Berlin - A new bargaining chip has emerged in the ongoing German coalition talks: the idea of holding referendums on major EU decisions - be it bailouts, enlargement or more transfers of sovereignty to Brussels.

The idea was formulated in a joint working paper drafted by Hans-Peter Friedrich, a member of Angela Merkel's Bavarian sister party (CSU) and currently the country's interior minister, and Thomas Oppermann, a member of the opposition Social Democrats (SPD).

A grand coalition would be a unique opportunity for "modernizing our democracy," they wrote.

More referendums - which currently can be held only on constitutional matters or if the country's borders are changed - would give voters the chance to "influence political decisions also in-between elections," they added.

In their leaked paper, the two politicians argue for a "careful transition to direct democracy," for instance when 1 million people gather signatures on a matter or if the parliament wants to consult the population on a specific law.

The paper also argues that referendums should be held on EU matters of "great significance" - such as EU enlargement, transfer of powers to Brussels or another eurozone bailout.

Merkel's Christian Democrat party (CDU) was quick to dismiss such wide-ranging plebiscites, saying there was a risk of them being hijacked by populist campaigns.

"There are still serious doubts about the introduction of referendums at national level," said Guenter Krings, the deputy leader of the CDU in the Bundestag.

The chairman of the EU affairs committee in the parliament, Guenther Krichbaum, said such a change would bring about the "advent of populism" in Germany.

The Social Democrats have also distanced themselves from referendums on EU matters.

They say plebiscites should be held on internal matters and formulated in a way that would not give a platform for anti-European campaigns.

"One can leave out certain questions that touch on the core principles of the EU," said SPD secretary general Andrea Nahles.

The issue will form part of coalition talks on Wednesday.

The negotiations are expected to last at least until the end of the month, with a final round expected on 27-28 November. The new government should be in place by mid-December.

It changes by the hour ....what a circus !!! lies and deceit and that's all !!

Good news for the European economy: retail sales were much stronger than expected in August.

Eurostat reported that retail sales volumes rose by 0.7% in the euro area, and 0.4% across the wider European Union in August. July's data was also revised higher, showing consumers weren't as cautious about spending as first thought.

Eurozone retail sales to August 2013 Photograph: /Eurostat

Eurostat's data shows that non-food shopping was strong, rising by 0.6% in the eurozone. That covers items such as computers, clothing and medical products.

The data also showed an increase in fuel purchases, suggesting a rise in motor journeys. Spending on "automotive fuel in specialized stores" (that's petrol stations to you and me) was up by 0.9% across euro members.

The eurozone recovery is gathering pace, with its private sector firms reporting the biggest leap in activity since June 2011 last month.

Data firm Markit's monthly surveys of companies across the single currency showed a solid rise in activity.

New business has picked up, and the rate of job cuts may finally be slowing to a halt.

Markit's monthly survey of activity came in at 52.2, up from August's 51.5. Both service sector firms and manufacturers said conditions were better.

Photograph: Markit

Here's some key factoids from the report (online here)

Ireland: 55.7 2-month low
Germany: 53.2 2-month low
Italy: 52.8 29-month high
France: 50.5 20-month high
Spain: 49.6 2-month low

The news comes hours after China's service sector output hit a 6-month high.

Chris Williamson, chief economist at Markit, said the eurozone data showed Europe's recovery on track, despite Spain's private firms faltering after a better August.

The European Union - in the longest recession ever

The eurozone has slumped into its longest recession ever, after economic activity across the region fell for the sixth quarter in a row.  Economic output across the single currency area fell by 0.2% in the first three months of 2013, statistics body Eurostat reported on Wednesday. France, Spain, Italy and the Netherlands all saw their economies shrink as the economic crisis in the eurozone continued to hit its largest economies. Eurostat's figures showed that the eurozone economy has contracted by 1% over the last year, putting further pressure on leaders as unemployment climbs to new record highs. The 0.2% contraction in the first quarter was an improvement on the 0.6% drop recorded between October and December, but analysts warned that the eurozone's economic outlook is darkening.  "What seems incontrovertible, on this evidence, is that the member-states of the euro zone are on the wrong track," commented Stephen Lewis, chief economist at Monument Securities. "The costs of the zone's one-size-fits-all strategy are becoming brutally apparent."

