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Workers protest in Rome Sept. 6, 2011 (ANDREAS SOLARO)
Workers protest in Rome Sept. 6, 2011 (ANDREAS SOLARO)

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Europe needs to pull together but divisions grow by the day Add to ...

These are stories Report on Business is following Tuesday, Sept. 7. Get the top business stories through the day on BlackBerry or iPhone by bookmarking our mobile-friendly webpage.

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Euro troubles escalate It needs to pull together, but the divisions in Europe are widening.

As BMO Nesbitt Burns notes today, markets are growing increasingly concerned that Greeks and Italians are fed up with austerity, while Germans are balking at financing the bailouts of the euro zone's weaker members.

In Italy, Prime Minister Silvio Berlusconi today toughened up his government's plans for an austerity package, and said it would go to a confidence vote in the Senate. At the same time, the country was gripped by a massive strike to protest the cutbacks.

In Athens, Greece will probably be forced to take further austerity measures because - no surprise here - its deficit is bigger than expected.

And in Germany, pressure is mounting on Chancellor Angela Merkel, whose party lost yet another regional election over the weekend.

"There are rising concerns that Greece and Italy are losing their appetite for fiscal austerity, and that Germany is losing its appetite for further bailouts," said BMO senior economist Sal Guatieri.

Where Germany is concerned, Mr. Guatieri noted fears of opposition as "bailout fatigue" grows.

"This could force Merkel to take a harder line on providing further aid unless the peripheral countries show greater resolve to cut deficits and reform their economies," he said.

Swiss central bank moves on franc For those like me who returned today from an end-of-summer break, the headlines are - not that surprisingly, I guess - strikingly similar to where we left off. Markets are anxious, economic fears continue to weigh, Greece is still in trouble, gold is still high, and the Swiss are still trying to fight a strong franc, with tough measures today.

Currency markets, in particular, are in turmoil after the Swiss National Bank moved to curb the rise of its currency by setting a cap against the euro. The decision to "no longer tolerate" the euro trading at less than 1.20 francs knocked down the currency, known in markets as the CHF, whose strength has whacked the Swiss economy.

"The massive strength in the CHF over the past few months related to its safe-haven status has caused a huge drag on the Swiss economy," said Benjamin Reitzes of BMO Nesbitt Burns. "This policy manoeuvre should provide a lift; though offsetting the drag of the slowdown in the rest of the world is another story."

The SNB's announcement was aggressive, to say the least, warning of further action if its latest move fails to ease the pressure.

"The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development," the central bank said in a statement as it set the minimum exchange rate for the currency.

"The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities," the central bank added. "Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures."

The Swiss franc is deemed to be one of the world's safest havens and, like other currencies such as the yen, has been on a tear. The central bank's move today raises questions about where anxious money goes now, and, in particular, what it could mean for the Japanese currency as it launches a new offensive in a currency war.

There's also the question of the success of such move.

"Currency pegs have never worked in the long term and if it's such a silver bullet why haven't the Japanese tried it given they have been trying for years without too much success to weaken their currency?" said CMC Markets analyst Michael Hewson.

"For it to work the fundamentals in Europe need to change for the better and with such a fragmented and disorganized response to the current sovereign debt crisis expect the Swiss National Bank to have its work cut out defending the peg."

Whither Ontario As Ontario's election campaign gets under way in earnest today, it's worth looking at the economic challenges facing Canada's most populous province, the region with the most at stake amid a U.S. slowdown.

"No province has proven more closely correlated to the U.S. than Ontario," CIBC World Markets economist Warren Lovely said in his most recent provincial study, released at the end of August.

"So with America’s economy sputtering, we now see Ontario’s expansion downshifting to little more than 2 per cent in both 2011 and 2012. Our adjustments to Ontario’s growth rate are consistent with the province’s own estimated sensitivities, which suggest a 1-percentage-point drop in U.S. real GDP growth slows Ontario’s expansion by 0.3 to 0.7 [of a percentage point]"

Ontario rebounded nicely from the recession, though troubles in the United States have left "an obvious mark" on its exports and on manufacturers who account for 15 per cent of its economy, Mr. Lovely said. Add to that a strong Canadian dollar.

