FXstreet.com (Barcelona) - Merrill Lynch analysts believe Europe has much to fear from the US fiscal cliff, given its fragile economic backdrop. “With negotiations in Washington DC likely to extend to the 11th hour, uncertainty will likely dent confidence in Europe. Even if the US narrowly averts the cliff – as our US team expects – the ensuing fiscal tightening will probably be felt across the Atlantic”, wrote analyst Gustavo Reis, pointing to a 0.2pp GDP hit in the euro area with a US fiscal contraction by 2pp.

Political inaction, with lack of market pressure and the looming German elections next fall slowing the progress toward a single supervisory mechanism, is likely to keep the market vulnerable to volatility spikes in 2013 despite the ECB efforts.