Eurointelligence Daily Briefing (Long Version), 18 August 2011. Obrigado ao Domenico Mario Nuti


Yet another sanctions regime that lacks credibility


The big news this morning are the details of the proposals by Angela Merkel and Nicolas Sarkozy, which also include a new sanctions regime for countries in breach of deficit rules. The two leaders want the European Commission to check more thoroughly whether money received under the structural funds is used to increase competitiveness. Furthermore, as Süddeutsche Zeitung reports this morning, countries that do not stick to the deficit rules would receive fewer structural funds. (Considering that France has been flouting the rules consistently, we wonder how serious this proposal is. It looks like one of those European sanctions that exist on paper, but will never be applied in reality. We are always amazed that after the spectacular failure of the sanctions-based approach to fiscal coordination, the EU continues down the same road.)


The two leaders also proposed at least two joint meetings of eurozone heads of state and governments, a system of bilateral corporate tax harmonisation, and a European financial transactions tax. In addition, they asked Herman van Rompuy to become the coordinator of this group, which would make him the eurozone’s most visible external representative.


El Pais made a quick calculation and concluded that Spain would be most at risk from this rule as its budget deficits now greatly exceed the budget rules, and as it is the second largest recipient of structural funds. In a separate article, El Pais explains that it is virtually impossible to establish a formal debt brake in the Spanish constitution, as this would almost inevitably require a referendum.


The reaction from other member states were divided. Italy was in favour of the proposals, and so were the Netherlands, albeit with some qualifications. Negative responses came from Finland, Austria and Luxembourg. The European Commission supports these proposals, but leading members of the European Parliament criticised them as insufficient, and as undemocratic, as they are purely intergovernmental.


In Germany, the two largest business lobbies welcomed the principle of a debt brake, but warned against any measures that would lead to higher taxation – which is a possible consequence of the proposal to harmonise taxes. They categorically reject a financial transaction tax, Frankfurter Allgemeine writes.


Le Monde writes that while leaders tried to craft a new era of economic policy coordination, what really interested the financial markets yesterday were the week growth performance of both France and Germany during the second quarter. Germany grew at only 0.1%, after a now downwardly revised 1.3% in the first quarter.


Le Monde also has an interesting article about the political difficulties faced by Mark Rutte, the Dutch premier, who came under intense pressure in a special three hour session in the Dutch parliament, where he apologised for his communication error, when he misrepresented the facts of the Greek agreement at the summit. He will have to rely on votes from the opposition to get this package through, as Geert Wilders’ populists oppose the agreement. The Financial Times quotes Mr Rutte as saying that he opposes eurozone bonds for as long as the fiscal arrangements have not been significantly toughened, with automatic sanctions for countries that break the rules.


FT Deutschland writes in an editorial that the results of the bilateral summit are not as bad as the reactions seem to suggest. The article makes three specific points. It is to be welcomed that eurozone economic policy is dealt with at the top level of government in a formal manner. Two annual eurozone summits are not going to change the world but they are a beginning of a process to fix the eurozone’s biggest single shortcoming. Second, the debt brake is likely to lead to greater fiscal discipline among the member states, the paper argues. And finally, both leaders did not rule out a euro bond.


Berthold Kohler writes in Frankfurter Allgemeine that Merkel and Sarkozy have decided to take the bull by the horns, and to deepen their economic integration. He says the Europeanisation of further areas of politics and the development of a political union will be evitable if one does not want to sacrifice the euro. He concludes the problem with the proposals is a lack of universal support among eurozone members, and more importantly the fact that they are long-term. The problem is that the crisis requires immediate solutions.


The paper is traditionally divided between a pro-European political and a europhobe economic section, in which Werner Musler writes that the agreement was full of French dirigisme, but the good news is that it will probably not lead to much in any case.



Finland strikes a bilateral deal with Greece

Ever wondered how the July eurozone summit overcame the long standing issue of Finland’s insistence that a second loan package to Greece would need to be collateralised? The eurozone’s leaders (rightly) rejected the idea, but allowed Finland to pursue their own arrangement with Greece. Yesterday, the two sides reached agreement, under which Greece deposits a guarantee, which Finland will invest in safe securities, which Greece will get back if it pays the loan in full. The bilateral agreement has been criticised by others, including Austria.



How not to stabilise the Swiss franc

After the speculation that the Swiss Franc might be pegged to the euro, the market expressed disappointment when the measures announced by the Swiss National Bank were indeed much softer than expected. The Financial Times reports that the SNB doubled the amount of liquidity available to the mone market to SFr200bn. The Swiss Franc jumped 2% on the news, but softened in later trading.



James Saft on central banks

James Saft writes a comment in Reuters on the role of central banks. They have been taking on an increasingly political role during this crisis, with disturbing long-term consequences. In respect of the ECB he writes that there is a risk that at some critical point the ECB balks at further bond purchases, and the expectation that this might happen is part of the reason for the volatility on the markets. A further consequence is that the aggressive bond purchases by the ECB was closing off policy options (presumably meaning that it forces the EU to go down the road of Eurobonds.)



Jeffrey Sachs on globalisation

Writing in the FT, Jeffrey Sachs argues that the west has seriously mismanaged globalisation. He said he had watched many financial crises, and the way out always consists of bold measures that are technical sound, and based on social values. Policy in the EU and the US had failed on all three counts. He now recommends three courses of action. First, investing in human and infrastructure capital. Second, cut wasteful spending, especially in misguided military engagements, and third, balancing budgets through tax increases on high personal incomes and international corporate profits.



Spreads, Forex, and ZC Swaps

Spanish and Italian spreads are rising again.




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Source: Reuters



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