Eurointelligence Daily Briefing, 5 de Setembro de 2011. Enviado por Domenico Mario Nuti.












Another election disaster for Merkel

  • CDU suffers a humiliating defeat in the state election of Mecklenburg-Vorpommern, which further weakens Merkel’s government;
  • FDP falls below hurdle to be represented in the state parliament;
  • the coalition is expected to suffer another loss at the state elections in Berlin in two weeks;
  • Troika suspends talks with Greece, after the Greek government falls behind in the austerity programme;
  • among the measures not implemented is the dismissal of 7500 public sector employees;
  • opposition New Democracy has overtaken Pasok in the opinion polls;
  • Lagarde calls on the eurozone to reverse austerity programmes, and says Germany should consider a discretionary stimulus;
  • Merkel and Sarkozy want to strengthen the position of van Rompuy and the EFSF, and give them both more staff to deal with the crisis;
  • they also want to replace Jean-Claude Juncker with a former finance minister;
  • DSK returns to France, and maintains suspension about his future plans;
  • FT Deutschland runs a full-page editorial calling for more European integration;
  • Mark Schieritz criticises S&P over a misleading statement on the potential rating of Eurobonds;
  • a majority of German economists advises the ECB not to cut interest rates now;
  • Wolfgang Münchau, meanwhile, and obviously in a minority, says the ECB should cut interest rates now to prevent a downturn that would endanger all crisis resolution efforts.

The state elections in Mecklenburg-Vorpommern produced another disaster for Angela Merkel’s coalition. One of the immediate consequences of the news was a sharp fall in the euro in Asian markets this morning, where was down to $1.4165.


Merkel’s CDU, until now the junior partner in a grand coalition with the SPD, scored only 23.1%,  the liberal FDP didn’t even make it over the 5% threshold and only made 2.7% trailing even behind the extreme right nationalists of NPD who scored 6%. Meanwhile the incumbent SPD prime minister Erwin Sellering scored 35.7%, the Left, always were strong in East-Germany, 18.4% and the Greens 8.4% (for all the results and comments see Spiegel-Online, Frankfurter Allgemeine Zeitung and Financial Times Deutschland).


The national relevance of this election is limited due to the small size of the state (1,6m inhabitants) and the exceptionally bad economic situation (high unemployment, little economic activity besides tourism).


Nevertheless the bad results for Merkel’s CDU and the catastrophic results for FDP will increase the general sense of lingering panic and confusion. It will be increased yet in two weeks when there will be most likely another huge loss for both governing parties at the state elections in Berlin in two weeks. The SPD will most likely retain mayorship in Berlin which will reinforce the party’s conviction that it is on the road back to the chancellor’s office.



Talks between Greece and troika interrupted after rift over dismissals


Following intense media speculation over the unexpected departure of foreign inspectors, George Papandreou and finance minister Evangelos Venizelos sought to reassure over the weekend, stressing that economic reforms are broadly on track and that early elections are out of the question despite mounting political discord, Kathimerini reports.   Last Friday, the EU/IMF inspection team interrupted discussions on a new aid tranche after disagreeing over why Athens has fallen behind schedule in cutting its budget deficit. Sources told Kathimerini that the plan agreed between authorities and auditors foresaw the dismissal of 7,500 public sector employees – a move that is certain to prompt furious protests and that would cost the government dearly in political capital.  Discussions are due to resume on Sept 14, Reuters reports.


Already the ruling Socialists are losing popularity. Three opinion polls published in yesterday’s newspapers showed that the main conservative opposition New Democracy party had widened its lead by between 0.6 and 5.1 percentage points over PASOK.


Lagarde calls for stimulus

Christine Lagarde stepped up her campaign for a globally coordinated stimulus programme when she said governments should consider stimulating growth to offset the crisis “if the situation permits”. In an interview with Der Spiegel, she said European countries should adjust their austerity programmes, and introduce measure to drive growth. “If Germany stimulates domestic demand, it is good for the German economy and for its neighbours,” she added, when asked if Germany should stimulate demand. 

So far, European policy makers are reacting with the usual complacency in view of the economic downturn. José Manuel Barroso said this morning that he still expected modest growth in Europe and did not anticipate a recession in Europe. 



