Eurointelligence Daily Briefing, 19 de Setembro de 2011. Obrigado ao Domenico Mario Nuti

Is Merkel’s coalition on the brink?

  • FDP implodes in Berlin regional election with only 1.9% of the vote, less than the fascists and the Pirate Party;
  • FDP’s poor performance raises questions about the future of the coalition, and its strategies towards the EU;
  • more and more German coalition politicians defy Angela Merkel’s call not to speculate in public about a Greek exit, as the chairman of CSU became the latest to break the ranks;
  • Hans Dietrich Genscher is reported to work behind the scenes to ensure that the FDP’s referendum on the ESM will fail;
  •  Wolfgang Schäuble warns the Greeks that Germany was serious about the conditionality of the programme – and implied that a eurozone exit was not completely inconceivable;
  • at the informal Ecofin, Timothy Geithner warned the Europeans that they are taking a catastrophic course;
  • ministers rejected his criticisms, pointing towards the US’s own dire situation;
  • Larry Summers compares eurozone policy with the incrementalism of the US policy process during the Vietnam War;
  • Jens Weidmann rejects proposal to leverage the EFSF with a banking licence;
  • A German constitutional justice says that Angela Merkel’s and Nicolas Sarkozy’s agreement for a joint eurozone government were unconstitutional;
  • hitherto unreported regional debt will increase Portugal’s overall deficits;
  • Greece is planning another round of austerity measures after troika expresses scepticism of measures taken so far;
  • ECB is hostile towards the latest Irish plans to restructure the financial sector;
  • Wolfgang Münchau, meanwhile, argues that the ECB cannot, on its own, end the crisis.

This is the low point for Angela Merkel’s liberal coalition partner. At the state elections in Berlin the FDP scored 1.9%, less that the extreme right-wing NPD. This last of seven state elections this year is certain to increase the sense of panic and confusion within the party and make it an even less predictable force within the coalition. The incumbent SPD mayor Klaus Wowereit won the election, albeit not convincingly, with a fall in the share of the SPD’s vote by 2.5% to 28.3%. Wowereit now has the option to form a grand coalition with the CDU (up by 2.1% to 23.4%) or the Greens (up by 4.5% to 17.6%). The real sensation was the rise in the Pirate Party, a group of anarchists, who scored 8.9%. Their main agenda point is uncensored and free access to the internet, legalization of cannabis and a minimum guaranteed revenue for everybody. For results and analysis check Der Spiegel, Financial Times Deutschland and Frankfurter Allgemeine Zeitung.

 

 

Merkel’s declining authority and her coalition’s potential implosion

 

Independently of the election disaster for the liberal FDP in Berlin, there are clear signs that Angela Merkel is losing control of her coalition. Talking to Der Spiegel the Bavarian Prime Minister and CSU chairman Horst Seehofer defied Merkel’s request to stop the loose talk about Greece leaving Eurozone. Should Greece be unable to deliver on reform promises “an exit of Greece from the Eurozone must be an option”, he said.  Seehofer is under huge pressure because Peter Gauweiler, one of Germany’s most vocal eurosceptics, has announced his candidature to become deputy party chairman at the CSU congress in the beginning of October. Simultaneously, the liberal FDP will present a position paper on Europe today that may put it on a eurosceptic course.

 

Der Spiegel also reports that Hans-Dietrich Genscher, honorary party president, is discreetly pulling the strings behind the scene to guarantee that the party referendum against the ESM fails and that the party stays on a pro-European course. Berlin was full of rumours of a possible collapse of Merkel’s coalition. SPD chairman Sigmar Gabriel and influential Green party deputy Jürgen Trittin said his party would support Merkel on the EFSF vote and be constructive so that a caretaker minority government could be capable to act until early federal elections.

 

 

Schäuble hints at a Greek euro exit

 

Talking to Bild am Sonntag Wolfgang Schäuble pointed to the CSU’s request that Greece may have to leave the eurozone and did not rule out such an scenario himself. “That is not foreseen in the treaties until now. Membership in a monetary union is a chance, but also a heavy burden. The adjustment measures are very tough. The Greek must know if they want to carry that burden on their shoulders.” Schäuble also tried to minimize the consequences should the coalition not be able to have its own majority in the vote on the EFSF September 29. While most analysts agree a failure to have its own majority would prompt the collapse of Angela Merkel’s current coalition he called such a scenario “not very exciting”. In votes were huge majorities are a given “discipline is not so strong”, he explained.

 

The eurozone crisis is now a transatlantic crisis

 

Informal Ecofins are normally little more than a wasteful bonding exercise, in which ministers and central bankers can talk for a little longer than they usually do. This time, Timothy Geithner intruded into this club and warned them bluntly that they are heading towards a catastrophe by following the policies they do. The European response was unsurprising. The FT quotes  Maria Fekter, the Austrian finance minister, as saying that the Americans should stop lecturing the Europeans, considering that they are in a much worse position.

  

Larry Summers’ on why the world must force Europe to act

 

This is quite an extraordinary column, which we urge Eurointelligence readers to read – if only to understand this big looming transatlantic conflict. Larry Summers starts by invoking a famous essay by Daniel Ellsberg on the Vietnam War, with some obvious parallels to the  policy process in the eurozone:

 

“…Policymakers acted without illusion. At every juncture they made the minimum commitments necessary to avoid imminent disaster – offering optimistic rhetoric, but never taking the steps that even they believed could offer the prospect of decisive victory. They were tragically caught in a kind of no-man’s-land – unable to reverse a course to which they had committed so much, but also unable to generate the political will to take forward steps that gave any realistic prospect of success. Ultimately, after years of needless suffering, their policy collapsed around them.”