All the jobs lost in Ontario in the recession have been reclaimed, and, the bank noted, business investment has juiced the rebound.

"Ontario is counting on the finance industry to drive growth, but shaky global financial markets could create some risk here," according to Mr. Lovely. "Housing prices have overshot fundamentals, signalling a near-term slowdown in residential construction, but with rates low, a housing crash is not in the cards. As in other parts of the world, fiscal restraint will constrain growth, with Ontario having the largest deficit to address of all the provinces."

In its most recent forecast, just last week, BMO Nesbitt Burns projects Ontario's economy will expand by 2.2 per cent this year and 2.1 per cent in 2012, about the middle of the road among the provinces.

"A number of factors will restrain growth, including a high Canadian dollar and a subdued economic recovery in the United States," said Alex Koustas of Bank of Nova Scotia, in an early July forecast.

"Looming public sector spending cuts will also drag on growth. That being said, there are several positives going forward, with a reformed corporate tax structure and educated labour force supporting the province’s competitiveness."

But - and here's where the politicians need to put their energy - its jobless rate is expected to be 7.8 per cent this year and 7.4 per cent next year. That would be the highest among the western and central provinces. Its unemployment rate now stands at 7.5 per cent, above the national average but down from the 9.3 per cent of two years ago.

Employment in Ontario has climbed to 6.75 million from 6.5 million in July, 2009, while the ranks of those without jobs has dropped to 550,300 from 665,100. But while the employment rate has increased to 61.7 per cent from 60.9 per cent two years ago, the participation rate has dipped to 66.8 per cent from 67.2 per cent amid growth in the size of the labour force.

Chinese company strikes deal for Wescast A China-based auto parts company plans to buy Canadian exhaust manifold maker Wescast Industries Inc. , paying $13.60 a share for the firm based in Brantford, Ont. and controlled by the LeVan family, The Globe and Mail's Greg Keenan reports.

Sichuan Bohong Industry Co., which was established in 1999 is, like Wescast, in the casting business and has other auto parts operations.

The offer of $13.60 a share for 100 per cent of the Wescast shares outstanding puts the value of the deal at $179-million. Members of the LeVan family control the company through multiple vote class B shares.

Precision Drilling in tax deal Precision Drilling Corp. has reached a deal with the taxman that will markedly lower what it has to pay.

Last year, the Canada Revenue Agency reassesed the Calgary-based company to the tune of $216-million, in both tax and interest, for its 2005 tax year. Precision disputed the move, but had to pay $108-million nonetheless while it appealed.

Under the deal announced today, the company said it now expects a reassessment of $37-million in tax and interest, which means a refund of $71-million. That will also mean a reassessment from Alberta of $13-million.

The two reassessments will mean a $50-million hit to the third-quarter results of Canada's biggest well drilling concern.

“We believe the settlement, which eliminates a potentially significant tax liability, is in the best long-term interests of Precision and its shareholders," said chief financial officer Rob McNally. " We are pleased to have resolution to this matter and close the final chapter of a 2005 transaction.”

RIM shareholder calls for change I'm not suggesting that investors pay too much attention to an activist shareholder of Research In Motion Ltd. that doesn't disclose how much stock it holds, but it is a sign of growing unease surrounding the BlackBerry maker.

Jaguar Financial Corp. said in a statement today it wants RIM to launch a formal process for "maximization of shareholder value." That could mean a sale of the company or spinning out RIM's patent portfolio.

“The status quo is not acceptable, the company cannot sit still," said Jaguar chief Vic Alboini, noting the company's weak share price.

Still, Jaguar didn't say how much stock it owns, and it doesn't appear to be a major shareholder.

In Economy Lab Calls for a renewed infrastructure stimulus program in Canada are clearly premature, Stephen Gordon writes.

In International Business Diamonds are a girl’s best friend, but the big question is whether they can also be the same for investors. Emiko Terazono of The Financial Times reports.

In Globe Careers How can you self-promote more comfortably, with grace and confidence? Kristi Hedges of Forbes looks at the issue.

In Personal Finance Parents who don’t budget for Pizza Days, class parties, book fairs and field trips will feel the pinch.

From today's Report on Business

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