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Markets Push Europe Toward Fiscal Union

European leaders are being pushed into closer fiscal union sooner than they had anticipated by volatile markets concerned over a dearth of ideas on how to solve the sovereign debt crisis in the euro zone, analysts and investors told CNBC.

European Central Bank
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European Central Bank

"If you believe the United States of Europe is stronger than the individual nations, it's simply a step that the politicians have been working towards, but now they're being pushed into it rather than managing the process," Neil Dwane, chief investment officer for Europe at RCM told CNBC.

Over the weekend, German chancellor Angela Merkel seemed to soften her position on the issuance of so-called euro bonds, but she stressed they were not on the table for now.

"I think [Merkel] is just realizing that politicians are pushed by markets into solutions that politicians don't feel comfortable with yet," Frank Engels, co-head of European Economics Research and Asset Allocation Strategy at Barclays Capital explained.

His comments reflected those made by Paul Donovan, deputy head of Global Economics to CNBC last week, who warned that markets would push European leaders towards "extreme action" and he called for the appointment of a European statesman to oversee closer fiscal union within the euro zone.

Fiscal Integration the 'End Game'

However, Engels said Europe's leaders needed to put the appropriate infrastructure in place to ensure fiscal union could occur.

"There is a sense that you have to move eventually towards a common fiscal union, a very coordinated policy approach on economic and fiscal policies, but not now, not yet because you need to lay the foundations in terms of political and legal infrastructure first and then later on move, that is the message [Merkel] wants to provide to markets," Engels said.

"So it's not a double 'no', it's not no by all means, but it's no now, it might be yes or likely in the future," he added.

Engels said continued intervention by the European Central Bank to ensure peripheral nations implemented fiscal and economic reforms could calm markets in the short term, but the "end game" would be centralized fiscal and economic consolidation within the euro zone.

Either the ECB keeps intervening in the markets until the fiscal, structural and economic reforms that have been implemented by countries such as Italy, Spain, Portugal, Ireland and even Greece show some success, or yields on debt will go further up, Engels warned.

He added that without fiscal consolidation in the euro zone, the so-called PIIGS nations were likely to end up in further international support programs.

Contact Europe: Economy

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