7.45am: Good morning, and welcome to another day of rolling coverage of Europe's financial crisis.

Today's main event is the first meeting of the year between German Chancellor Angela Merkel and French President Nicolas Sarkozy. The pair are holding talks in Berlin at which they will discuss the new 'fiscal compact' that they hope will hold the eurozone together.

The meeting begins this morning, with a press conference scheduled for lunchtime.

Conveniently, industrial trade data for Germany is released today along with German and French trade data, which should show how both economies are faring.

We'll also be watching the financial markets, where the euro slumped badly last week. Several countries are auctioning short-term debt today, including Hungary -- which was forced to abandon an auction late last month. But surely a sale of six-week bills should fly?....

7.56am: Here's today's agenda:

• Talks between Angela Merkel and Nicolas Sarkozy begin: 10am GMT / 11am CET
• Merkel-Sarkozy press conference in Berlin: 12.30pm GMT / 1.30pm CET.

Other events:
• Sale of 40bn forints of Hungarian debt - 10.30am GMT / 11.30am CET
• Eurozone investor confidence data - 9.30am GMT / 10.30am CET
• German industrial production data - 11am GMT / noon CET.

8.15am: Germany and France have both received encouraging economic news this morning – which suggests that both countries avoided being badly bruised by the crisis late last year.

The latest trade data showed that Germany's trade surplus actually increased in November. Exports rose by 2.5% during the month, while imports dropped, which pushed its seasonally adjusted trade surplus up to €15bn.

Economists said the better-than-expected data indicated that Germany grew faster than feared at the end of 2011. Jurgen Michels of Citigroup called it a "positive surprise".

There was a similiar story for France, where exports grew in November while imports were basically flat. That meant its trade deficit shrank to €4.4bn.

It's quite surprising that both countries posted such good trade data for November, given the scale of the crisis that was raging in the eurozone (this was the month in which technocratic governments were installed in Greece and Italy).

Nicolas Sarkozy hailed Mario Monti's 'inspiring courage' when they met last Friday. Photograph: Antoine Antoniol/Getty Images

8.31am: Today's meeting between Nicolas Sarkozy and Angela Merkel in Berlin is the first big get-together of 2012 (although the French president did meet Italy's Mario Monti last Friday).

January is going to be a busy month, with Merkel and Monti due to meet on Wednesday. All three leaders are then meeting again in Italy on 20 January, ahead of a meeting of EU finance ministers on 23 January, and a EU summit on 30 January.

So why all the jaw-jawing?

Well, having agreed to create a fiscal compact (tighter budgetary rules) for the eurozone at the EU summit of 9 December, Merkel and Sarkozy want to hammer out the details before the next meeting at the end of this month. Including Mario Monti in the talks gives the Merkozy partnership two benefits:
1) another key ally, whose presence might ease fears of a Franco-German carve-up
2) it demonstrates that Europe's biggest problem child is fully involved with the rescue plans, and thus committed to reforming its economy and cutting its deficit.

Sarkozy poured the Gallic charm over Monti last Friday when they met, telling journalists that:

Monti's courage inspires confidence.

France and Italy share identical views on Europe's future and how to resolve the crisis of confidence.

8.58am: Fears that Europe could be heading into a second credit crunch are likely to be fuelled by the latest overnight lending/deposit data from the European Central Bank.

The ECB reported this morning that European banks stashed a total of €463.5bn with it on Friday night – that's a new record high, up from €455.3bn on Thursday.

The European Central Bank headquarters in Frankfurt. Photograph: Ralph Orlowski/Reuters

It's less than three weeks since the ECB loaned half a trillion euros to the region's banks, in an attempt to prevent credit markets seizing up.

However, much of that cash is now being left with the ECB rather than making its way into the real economy. This is alarming banking analysts – as it shows that banks are so worried about lending to rivals that they would rather earn just 0.25% in interest from the central bank.

On a brighter note, though, the ECB said it had loaned just €1.3bn through its overnight lending facility. That's lower than on Thursday – and a significant improvement on the €8bn+ the central bank had to lend in December*.

* -- if banks are borrowing from the ECB at its overnight rate then they've either messed up their maths and need tiding over, or they're really struggling to borrow from the rest of the market.

9.12am: A fairly weak start in the financial markets has seen the FTSE 100 drop 12 points, or 0.2%, this morning to 5637. Germany's Dax posted a similar decline.

