Eurointelligence Daily Briefing, 18 de Abril de 2012. Enviado por Domenico Mario Nuti.

Is contagion about to spread to France?

  • Ten year spreads have been rising in France as nervousness grows about the outcome of the French election;
  • analysts warn that bond vigilantes might cross over from Spain to France;
  • a poll, however, suggests that a majority of fund managers expect Nicolas Sarkozy to win the elections;
  • in an interview with Handelsblatt, Francois Hollande positions himself as the anti-Merkel; says he will not sign fiscal pact, unless it is complemented by a growth initiative;
  • says there will be no constitutional debt brake in France;
  • the latest Ifop poll shows him beating Sarkozy 56% to 44% in second round;
  • the IMF’s Fiscal Monitor shows the French deficit at 3.9% in 2013, thus overshooting the target;
  • the IMF also registers overshoots in Italy and Spain;
  • a Monti administration official also acknowledges that Italy will overshoot  the deficit target this year and next, though by a smaller margin than forecast by the IMF;
  • he says that Monti has yet to decide whether or not to compensate for the shortfall;
  • the IMF is relatively optimistic about the world economy, and predicts increases in GDP even in Italy and Spain;
  • but Spain is not expected to reach the 3% deficit target until 2018;
  • a bunch of German business activists have taken the Bundesbank to court over Target 2;
  • Bild is worried that the deterioration of Spain may cost Germany a lot of money; 
  • Wolfgang Munchau says Andres Velasco of Chile is right when he says that the eurozone has failed to learn from the experience of others;
  • Manfred Neumann says that it is too early to tell if austerity has gone too far; also says economists have the right to assess a country’s exit from the eurozone;  
  • Martin Wolf argues that the eurozone will most likely stay together;
  • The populist True Finns, meanwhile, lost 7pp in the latest polls.

The FT has picked up on the steady rise in French 10-year spreads (see also our table below),  which this morning stood at 1.363%, as investors are becoming nervous about the French elections, and the prospects that Francois Hollande might win and implement his programme. The article makes the point that investors have been so fixated on Spain that they have taken their eyes off the ball in France, where the deficit has come in at 5.2% last year. The article quotes one well-known economist who says that if Hollande does not immediately focus on the deficit, the bond vigilantes are likely to cross the border from Spain to France. Interestingly, the article refers to a survey of fund managers, a narrow majority of whom expect Nicolas Sarkozy to win (we suspect some of them must be confused by the dual-round voting system, and do not understand that a first-round lead does not automatically translate into a victory).



Hollande positions himself as Europe’s Anti-Merkel



In an interview with Handelsblatt, Hollande positions himself as the politician who will break Angela Merkel’s dominance of the European political scene. He reiterated his announcement not to sign the fiscal pact, if it is not amended with measures in favour of growth and employment. Also Hollande insisted that economic policies needed to be better coordinated in Europe. „All EU countries, even Germany, are suffering from a lack of economic dynamism. There is no common initiative for economic revitalization because we don’t coordinate ourselves“, he explained. The Socialist candidate also announced that he wanted to discuss with Merkel „how the European Central Bank can more strongly intervene in order to restrain the speculation against state finances“. Hollande reiterated that he had no plans to introduce the debt brake into the French constitution on the grounds that the constitution already requires balanced public finances. The candidate also underlined that he was going to implement his plans to raise taxes for millionaires to 75% and to reduce tax breaks for wealthy French by €40bn. However, Hollande said that the EU needed „the Franco-German couple in this deep crisis“, and his first foreign trip would therefore be to Berlin.


IMF sees French deficit at 3.9% in 2013 instead of 3.0%



In its Fiscal Monitor the IMF forecasted the French deficit in 2013 at 3.9%, the Le Monde blog Contes public reports. That is significantly above the 3.0% both Nicolas Sarkozy and Francois Hollande promised their EU partners to reach in that year. If the IMF projections are correct, the next president will have find additional cuts in the magnitude of €18bn.


The latest polls: according to Ifop Hollande will beat Sarkozy by a big margin



According to an Ifop poll for Le Monde Hollande and Sarkozy would both get 27% at next Sunday’s first round but Hollande would beat Sarkozy by a clear margin of 56% to 44%.


The Monti administration expects to miss deficit target



The FT reports that Italy’s government expects to miss the 3% deficit target, citing unnamed officials. This comes from the government’s annual budget forecasting document, to be considered by the cabinet on Wednesday, which (as we reported yesterday) is likely to include a higher than previously forecast recession. The new budget deficit will be 0.5%, rather 0.1%, a target the Italian government now expects to hit in 2014. Monti has said repeatedly that he would not impose additional austerity to meet the targets, but the official said Mr Monti had not yet made a final decision on the matter.


Il sole 24 ore focuses on the IMF’s forecast for Italy, showing a fall in GDP of 1.3% this year, and a rise of 0.5% in 2013, with a deficit of 1.7% this year, and 0.5% next year – which is significantly above the Italian’s government own (revised) forecasts. Public debt to GDP will peak at 123% this year, before falling back to 114% in 2014.


