6,142.00 points and Paris’ CAC 40 rallying 1.60 per cent to 3,215.47 points.
In foreign exchange trading, the euro shot up to $1.3487 after Mr Sarkozy and Mrs Merkel began speaking, before settling to around $1.3475. It was up from $1.3403 late in New York on Friday.
Tension on the eurozone bond market eased markedly, with interest rates demanded on Italian and Spanish 10-year bonds falling sharply.
In a sign of rising market confidence, Italy’s long-term borrowing rate fell back below the key six per cent threshold for the first time since the end of October.
Strains on the bond market had already relaxed at the end of last week on rising sentiment that Germany and France intend to reach a solution to the eurozone crisis by the end of the year.
Milan shares jumped 2.97 per cent as investors hailed the approval of an austerity budget by the government of new Italian Prime Minister Mario Monti.
Mr Monti’s Cabinet gave its go-ahead to the crisis-busting plan on Sunday, estimating that it would save €20 billion but warning that it would not prevent the economy from slipping back into recession next year.
He warned yesterday that Italy would “collapse” like Greece if it does not adopt harsh austerity measures.
“Markets are gaining ground as investors acknowledge reports out of Italy surrounding tough new austerity measures,” said IG Markets analyst Harley Salt.
Dublin stocks added 1.33 per cent as the Irish government was due to begin rolling out a 3.8-billion-euro austerity budget this afternoon.
US stock markets got off to a strong start as the Italian government’s new austerity measures raised hopes Europe is on the road to resolving its debt crisis.
By 1540 GMT the Dow Jones Industrial Average had leapt 1.28 per cent to 12,173.66 points.
The tech-heavy Nasdaq Composite added 1.52 per cent to 2,666.97 points, while the broader S&P 500-stock index advanced 1.70 per cent to 1,265.39 points.
“All eyes remain firmly on Europe, as signs begin to emerge of concrete austerity measures for Italy,” said Karee Venema at Schaeffer’s Investment Research.
EU leaders now have three days to digest Mrs Merkel’s and Mr Sarkozy’s proposals before the EU summit begins in Brussels and the board of the European Central Bank (ECB) meets in Frankfurt.
EU leaders will gather in Brussels on Thursday and Friday to seek a way to save the 17-country single currency bloc.
Some experts argue that European leaders would have to deliver “bold” moves in order to avoid the breakup of the eurozone and another painful credit crunch.
“The EU crisis has reached its final stage,” said Mediobanca equity analyst Antonio Guglielmi.
“We expect this week to see a positive turning point: bold decisions on eurobonds, fiscal union, delivery of Italian reform and ECB liquidity injection could further help the market’s confidence.
“No delivery from this week’s meetings would instead mean a much higher probability of a euro breakup and of a liquidity shock. We are reasonably constructive, as it is now or never for Europe,” he added.