Merkel and Sarkozy sketch out details for the eurozone’s economic governance


According to Der Spiegel, Angela Merkel and Nicolas Sarkozy plan to dramatically change the eurozone’s economic governance. Their plans include putting Council president Herman Van Rompuy in charge of all the activities of the 17 euro member states and give him additional staff for the task which would amount to the dedicated euro secretariat the French have been asking for for a long time. Van Rompuy’s promotion would come at the expense of Jean-Claude Juncker who is chairing the euro finance minister’s meetings but who has fallen out of grace with both Merkel and Sarkozy. The German and the French leaders would apparently also like to see the Luxemburg prime minister replaced by a former finance minister who would do the job on a full time basis. Also the Eurogroup Working Group in which high finance ministry officials do the footwork for the euro ministers will be beefed up and get a full time chairperson. Additionally Merkel and Sarkozy want to reinforce the analytical capacity of the EFSF by giving it a full blow research department in order to scrutinize developments on the financial markets. All of that is also designed to sideline the commission and its Ecofin department which is seen by Berlin and Paris as inefficient, untrustworthy and as having failed to prevent the crisis developments of the countries like Greece, Ireland, Portugal and others.


DSK’s return to France is weighting of the Socialist’s presidential hopefuls


Dominique Strauss-Kahn returned to France Sunday morning. He so far refused to talk and limited his public appearances to smiling and hand waving, according to Le Monde and Le Figaro. His communication people say that he may explain himself within days on TV or in a big magazine interview. Meanwhile, his re-emergence in the French pre-electoral landscape is weighting on the two top competitors for the Socialist’s primaries. Frontrunner Francois Hollande knows he would not have stood a chance of getting nominated had DSK been around. And former party chairwoman Martine Aubry is still torn between her former loyalty to DSK and her desire to run herself which leads her to contradicting and confusing statements about DSK, his alleged rape charges in the US and France and his relationship with women in general.


FTD is pleading to fight the euro crisis with more Europe


In an environment where many German newspapers have taken on a eurosceptic stance, Financial Times Deutschland goes in the opposite direction. In a full page unsigned editorial it warns of a return to national fragmentation and it advocates much stronger economic integration including a road map to fiscal union analogous to the road map to monetary union of the early nineties.


Mark Schieritz on S&P’s Eurobond downgrade threat

Writing in Herdentrieb, Mark Schieritz makes an important point about a recent threat by S&P according to which a Eurobond would automatically receive a CC rating. The reason is that if every member state guaranteed the bond, its default probability would logically depend on the rating of the weakest member guaranteeing it. Schieritz says that if the EU were so stupid to construct a Eurobond this way, it would deserve to fail. But the whole point of a Eurobond is to be joint and several, and thus to be guaranteed by the community. (We also thought that the comment by S&P was deliberately designed to add confusion to the debate. The whole idea of a eurobond is to replace, or complement, an existing system of national guarantees, which is, of course, the EFSF.)


Majority of economists advises the ECB against lowering interest rates


In Financial Times Deutschland’s monthly interest rate survey 27 out of 30 polled bank chief economists advise the ECB against lowering its interest rate of currently 1.5% at this Thursday’s meeting. Most of the economists argue that real interest rates are still negative and that a wait and see posture is appropriate at the moment. Should there be a pronounced recession or a further steep loss of confidence they advise the ECB to swiftly go back into crisis mode and lower back 1.0% – the ECB’s interest rate level from the autumn of 2008 until April 2011.


Wolfgang Münchau on why a downturn would be extremely dangerous for the eurozone


In his FT column, Wolfgang Münchau argues that the last thing the eurozone now needs is an economic downturn because EFSF programmes, the Italian and Spanish bond yields and the eurozone’s (insufficient) bank resolution strategy all depend on a moderately strong economic recovery. Trying to prevent to slowdown should thus be the first, second, and third priorities of economic policy. He argues that the ECB has the greatest room for manoeuvre, given that inflation expectations have now subsided, to be supported by a reversal of austerity programmes, and targeted stimulus programmes in the northern countries of the eurozone. Unfortunately, he says, eurozone policy makers are often in denial of a problem until it becomes massively worse.


Spreads, Forex, and ZC Swaps

Another dramatic deterioration. Italian and Spanish spreads rise, as investors seek security in German bunds, whose yield has fallen to below 2%.


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