IMF believes that Spain will not hit 3% deficit target until 2018



This would normally have made top billing in El Pais, but the Spanish press is understandably preoccupied by the fallout of Argentina’s threatened nationalisation of its domestic Repsol activities. El Pais writes that the latest IMF forecasts say that it will take Spain until 2018 to reach the 3% deficit target, with a forecast of a 2012 deficit of 6% (as against a target of 5.3%), and 5.7% in 2013 (against a target of 3%). But the IMF is also forecasting a return to economic growth in 2013 (of 0.1%). Total public debt is set to increase to 92% by 2017, which would a containable scenario.  The article quotes Olivier Blanchard as saying that the IMF would not advise Spain to enact further austerity if the economy continued to contract. But the economic outlook for the global economy is now better than it was three months ago. The Spanish government responded to the IMF forecasts with the comment that the IMF has not always been accurate in their economic forecasts. (That is true, but the Spanish governments’ successive track record is much worse.)


Bundesbank taken to court over Target balances



According to Frankfurter Allgemeine Zeitung, the Munich based economic lawyer Bernd Schüneman and a foundation of family-run companies have taken the Bundesbank to court over embezzlement because of the target balances. „Because of the dimension of the risks those who are responsible must no longer look the other way“, the foundation’s chairman Brun-Hagen Hernekes told the paper. „The Bundesbank board and the federal government should not have let the European Central Bank act as it did. It was their duty to keep away damage from the Federal Republic and the taxpayers.“


Bild worries about Spain, the German’s favourite holiday destination



Bild is worried about Spain and its effects on the eurozone.  The headline runs: „Euro crisis: How dangerous is a Spanish bankruptcy for my money?“. The paper quotes the economist Lars Feld who warns that the repercussions could this time be worse than they were 2011. The article basically tells Bild’s 10m daily readers not to worry too much. The biggest risk according to the paper is that the euro will depreciate as a result of an escalation in Spain which would make gasoline even more expansive in Germany than it already is. But crucially there is no reason to worry about holidays already booked in Spain. „If you have booked with a German travel agent there is nothing to fear“, Bild quotes the federation of German travel agents.


Wolfgang Munchau on Andres Velasco



Writing in FT Deutschland, Wolfgang Munchau says Andres Velasco, the former Chilean economics minister, gave the best speech at this year’s INET conference (the last of the lot, held at midnight).  Velasco makes the point that eurozone policy makers have failed to consult anybody from other parts of the world with first-hand crisis experience, thus repeating all the mistakes others have made before them. Munchau lists voluntary private sector participation, and pro-cyclical austerity as among those mistakes. He concludes that the failure to consult is a consequence of European navel-gazing, a lack of interest in, and understanding of, events that occur outside its own borders, and a long tradition of economic exceptionalism.


Manfred Neumann on austerity – and the Wolfson prize



Writing in Vox, Manfred Neumann defends austerity, saying it is too early to sound the alarm, but says economists are right to consider all options, including exit. He says countries subject to a large adjustment now face three options. The first is simply to reverse the fiscal programme, which would trigger an immediate market crisis. The second is to continue austerity, but to fine-tune its composition. He favours this option, especially in view of the moderately strong global economic recovery. The third is to exit the euro, an option he prefers for Greece. He says it was legitimate for economists to consider and analyse this option acknowledging that a break-up of the eurozone as such is unrealistic, and should be discarded as an option.(Just to put this into context, Neumann is one of the judges of this year’s Wolfson prize, which asks the question of how to dismantle the eurozone. )


Also, Vox has a wider debate on whether austerity has gone too far, with contributions fromGiancarlo Corsetti, who argues that it has, from Alberto Alesina and Francesco Giavazzi, who argue that Corsetti has gone too far, and from Brad DeLong who says the costs of austerity will exceed its benefits.


Martin Wolf on why the eurozone may yet survive



In his FT column, Martin Wolf argues that the eurozone may yet survive due to the will of its political elites. But it is no optimistic column, and his prediction is that it will survive in misery.

“The principal political force is the commitment to the ideal of an integrated Europe, along with the huge investment of the elite in that project. This enormously important motivation is often underestimated by outsiders. While the eurozone is not a country, it is much more than a currency union. For Germany, much the most important member, the eurozone is the capstone of a process of integration with its neighbours that has helped bring stability and prosperity after the disasters of the first half of the 20th century. The stakes for important member countries are huge.” 

He concludes that the most likely outcome would be a compromise under which German support will grow, with lower surpluses, and higher domestic inflation, while the periphery adjusts internally.


Support for True Finns on the decline



A year after their big parliamentary win, support for the Finns Party continues to slide, according to  YLE. A new Helsingin Sanomat poll finds that the party currently enjoys popular backing around 16%, which is some 7 percentage points down from last summer. With a backing of 23%, Prime Minister Jyrki Katainen’s National Coalition has maintained its position as the country’s largest party.


10-Y Spreads, Forex, ZC Swaps and Euribor-Ois

Some relaxation for Spain, but note the rise in French bond spreads.











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Source: Reuters




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