City traders are keeping at least one eye on events in Berlin. As Michael Hewson, analyst at CMC Markets, explained:

Markets will be hoping that the one-eyed insistence on budget discipline by Angela Merkel also gives way to looking at practical measures to stimulate growth in Europe.

9.38am: Looking at today's papers, the Financial Times says David Cameron is heading for a major row with his eurosceptic backbenchers over Britain's contributions to the IMF.

The FT reports that government insiders say the UK could put more cash into an IMF eurozone rescue package if other countries, such as Japan, China or Brazil, also do so. It quotes a government insider saying:

There isn't a proposal to do so at the moment, but I'd expect the issue of resources to be discussed in February at the G20 finance ministers meeting.

The prime minister could face opposition from his own ranks to increasing Britain's IMF contributions. Photograph: Bloomberg/Bloomberg via Getty Images

As you'll probably remember, in December the UK refused to put €30bn into an IMF rescue fund – partly because Cameron only had parliament's permission to lend another €10bn to the IMF.

At the time, UK officially indicated that they might be prepared to discuss increasing the IMF's resources "at a G20 level". That would need parliament's approval – and there's every sign that Cameron would face a major firestorm if MPs felt the IMF was being forced to fund a rescue job that should really be handled by the European Central Bank.

9.52am: The euro hit a new 16-month low against the US dollar of just $1.2688 early this morning, before recovering more than one cent after surprisingly strong trade data from Germany and France (see 8.15am for the details).

Jane Foley, currency expert at Rabobank, forecasts that the euro will slide to $1.25 against the dollar in the next few weeks. She argues thath today's decent trade data shows that Germany's exporters have profited from the euro's recent weakness. She wrote in a research note that:

Better than expected German trade data this morning is a reminder that for the eurozone the softer euro exchange rate is not all bad news.

The recent better trade and employment data from Germany offers a sprig of positive news from the eurozone and underpins the likelihood any recession could be mild.

Union members and steel workers on a two-month strike protest outside the labour ministry in Athens, Greece Photograph: Petros Giannakouris/AP

10.11am: Greece's austerity package continues to batter the country's economy.

The latest Greek industrial data showed that output shrank by 7.8% on a year-on-year basis in November. The slump in output is actually an improvement on October's 12.3% slump in year-on-year output.

The figures will only reinforce fears that Greece's economy is being smashed by the heavy spending cuts and tax rises imposed since the country accepted its first IMF rescue package.

And as if Greece didn't have enough problems – Germany's finance minister Wolfgang Schäuble has urged its leaders to hurry up and agree a debt-reduction deal with its creditors:

Schäuble told German radio that:

Greece...could go faster. We are pushing hard for that.

Greece has to implement what was agreed. All the rescue packages in the world can't help if the causes are not tackled credibly.

10.39am: In a record move – Germany has sold €3.9bn of six-month bills at a negative interest rate.

The Bundesbank just announced that it sold the debt, repayable in July, at a average yield of - 0.0122%. That means that investors agreed to receive less than they lent to Germany, when the bills are repaid.

According to the Bundesbank, this is the first time that investors have agreed a negative yield at an auction of German debt.

So why would anyone accept a negative interest rate? Typically, this happens for two reasons. Either buyers want protection from deflation, or they fear that there is nowhere better to place their money. In this case, the rush for Safe Havens is probably to blame.

In contrast, Hungary's borrowing costs have been driven even higher today, as the country's political crisis continued to fuel fears that it could default.

Hungary sold 40bn forints (£18m) of six-week debt (repayable in late February) this morning, but was forced to agree an interest rate of 7.77% (up from 7.24% at the previous auction of this kind).

11.08am: To India, where George Soros is going around the country stirring up alarm over the eurozone crisis.

Soros told an audience in Bangalore this morning that the debt crisis in Europe is more dangerous than the global financial turmoil in 2008. The billionaire investor warned that a "deflationary vicious cycle" could strike at the heart of the world economy this year.

The warning comes a couple of days after Soros warned in Hyderabad that the euro was endangering the "political cohesion of the European Union":

If the common currency were to break down, it will lead to the break up of the European Union itself. And this will be catastrophic not only for Europe but also for the global financial system.

11.41am: What can we expect from today's Merkel-Sarkozy meeting? The consensus is that the two leaders will focus on three main points:
1) Putting meat on the bones of a new "fiscal compact" for the eurozone.