France was dragged back into recession by a 0.2% drop in GDP, announced on the first anniversary of François Hollande being sworn in as president. Pierre Moscovici, French finance minister, denied Paris's forecast of 0.1% growth this year was too optimistic. "I'm sticking to the figures," Moscovici told reporters, adding that the EU must prioritise growth over tackling budget deficits.

There was also disappointment that Germany eked out growth of just 0.1%, worse than economists had expected. The Dutch economy shrank by 0.1%. "The bottom line is that both the German and French economies, which together account for half of the eurozone's output, are in the doldrums," said Nick Spiro of Spiro Sovereign Strategy. "Add in the persistent recession in the Netherlands, which accounts for a further 6.5% of eurozone GDP, and the core and semi-core of the eurozone are in significantly worse shape than a year ago."

Italy's new prime minister, Enrico Letta, was given an early reminder of the challenge he faces with the news that Italian GDP fell by 0.5%. Italy's economy has been shrinking for the last seven quarters, its longest recession since at least 1970.

Beyond the eurozone, the Czech Republic suffered a 0.8% decline in GDP during the quarter. The data came a day after the Washington-based Pew Research Centre reported that public support for the European Union had fallen over the last year, from 60% to 45%. Pew warned that the ongoing financial crisis means the European project was "in disrepute" in some countries, with many Europeans losing faith in closer integration. "These results spell trouble ahead for the EU," said Lewis."They are likely to be taken seriously in Washington."

Eurostat's figures also showed that the European Union shrank by 0.1% during the last quarter, despite the UK growing by 0.3%.

Figures released last week showed that Spain's economy contracted by 0.5%.

Stocks are up big to start 2013 but Marc Faber, Editor & Publisher of the Gloom, Boom & Doom Report, says it ends in tears.

"Either the market is going to correct more meaningfully now or we have a shallow correction and a continuously rising market until July or August," Faber told me via phone from Thailand. If stocks don't pullback soon, he says we risk a repeat of 1987 when stocks rallied 40% into summer only to collapse 41% in 2 months.

"In March of 2009 everything looked horrible, now nobody can find a reason why stocks could go down," Faber claims. "We ask that you should buy stocks when everything looks horrible, you shouldn't rush to buy them when everything looks perfect."

The problem is that it's hard to find anyone claiming the environment is perfect. Even the theme running under the reports of "the masses" buying stocks is that it's a cue to sell, not buy.

Analysts are looking for almost no corporate earnings growth in the current quarter and not much better than that for the balance of the year. The idea that Fed money printing is supporting assets may be true, but the FOMC has given clear guidelines on when the printing will stop. When inflation (as measured) rises past 2% or unemployment falls below 6.5% the Fed will raise rates.

Even if you think the Fed is wrong, there's no basis for calling them liars. A surprise end to Quantitative Easing isn't on the table. It's hard to make much of a case for ebullience beyond the fact of stocks much-hyped journey toward all-time highs.

So what's an investor to do? Faber says it's a matter of allocation and perspective. Stocks have gone very far in a relatively short amount of time. If you caught the rally, he says it's time to trim but not bail out entirely. If you're a Johnny-come-lately to stocks, you're too late as he sees it.

"If you have 100% of your money in equities and you just bought them now, maybe you should reassess your position," says Faber.

Growth in China, Risks in the USA...If the situation in Southern Europe doesn't improve in 2013, the German economy will become even more dependent on consumers in the rest of the world -- particularly in the United States and China.

Concerns about a slump in Chinese growth have eased recently, with the World Bank revising its growth forecast upwards. And demand from emerging economies continues to be good.

But the situation in the US is more difficult. President Barack Obama's re-election has dispelled some uncertainty, but the country's political divide is deeper than ever before. The brinkmanship that saw a deal reached on Jan. 1 on the "fiscal cliff" may have averted disaster, but it hardly inspires confidence in the world's largest economy. And while there may have been a last-minute deal, it is difficult to predict what effect it will have. After the Democrats and Republicans reached an 11th-hour deal on the budget in 2011, rating agency Standard & Poor's responded to the deal by stripping the US of its highest rating.

The shakier the global economy, the more important domestic demand becomes. In Germany, companies have been wavering for some time, with investment in new equipment declining over the past year. Consumers, on the other hand, have been a driver of the German economy, a first in a country that has often been criticized for its heavily export-dependent economy.

