In this macro report with Steen Jakobsen, Chief Economist, Saxo Bank, he analyses the situation for the Eurozone ahead of the EU leaders’ first summit for 2012.

The broader terms of the fiscal compact (agreed to at the December 2011 summit) are expected to be pretty much settled at the meeting, says Steen. But with the general improvement in overall markets the pressure for policymakers to really come together is unfortunately somewhat off, he adds. Therefore a truly workable solution will not be the outcome and many more negotiations ahead of the next summit in March are needed.

There’s also some way to go before the details surrounding the European Stability Mechanism, the permanent European bailout fund, are ironed out. The size of the total fund available is still very much an issue as increasing the amount via the likes of the International Monetary Fund is hardly an easy task for central banks in countries that are currently struggling, Steen says.

German Chancellor Angela Merkel’s words at the summit will be of key interest and her tactics in the months ahead could well result in her even losing her own foothold, says Steen who believes however that Germany will eventually come to the party and agree to Eurobonds and doing everything to safeguard Europe’s future.

The future of Greece remains a main concern as time is running out for a debt restructuring solution with private bond holders. Nevertheless, a ‘voluntary forced’ deal is seen only buying time. Greece is a lost cause though with bankruptcy and a ‘vacation’ from the Eurozone and devaluation inevitable, says Steen.

When the private sector investment talks in Greece are out of the way focus will increasingly shift to Portugal where already now credit default swaps are making new historical highs there. Portugal is really where Greece was 18 months ago, he says.

For more comments by Steen Jakobsen see his blog Steen's Chronicle on TradingFloor.com