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One giant step forward, two steps back

David Brancaccio Dec 5, 2011

German Chancellor Angela Merkel and French President Nicolas Sarkozy took a pretty dramatic and united step forward today. They jointly pushed for a new European treaty that, if ratified, would alter the treaty that created the eurozone. It will create a system of budget cops to enforce automatic penalties on nations running deficits. Consider yourself even more on notice, Greece, Portugal, Ireland, Italy and Spain. And even though it’s still in the planning stages, the European Central Bank could lower interest rates when it meets Thursday.

We spoke with Doug Cote, chief market strategist at ING. He says it’s critical to know who the real key players are at this stage of the eurozone crisis: German Chancellor Angela Merkel, ECB president Mario Draghi and…U.S. Treasury Secretary Tim Geithner? Cote says Geithner is key because of the U.S. role in the driving the International Monetary Fund. The treasury secretary heads to Europe tomorrow and will hold meetings with key eurozone leaders ahead of the summit on Friday.

Chancellor Merkel says she hopes to ratify a new treaty as quickly as March 2012. That’s lightening fast for eurzone countries to reach agreement. Cote says the leaders recongize they’re simply out of time. They have to act quickly to save the eurozone and prove to the world that there’s still a reason to invest in Europe.

U.S markets responded positively to this news, only to be dragged down late in the day by an announcement that the S&P has warned six euro countries that their AAA credit ratings might be in jeopardy. Among the countries getting a warning: mighty Germany.

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