What rules will member states have to agree to? What will be the penalties for non-conformance? Who will oversee it?....

...and can we even trust it? Elisabeth Afseth, analyst at Evolution Securities, is dubious:

The European countries did not stick to the fiscal rules in the Stability and Growth Pact, but that's no reason to question future adherence to the compact, is it?

2) A financial transaction tax for Europe.

Merkel and Sarkozy's enthusiasm for a levy on financial charges is matched only by the City of London's antipathy.

Any indication that the Robin Hood Tax might be implemented soon will be welcomed by anti-poverty campaigners. But the situation is getting seriously murky -- yesterday France said it would introduce a financial transaction tax on its own if necessary, while David Cameron pledged to get his veto card out again to prevent an EU-wide levy.

3) A plan to boost growth in Europe.

This is the key focus of the EU summit scheduled for January 30, so it will be interesting to hear Merkel and Sarkozy's views. As today's grim Greek industrial output data showed, fiscal consolidation is already squeezing the life out of parts of the European economy.

Photograph: Fabrizio Bensch/REUTERS

11.51am: Angela Merkel and Nicolas Sarkozy were all smiles at the start of today's meeting in Berlin, as this picture shows.

We're still expecting the press conference to take place at 12.30pm GMT (although veterans of this crisis will be aware that these events have a habit of running late).

11.57am: On the issue of an EU financial transaction tax (see 11.41am for more), my colleague David Gow points out that German newspaper Der Spiegel has laid into Nicolas Sarkozy today for threatening to introduce the FTT on his own.

Spiegel accused the French president of 'going solo' for purely electoral reasons (to thwart his socialist rival, Francois Hollande). So perhaps the French delegation might not get such a warm reception in Berlin after all....

More here.

12.12pm: Those of a nervous disposition should avoid looking at Unicredit's share price today. Italy's largest bank has nearly halved in value this year - yes, since the start of 2012 - and saw its shares suspended again today after they fell by over 10%.

The latest selloff comes amid Unicredit €7.5bn rights issue -- a desperately needed cash call. The 'right to buy new shares' in the bank started trading today, and immediately plunged by around 35%.

Unicredit's struggle may make it much harder for other banks to raise capital in the financial markets. As Louise Cooper of BGC Partners pointed out:

For any other European banks that were considering raising new equity via the markets, the performance of Unicredit must have severely put them off.

Although Unicredit is guaranteed to gets its €7.5bn as the issue is fully underwritten, this is not helping the bank's reputation.

12.35pm: The Merkel-Sarkozy press conference in Berlin is about to start. You can watch it here in German, or here in French.

UPDATE: Or you can watch it on Sky News and BBC 24 with a translation into English!
UPDATED UPDATE: In between adverts, the weather, and the 1pm news headlines, anyway.

12.45pm: The press conference has begun, with Angela Merkel speaking first.

The German chancellor says that discussions about the fiscal compact are "progressing positively". She said there is a "good chance" that the EU will agree the "debt brakes", and such like, so that agreement could be signed at the end of January. Or, at the latest, by the full EU summit in March.

12.47pm: On the issue of the European Stability Mechanism, Merkel says she and Sarkozy agreed that they needed to find a way to speed up the injection of new capital into the ESM.

12.51pm: Thirdly Greece - and Merkel warns that time is running out for Athens. She tells the Berlin press conference that she and Nicolas Sarkozy agreed that negotiations with private creditors over debt haircuts need to be concluded "very quickly now"":

Otherwise, we will reach the point of not being able to pay the next aid tranche to Greece.

12.53pm: Finally, Angela Merkel says she will hold talks with Christine Lagarde, head of the International Monetary Fund, tomorrow, to discuss the situation in Greece.

12.56pm: Now Nicolas Sarkozy speaks, and he also tells the press conference that this morning's negotiations have gone well.

The French president says he and Angela Merkel wants to finalise the negotiations in the next few days, so that it can be signed off at the EU Treaty in March.

Sarkozy also states that he and Merkel agree to ask the European Central Bank to do all it can so that the European Financial Stability Fund (the current bailout vehicle) works "as well as possible".

So far, so united. Onto questions....

12.58pm: Sarkozy is asked to defend France's threat to launch a financial transaction tax on its own. The French president responds extremely robustly, clearly irked by the suggestion that he has broken ranks with Germany.

