Madame Non again
We had a report on Friday that Angela Merkel went a long way to reject Eurobonds on a campaign trial. Over the weekend she firmed up her opposition to the idea, when she said “the markets want to force us into doing certain things, and that we won’t do.” Wolfgang Schäuble gave a nuanced endorsement of her position when he reiterated his view that Eurobonds required a proper fiscal union with a full transfer of sovereignty to Brussels. While he, as a private citizen, would support such a transfer, as a finance minister he has no choice but to insist that the eurozone solves the problems on the basis of existing contracts. Reuters reports that Mr Schäuble will meet his French counterpart Francois Baroin next week to discuss the financial transactions tax that Merkel and Nicolas Sarkozy agreed on during their summit last week.
(As ever, the German chancellor is very clear on what she does not want, but offers no plausible anti-crisis strategy of her own, except to hold the current course. We are now certain that her strategy is to postpone any movement on Eurobonds until after the elections, which means that the financial crisis could last for an uncomfortably long time.)
Merkel also played down any fears of a recession saying that she sees no reason to be concerned about the economic development.
The legal debate Frankfurter Allgemeine’s story on Merkel’s decision to rule out Eurobonds contained an interesting discussion of the legal issues involved. The German finance ministry believes that the introduction of Eurobonds would require a change in the EU treaties. (Incidentally, Frank Walter Steinmeier the SPD leader in the Bundestag believes that too.) The Bundestag’s legal service also considers Eurobonds as a breach of the No Bailout rule. The article also quotes a former justice of the Constitutional Court who said that national parliaments have long lost their budgetary sovereignty. Eurobonds would merely formalise a process that has already been under way.
Peter Spiegel on fiscal union Writing in the FT, Peter Spiegel makes the point that after everything has been tried – and mostly failed – fiscal union may be the only way out of the European debt crisis. And the issue is clearly on everybody agenda. But last week’s attempt by a handful of small countries to seek their own special deal with Greece was an ominous sign that this particular solution may not be possible politically.
Dutch opposition threats to veto Greek bailout programme The Dutch Labour party has threatened to vote against the Greek bailout package if it included a cash guarantee from Greece. The coalition depends on the opposition as it has no majority of its own. Reuters quotes Ronald Plasterk, the finance spokesman for the Labour party, as saying that it was “entirely unreasonable” for different countries to seek financial guarantees. He also said that “if all countries ask for a free ride” no bailout could be agreed.
(We agree with Plasterk’s assertion. Large countries could not do this, as Greek could not collateralise the full amount it borrows. The collateral debate is probably the most depressing example yet of a lack of comprehension in member state of what a monetary union implies.)
Venizelos calls for European unity, Papandreou rejects call for snap elections The Greek finance minister Evangelos Venizelos called for the EU to step in and display a united European front after several small eurozone states had insisted last week that Greece provides collateral in exchange for their contributions to the second bailout package. He indicated that technical solutions can “easily be found” but insisted that the “key issue however is entirely political and must be treated as such so that clear and positive messages are sent out to the global markets and to European nations, Kathimerini quotes from the letter.
George Papandreou on Sunday ruled out the possibility of snap elections amid growing pressure. “Citizens want change, not elections,” he said in an interview with the Sunday newspaper Real News.
Greek banks save a small competitor Four large Greek banks took up a €50m convertible bond to save Proton bank, a small lender on the verge of collapse, the FT writes. While the deal itself was small, it mattered because the banking sector has become extreme fragile to the extent that the failure of a small bank might trigger a generalised bank run. The article also said the Greek banks no longer had access to ECB funding, which they would replace with emergency liquidity assistance from the Bank of Greece.
Spanish government unveiled further austerity measures worth €5bn and sales tax cut on houses Spain announced further austerity measures last Friday to yield €5bn of additional savings, Reuters reports. Though comparatively small, the austerity measures could compensate for any overshooting of public deficit targets by Spain’s 17 autonomous regions, a persistent market worry. The savings include a cut in drug costs for regional governments for €2.4bn and a further €2.5bn by front-loading tax payments from large businesses.
Also announced was a cut in half on a sales tax for home purchase to address a glut of around 1 million unsold houses and stimulate Spain’s collapsed property market. Der Standard writes this measure is better understood as a tactical political manoeuvre ahead of the national elections in November. The conservative party had promised tax incentives for home buyers in case of their likely victory. But tax incentives alone are unlikely to revive the market as long as mortgages are difficult to obtain and prices remain high.
Portuguese president critical of constitutional debt brake The Portuguese President Cavaco Silva expressed his opposition to a constitutional debt break as promoted by Nicolas Sarkozy and Angela Merkel. Cavaco Silva, in a message on his Facebook website, said that to “constitutionalize an endogenous variable like the budget deficit – that is, a variable not directly controlled by the authorities – is theoretically very strange. It reflects an enormous distrust of policy makers regarding their own ability to conduct fiscal policies right,” Jornal de Negocios reports.
About Ireland’s recovery There is an interesting debate in the Irish economy blog about whether or not the Irish economy is recovering. John Murray Brown of the FT gives a somewhat optimistic assessment, but this was slapped down in a comment by Michael Hennigan from Finfacts who said the export-led recovery story was pure spin, given that Ireland’s three main export markets – the eurozone, the US and the UK – are all weakening. His prediction is for 0% growth until 2014.
Spreads, Forex, and ZC Swaps Italian and Spanish spreads have gone up further to 3%, and this desite rising German yields. There is no let up in the crisis.
Euro bilateral exchange rates:
Zero Coupon Inflation Swaps
Source: Reuters
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