"Even during the financial crisis, consumption was solid as a rock," said Ifo's Carstensen. "That was because the labor market was supported by measures such as shorter working hours."

However, at the end of 2012, that mood deteriorated, with the GfK consumer confidence index falling twice in a row, largely because of fears over employment prospects. According to a survey by insurer Allianz, the fear of job losses has increased significantly over the past year. Thus far, many German companies had continued to hire new staff, while existing workers benefited from salary increases secured through collective bargaining agreements. According to Weber, however, "that positive trend in the labor market is broken."

During the 2009 financial crisis, after the federal government introduced its short-time working program, many German companies sucessfully avoided layoffs. And Weber believes 2013 will not see any catastrophic plunge. "There will be no major downturn," he says, but rather "more of a long, drawn-out dampening."

At the summit of the Group of 20 leading economies in Los Cabos, Mexico, Mr. Rajoy told his counterparts that it was necessary to "break the link between risk in the banking sector and the sovereign risk," a Spanish official said. Officials in Brussels cautioned the momentum hasn't moved in favor of making such far-reaching changes to the Spanish bank-aid plan. But they said at least one issue is back on the table: putting bank rescue loans on equal footing with government bonds held by private investors. Germany has insisted that official loans should have a preferred status, meaning they shouldn't suffer losses even if private bondholders are forced into a restructuring.

Some analysts have blamed this prospective subordination of private creditors as contributing to the retreat of Spanish bond markets since the bank-bailout plan was announced 10 days ago. Others argue investors should assume official lenders will have preferred status anyway....putting the ESM on equal footing with regular bondholders would only resolve part of the problem—assuming that investors would actually believe a statement to that effect by euro-zone leaders, said Guntram B. Wolff, deputy director of Brussels-based think tank Bruegel.

The much bigger issue remains the country's growing debt load, he added, for which no institution has offered a credible solution so far. Spain's demand for direct capital injections for its banks rather than lending the money first to the government is being supported by the European Commission, the EU's executive, and some other EU governments, but is still being resisted vehemently by Germany, officials said. One EU official, however, said that "it is still early days" and that the exact structure of the aid hadn't been decided yet.

A remarkably gloomy assessment of the world economy - Ms Lagarde warned that urgent action is required to stave off the threat of global recession and another credit crisis. Sounding a stark warning to stronger European countries such as Britain and Germany, the new IMF chief said: "We could easily see the further spread of economic weakness to core countries, or even a debilitating liquidity crisis." To reduce these risks, she called for "substantial" and mandatory recapitalisation to bolster European banks' balance sheets, which will be "key to cutting the chains of contagion". Ms Lagarde, who was speaking at the US Federal Reserve's annual forum at Jackson Hole, said the recapitalisation should first be financed through private channels, but could also be sourced from a Europe-wide bail-out fund. "Developments this summer have indicated we are in a dangerous new phase. The stakes are clear. We risk seeing the fragile recovery derailed. So we must act now," she said. Put simply, macroeconomic policies must support growth. Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation." Ms Lagarde's comments risk creating new panic about the funding levels and financial stability of European banks. There have been concerns that lending between banks has started drying up over recent weeks, which was a key sign of the "credit crisis" in 2008.

"Who knows?"

William Hague, the foreign secretary, has raised doubts about the future of the euro, saying it was impossible to know whether the currency would collapse. The Foreign Secretary, a vociferous and long-standing critic of European monetary union, said he "hoped" that the euro would survive, but added: "Who knows?" His comments came as talks continued about the possible need to bail out debt-ridden Ireland, the latest crisis-hit eurozone member. Asked whether the euro could collapse, Mr Hague told BBC Radio 4's Today programme: "Well I hope not. The Treasury has not ruled out any options for financial aid to Ireland, including the possibility of a bilateral bail-out, although that appears unlikely.
Britain would be required to guarantee up to about £6 billion of support as part of the European stability mechanism, if that option is pursued. Many Tory MPs are deeply opposed to the use of UK taxpayers' money to bail out Ireland. Earlier this week, Edward Leigh warned: "The British people want to be assured at a time when very painful cuts are being made here that good money is not being thrown after bad in driving the Irish further into the sclerotic arms of the euro which caused the problems in the first place."