I am pushing this tax becuase Mrs Merkel and I said we agreed in principle to this tax.

Sarkozy went on to defend the concept of a Robin Hood tax on financial transactions, saying there have been "scandalous" behavious in the financial world in the run-up to the current financial crisis.

Sarkozy said he plans to present details of a financial transaction tax by the end of January.

Angela Merkel also weighed in on this issue, saying that she wants EU finance ministers to draw up plans for an FTT across the EU by end of March.

That would appear to herald another clash between Britain and the rest of the EU. The UK government's position is that it will not accept an FTT unless it is introduced worldwide.

1.09pm: Another reporter risks Sarkozy's ire by raising the question of France's AAA credit rating. Is it at risk?

The French president found the issue amusing, appearing to laugh at the question. That's a no then.

Angela Merkel offered some support, saying that neither France nor Germany will lose their triple-A credit rating.

Over to you, S&P....

1.17pm: The euro has fallen steadily since the press conference began. Or, more specifically, since Angela Merkel threatened Greece with the loss of its next aid tranche unless it reaches a 'haircut deal' with its creditors.

From a high of $1.2785 against the dollar, the euro has now lost half a cent. That still leaves it someway above the 16-month low it hit in the early hours.

Angela Merkel and Nicolas Sarkozy at today's press conference. Photograph: Odd Andersen/AFP/Getty Images

1.26pm: Merkel's threat that Greece might lose its next aid tranche if it can't agree a deal with its creditors is pretty serious. These negotiations have been running for several weeks -- with apparent deadlock over the issue of the 'haircut' which lenders will accept.

The original plan was for a 50% haircut on Greek debt. However, lenders are now apparently being asked for a 60% cut instead.

And without the aid tranche, Greece would be unable to pay €14bn of debt redemptions that come up by the end of March. A default would surely end its membership of the euro....

Despite the threat -- Merkel insisted that she still hopes that Greece will remain in the euro:

Our goal is that no country has to leave the euro zone. ... We have said time and again that Greece is a special case and if you look at the Greek data you see that the contribution of the private sector is a necessary precondition but not a sufficient one to get Greece back onto an acceptable path.

We have agreed a voluntary debtrestructuring with the banks. Greece should get a chance but Greece remains a special case.

(quote via Reuters)

1.33pm: Some breaking news from outside the eurozone crisis -- Philipp Hildebrand, the president of the Swiss National Bank has just resigned.

More soon.

1.38pm: Here's a quick round-up of the key developments at this lunchtime's press conference with Angela Merkel and Nicolas Sarkozy.

• Greece was warned that time is running out to reach a deal with its creditors. Merkel said that Greece will not receive its next aid tranche unless the terms of the Private Sector Involvement (the haircut agreed by its lenders) are hammered very soon.

• The EU fiscal compact is on track to be ready by March. Sarkozy said that negotiations will be wrapped up "in the coming days", so that it can be signed on 1 March. Merkel reckoned the details could be agreed by the end of January.

• France and Germany remain committed to implementing a financial transaction tax. They want a plan drawn up ready for EU finance ministers' meeting in March.

So, no major breakthrough (but who really expected one?). So I'll hand this blog over to my colleague Alex Hawkes. Thanks.

1.47pm: Good afternoon everyone. The shock resignation in the last few minutes of Philipp Hildebrand, president of the Swiss National Bank, has stunned the City.

My colleague Jill Treanor has the story:

Philipp Hildebrand, the boss of the Swiss central bank, suddenly quit at lunch time, just hours before he was due to appear before a parliamentary committee.

He was due to face tough questioning over currency dealings made by his wife, Kashya, that allowed her to profit from policy measures implemented by Hildebrand that were intended to stop the Swiss franc's rise.

Der Sonntag had earlier reported that Hildebrand intended to submit emails to parliament showing his wife acted alone in buying $504,000 with Swiss francs on August 15, three weeks before the Swiss National Bank intervened to stem the currencies rise during the eurozone crisis.

The transactions made a a profit of SFr75,000 (£52,000) as the dollar was worth 0.79 Swiss francs on August 15 and 0.92 Swiss francs on October 4.

A the end of last week, Hildebrand, who joined the central bank in 2003 before taking over as president in January 2010, was insisting he would not resign from post that earned him credit for cutting interest rates to zero and put him centre stage of plans to force UBS and Credit Suisse Group to hold more capital.

