Here's today's look at some of the top stories on markets and politics in Europe:

Merkel ties spy scandal to trade talks

Speaking to the Bundestag, German Chancellor Angela Merkel tied a EU-U.S. free trade deal to the outcome of the National Security Agency spying scandal. "The relationship with the U.S. and the negotiation of a transatlantic free trade agreement are currently, without doubt, being put to the test by the accusations that have been aired against the U.S. about the gathering of millions of bits of data," Merkel said. She also asked the U.S. for a "clarification" of the NSA's operations in Europe. That did not sound like much of an ultimatum: Merkel is not calling off the trade talks or threatening any specific unfriendly moves against the U.S. As her political rivals on the left accuse her of cowardice, Merkel and her government are content to wage a polite war of words on America, discussing the spying scandal as "accusations" and rebutting U.S. attacks on Germany's trade surplus.

Prokhorov acquires potash leader Uralkali

Russia's 10th richest man, Mikhail Prokhorov, agreed to buy 21.75 percent of the world's biggest potash producer, Uralkali, from Suleiman Kerimov, Russia's 20th richest man. The deal values the company at $20 billion. Kerimov's minority partners will also exit the company, selling their 11.8 percent to Dmitri Mazepin, not yet on the list of billionaires. The deal is essentially political: The Russian government has been watching it closely because relations with neighbor and ally Belarus hinge on the outcome. Under Kerimov, Uralkali broke a cartel agreement with state-owned Belaruskali, unleashing a global price war and prompting Belarus dictator Alexander Lukashenko to have Uralkali chief executive Vladislav Baumgertner arrested for "abuse of power." He is still under house arrest in the Belarus capital, Minsk. Prokhorov is expected to make a new deal with Belaruskali. If that happens, Baumgertner will come home and global potash prices will start rising.

Pioneer says markets underestimate European political risk

Giordano Lombardo, chief investment officer of the Pioneer asset management group, says financial markets are pricing European assets too optimistically in view of the political risk caused by the rising popularity of euro-skeptic parties. "While it's not likely, it is possible that a major anti-euro party gets a major victory in a European country," Lombardo said. "This is not priced in." The investor's warning came just as Italian Prime Minister Enrico Letta predicted that the next European Parliament, to be elected in 2014, will be the most "anti-European parliament" in its history. Letta thinks Germany can help fix the problem by "sharing its growth." Lombardo's perspective is different: Short French government debt, he says. It could be a hedge against the political risk. French bond yields are too low, anyway, given the country's governance problems and lack of economic growth.

Forex probe focuses on traders' accounts

The U.K.'s Financial Conduct Authority is studying a new aspect of the suspected manipulation of foreign exchange "fixes", or rate snapshots taken several times a day for contract settlement purposes. The FCA has asked several banks to see if their traders used undeclared personal accounts. That means the scope of the investigation, which now involves more than 15 banks on three continents, has widened to include insider dealing. Before, the authorities were simply looking for signs of collusion among traders. The forex scandal has the potential to turn even sleazier than the infamous Libor case. If bank employees are caught using private accounts undeclared to their employers to trade ahead of client orders, there will be heavy fines, criminal charges and another tightening of the screws for bankers. Meanwhile, The Financial Stability Board said last week that "shadow banking" now accounts for 24 percent of global financial assets. As banks are discredited and ever more tightly regulated, money slips into the shadow where there are no scandals because scrutiny is not so intense.

Watchmakers scramble to buy Swiss parts producers

In recent months, luxury watchmakers such as Hermes, Moet Hennessy Louis Vuitton LVMH and Cie. Financiere Richemont, have all acquired Swiss watch parts manufacturers. They are concerned they may soon find it difficult to qualify for the coveted Swiss Made label, which requires that 60 percent of a watch's value be produced in Switzerland. The reason is that Swatch, the world's biggest maker of watch parts, has received permission from Swiss competition authorities to stop selling watch movements to competitors by 2020. The average movement costs $133 and accounts for 6 percent of the average wholesale price of a Swiss watch. Swatch is generally phasing out component sales, apparently hoping to drive smaller manufacturers out of the market, so watchmakers who still want to command exorbitant "Swiss Made" prices must source parts elsewhere. One of the world's most conservative industries is clearly more concerned about breaches in its quaint supply chain than about the advent of wearable computers, and with good reason. Electronics manufacturers, even Apple, have no idea how to sell luxury at an absurd multiple of the production cost, an art Swiss watchmakers have perfected.

(Leonid Bershidsky can be reached at bershidsky@gmail.com).