LONDON, Nov 5 (Reuters) - New European Commission macro forecasts for the euro zone and the EU have been given added significance by an alarming drop in inflation to 0.7 percent which has heaped pressure on the European Central Bank to ward off any threat of deflation.
There are myriad other questions - Will the Commission predict that Italy will miss its deficit target? What will it say to those countries in bailout programmes - particularly Greece, where the troika returns for a bailout review today, and Portugal? And what about France's sluggish economy? PMI surveys on Monday showed it is acting as a drag on the euro zone recovery.
Against that backdrop, European Commission President Jose Manuel Barroso will speak at Frankfurt's St. Paul's Church, the seat of the first democratically elected parliament in Germany. He is expected to outline the political priorities of the European Union in the months to come and spell out his expectations of a new German government.
German coalition talks between Angela Merkel's centre-right and the centre-left SPD resume with a third meeting of the group of 77, yes 77, negotiators.
They still need to hammer out compromises on banking union, a minimum wage and other issues in order to meet their goal of forming a 'grand coalition' government by Christmas. Until then, major euro zone political moves are on hold.
The ECB's Thursday meeting already looms large for the markets. Today, Mario Draghi, Joerg Asmussen and Vitor Constancio all speak although they should be in pre-meeting purdah on the monetary policy front.
A policy change is still unlikely on balance but the central bankers, who are mandated to target inflation at close to 2 percent, will be discomfited by price pressures evaporating.
We reported last week that a strengthening euro has also come onto the ECB's radar, given it could depress both growth and inflation, and that there are three camps within the Frankfurt HQ - one wanting an interest rate cut (which we know was discussed at the last meeting), another preferring to keep the option open of another long-term liquidity flood for the banking system, and a third wanting to do nothing.
Our latest poll of 59 economists predicted the ECB would inject more liquidity into the banking system, probably early next year. Unless inflation picks up, the odds on a rate cut to 0.25 percent will tumble with the December meeting, which features fresh growth and inflation forecasts, a possible candidate.
Italian Economy Minister Fabrizio Saccomanni said last night there was no threat of deflation - and that seems to be the prevailing view within the ECB. However, he told the FT the strong euro was a threat to the bloc's economy and said markets wanted to see 'concrete action' before the year-end.
Italy will launch a new inflation-linked 'BTP Italia' retail bond. Previous such issues have sailed out of the door though there is the longer-term question of how much longer Italian banks can continue to gobble up government bond auctions.
Saccomanni holds talks with Bank of England chief Mark Carney on day two of a trip to London to convince investors his government's economic policies are bearing fruit.
The EU/IMF/ECB troika is back in Athens to resume a review of Greece's bailout. The government has said it will not impose any further austerity measures and hopes the ability to run a primary surplus will persuade its lenders to cut it some slack on its bailout loans. The EU and IMF say there will be a 2 billion euros fiscal gap next year that must be filled.
The bottom line is that after Angela Merkel decided once and for all last year that Greece should not be allowed to fall out of the euro zone, this will be sorted one way or another.
However, reform is never easy in Greece and the coalition government has a wafer-thin majority. Prime Minister Antonis Samaras took to the airwaves last night to say Greece was not at war with the troika but repeated that the public could not take more austerity.
The EU will open a new chapter of accession talks with Turkey. We're a million miles away from Turkey joining the bloc but this denotes something of a thaw after Germany blocked the opening of the new chapter earlier this year in protest at Turkey's handling of protests in its major cities.
Romania holds a monetary policy meeting. Having cut three times this year by a total of 100 basis points, another quarter point should be lopped off at what is the last meeting of the year.
(Editing by John Stonestreet) Keywords: EUROPE/VIEW
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