The SNB said in a brief statement that Hildebrand would speak about his decision at 14:15GMT at a media briefing in Berne and make available a number of unspecified documents.

2.09pm: While all that has been going on, David Cameron has been offering his views on the eurozone crisis.

The Prime Minister was being interviewed on Sky News, and said that he thought the "most likely outcome" was that the euro would hold together, despite the current debt crisis.

PA news has this:

[Cameron] stressed that in the longer term it was essential to address the "fundamental competitiveness divide" between the powerful German economy and the weaker southern states.

"I think that the most likely outcome is, yes, it will hold together but it has to take some pretty decisive steps," he told Sky News's Boulton & Co.

"There are the short-term sticking plaster steps of a proper firewall to prevent contagion around Europe, a much more decisive settlement for Greece which the problem still hasn't gone away, strengthening the European banks.

"But that is only the short term. The longer term is that you have got to address the fact that there is a lack of competitiveness between Germany on the one hand and many of the southern European countries on the other.

"You can't have a single currency with those fundamental competitiveness divides unless you have massive transfers of wealth from one part of Europe to another."

2.22pm: Some quick comment from Geoff Kendrick at Nomura on Hildebrand's resignation and its implications for the strength of the Swiss franc (which spiked briefly immediately following the announcement).

Hildebrand's resignation just now doesn't change anything for EUR/CHF, in my view.

One man doesn't make a central bank (outside of Greenspan) and, as such, I continue to see the 1.20 floor as 100% credible. The small dip in EUR/CHF on the announcement was a buying opportunity.

In terms of who becomes his successor, Thomas Jordan is the likely replacement for the top job. This will leave a replacement role needed for the third position on the board. This is very likely to be an internal candidate, as when Roth resigned, Danthine came from internal.

2.28pm: Philipp Hildebrand is now speaking.

He says he has quit because he cannot provide final proof that his wife made the forex trades without his knowledge.

He said the policies of the SNB were successful in recent years, and that his decision should help maintain its credibility.

2.32pm: The US markets have opened, but aren't going anywhere fast.

The Dow Jones is up 9 points, a rise of 0.07%, and the S&P 500 is up 2.4 points, or by 0.19%.

2.34pm: The SNB says Thomas Jordan will take over as chairman for the time being, and that the free position on its three-person board will be filled as soon as possible.

2.42pm: Here is a bit more from that Hildebrand press conference in Berne:

In view of the continued public debate centres on these financial transactions and following detailed examination of all documentation and reflection since the news conference, I have come to the conclusion it is not possible to provide conclusive and final evidence that my wife did initiate the transaction without my knowledge.

The fact is my word is my bond I had no knowledge of my wife's transaction on that day.

3.53pm: Philipp Hildebrand's wife Kashya has spoken about the trading that led to her husband's resignation.

Reuters is saying that she has apologised unreservedly to the Swiss people, the Swiss National Bank and to her husband.

3.59pm: Another note on David Cameron's comments about the euro on Sky News earlier today.

Cameron refused to rule out contributing more to the IMF, saying:

We have set out our conditions for contributing more to the IMF. We support countries and not currencies or currency zones. The IMF shouldn't be doing what the eurozone itself should be doing.

4.16pm: The Bank of England's Mervyn King has offered his view on the departure of Philipp Hildebrand too.

The Reuters snap reads that King is "saddened by departure of SNB's Hildebrand, he is a man of total integrity."

Live blog: Nils Pratley

4.20pm: The Guardian's Nils Pratley has blogged on the departure of Hildebrand here.

His conclusion?

Mr Hildebrand should have reversed the transaction the following day, when he said he became aware of it, and set up a blind trust. He said last week he regrets not having done so. Too late. He had to go.

4.48pm: The markets have closed down for the day.

The FTSE 100 fell 0.66%, or by 37 points.

The French Cac was down 0.3% and the German Dax 0.6%.

5.27pm: Ok, it's time to wrap up here. Before we go I thought this piece on Goldman Sachs' predictions for oil and gold was worth a look.

Goldman's head of commodities research Jeff Currie says both oil and gold will be stronger at the end of the year - and that recent falls in gold were temporary.

Goldman is expecting Brent Crude to end the year at $127.50 (currently at $112), and gold to rise to $1,940 (currently at $1,612).