 

Summers argues that the European incrementalism will likewise end in catastrophe. He agrees with Christine Lagarde’s analysis that a solution must involve a partial loss of financial sovereignty, a big bank recapitalisation, and stimulus. He close by urging the rest of the world to nudge the EU in that direction. (It will be interesting to see what happens once the irresistible force hits the immovable object.)

 

 

Weidmann opposes ECB liquidity for the EFSF

 

The proposal is from Deutsche Bank’s chief economist Thomas Mayer and CEPS director Daniel Gros. Both want to give the EFSF a bank licence so it can go to the ECB and get liquidity against euro government bonds which would increase the future effective lending capacity of €440bn fivefold. But Jens Weidmann shot down this proposal which apparently had some supporters within the EU finance ministers at the informal Ecofin meeting in Wroclav. “This contravenes against the interdiction to finance states”, the Bundesbank president said, according to Financial Times Deutschland. Weidmann opposes all attempts to solve the fiscal crisis through the back door on monetary policy. According to FTD Jean-Claude Trichet is also opposed whereas Mario Draghi’s views on this issue are unknown.

 

 

Karlsruhe judge doubts constitutionality of Merkel’s and Sarkozy’s economic government

 

In an interview with Süddeutsche Zeitung the constitutional judge Peter Michael Hubert doubts that Angela Merkel’s and Nicolas Sarkozy’s idea of an economic government of the 17 heads of state and government is in line with the German constitution. Should this body, which Merkel and Sarkozy wants to meet at least twice a year in order to reform the eurozone and increase its competitiveness, have relevant decision powers it would violate the constitutional principle that the “majority of tasks and competencies” must remain with the nation state, according to Huber. In order to overcome this, there would have to be a change of the constitution that would have to ratified by a referendum.

 

 

Unreported debt in one of Portugal’s autonomous regions

Unreported debt of the small autonomous region Madeira will increase the deficit by 0.3% of GDP, the Portuguese central bank and statistical office revealed on Friday. Madeira did not report debts or expenses since 2003 that would have had a combined impact of €1.1bn in the 2008, 2009 and 2010 deficits, according to Bloomberg. The Portuguese government needs to improve control over expenditure and cut spending to meet its budget-deficit targets as it seeks to regain access to bond markets in 2013, the IMF said earlier this week. FT Alphaville points out that this is an important lesson for the eurobond debate, where one of the assumptions is that fiscal coordination becomes more automatic not only between states but also within states.

 

 

Venizelos is expected to announce new round of measures

Evangelos Venizelos will announce the next moves of the Greek government today after a teleconference with troika officials and further meetings with cabinet colleagues, Kathimerini reports. Venizelos suggested that his eurozone counterparts had not been convinced that an emergency real estate tax designed to plug a €2bn hole in public finances this year would work. The tax, which will see homeowners pay several hundred euros this year and next, was announced last Sunday and prompted heavy criticism from opposition parties, commentators and unions.  Greece’s trustworthiness is being called into question. This cannot continue, he said, lashing out at opposition leader Samarras for being irresponsible. WSJ blog has Venizelos statement in full.

 

 

Noonan plans to cut rates on Anglo notes could meet resistance of ECB

The Irish government’s attempt to restructure the €30bn promissory note used to bailout Anglo Irish Bank is likely to meet significant resistance from the ECB, the Irish Independent has learned. Finance Minister Michael Noonan as good as admitted he was giving up on forcing losses on Anglo’s senior bondholders in favour of pursuing changes to the promissory notes used to finance Anglo. Noonan was hopeful of reducing the interest rate and/or extending the duration of the payouts so the State will have to pay less every year over a longer period. After meeting with Jean-Claude Trichet, Noonan admits that the ECB president had been “pretty non-committal” on the promissory notes issue. The proposals have not yet been discussed with ratings agencies or with the bank’s own management.

 

 

Wolfgang Münchau on why the ECB won’t bail out the eurozone

In his FT column, Wolfgang Münchau argues that the ECB can, and will, do a lot more, but they will not raise the SMP for €150bn to €1000bn, and cross a threshold beyond which they are clearly engaging in fiscal operations. The only scenario in which this might be possible is in support of a genuine multi-step political process towards that might lead to a single European bond, and which could take as long as 10 years to complete. By ruling out Eurobonds so forcibly on the political and judicial level, Germany is moving away from what appears to be the only feasible long-term scenario under which the eurozone can exist.

 

  

 

Spreads, Forex and ZC Bonds

 

Spreads sideways, euro down.

 

10-year spreads

 

 

 

 

 

 

 

Previous day

Yesterday

This Morning

France

0.785

0.752

0.744

Italy

3.673

3.655

3.649

Spain

3.485

3.446

#VALUE!

Portugal

10.492

10.429

9.995

Greece

21.561

20.150

#VALUE!

Ireland

6.890

6.797

#VALUE!

Belgium

2.017

1.868

1.863

Bund Yield

1.931

1.863

1.869

 

 

 

 

 

 

 

 

Euro Bilateral Exchange Rate

 

 

 

 

 

 

 

Previous

This morning

 

Dollar

1.386

1.3664

 

Yen

106.410

105.09

 

Pound

0.877

0.8706

 

Swiss Franc

1.208

1.2055

 

 

 

 

 

 

 

 

 

ZC Inflation Swaps

 

 

 

 

 

 

 

previous

last close

 

1 yr

1.48

1.48

 

2 yr

1.57

1.57

 

5 yr

1.78

1.78

 

10 yr

1.97

1.97

 

 

 

 

 

Source: Reuters

 

 

 

 

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