Eurointeligence Comment and Analysis

 

She might as well have said “not over my dead body”.  Speaking in a closed door meeting of the parliamentary group of her coalition partner FDP, Angela Merkel said there would be no mutualisation of debt as for example with Eurobonds “as long as I live”, Spiegel Online reports. Several FDP deputies reacted by telling the chancellor: “We hope you will have a long life”. Merkel’s remark is a sign of hardening positions just ahead of tomorrow’s summit. Up to now she had never categorically excluded Eurobonds but rather insisted that she did not think there were the right instrument “at the moment”. That left open the option to introduce them at a later stage once the German conditions on strict budgetary discipline, transfer of fiscal sovereignty to the European level and European control and sanctions mechanisms were established. According to Spiegel Online the radicalization of the chancellor’s position is a reaction to the plan of the group of four (Van Rompuy, Barroso, Draghi, Juncker) which foresees progressive steps towards a mutualisation of debt while shying away from far reaching proposals on a political union as it is claimed by the Merkel government.

 

Monti threatens his challenge to Merkel

 

Mario Monti announced yesterday that he would challenge Angela Merkel’s position, and defend his proposal for ESM bond purchase to the limit – literally. As Il sole 24 ore reports, Mr Monti said if necessary he would hold up any agreement of the summit until the market opening on Monday morning. Speaking in the Italian parliament yesterday he said the EU cannot afford another summit with no concrete decisions.

 

Berlusconi says he could become finance minister

 

Even more interesting are the manoeuvring in the PDL, Silvio Berlusconi’s party, as reported in Corriere della Sera. Berlusconi met with Monti yesterday, and came out with the seemingly supportive statement that if Monti fell over the EU, it would be a catastophe. At the same time, he also said that 75% of his party’s supporters were against the Monti administration. And it seems that Berlusconi is well prepared for Monti’s resignation. He said in this case PDL party secretary, and former justice minister Angelino Alfano would become the prime minister, with Berlusconi himself happy to serve as finance minister. Berlusconi also repeated his suggested that it would be much better for Germany to leave the eurozone, and a large number of other countries.

  

Everything is in place to corner Merkel

 

 

Under the headline “Europe is in battle order to break Merkel’s resistance” Le Monde describes the plan of four and how the euro member states prepare to confront the German chancellor. Merkel will see her worst fears confirmed if she reads the interview in Le Monde with Bernard Cazeneuve, the French minister for European affairs. “The European integration cannot be a condition for emergency measures”, the Socialist who is among the eurosceptics in his party and who had voted against the EU constitution in 2005 claims. “Nobody in the European Union imagines that we can go further in the re-enforcement of the monetary and financial union without thinking about the integration that will be necessary if we create instruments of mutualisation. We don’t have any reason to refuse that debate”, the minister concedes. “But that is not at the heart of the topic. To summarize, we have to give answers to the crisis now.”

 

More speculation on the van Rompuy plan

 

 

Newspaper have more information on the plan of the four presidents, with the FT reporting that the plan has been watered down, with all the concrete proposals on banking union taken out. The timetable, contained in earlier version, has also been eliminated, but the remit of the ECB as banking supervisor to include all banks has remained unaltered. The overall size of the document has been reduced from ten to seven pages – presumably to accommodate concerns expressed by member states.

 

Discussions are under way to dump ESM preferred creditor status on a case by case basis

 

One might remember the preferred creditor status of the ESM was also one of Germany’s red lines in crisis management. Reuters has the report that Merkel told MPs at the closed-door party meeting, that there are discussions under way to remove the status, but only on an ad hoc basis. Countries could request that the status be removed, and the decision would be taken by the other governments. But sources said that neither Merkel nor Wolfgang Schäuble had yet supported this proposal. And Germany is also hardening its position regarding any direct aid to the financial sector through the ESM.

  

Spain is on a trajectory to miss its 2012 deficit target by a wide margin

 

The Spanish central government deficit for the first five months of the year has been 3.41% of GDP, close to the 3.5% target agreed for the whole year. It marks an increase of 30% compared to the deficit in the same period of last year. The number suggest that Spain is headed for a massive budget overshoot this year, and is unlikely to meet the overall national deficit target of 5.5%. As El Pais reports, the government is now consider further austerity measures to get the deficit under control, include the scrapping of a tax exemption for house purchases, and the levy of a special fuel tax.

 

6.7% contraction forecast for the Greek economy

 

A new gloomy forecast published by the Center of Planning and Economic Research (KEPE) estimates that the Greek economy will contract by 6.7% this year, with a 9.14% contraction for the July-September period, Kathimerini reports. The official 2012 estimate is a contraction of 4.7%, but the government and its official creditors already expect GDP to shrink more, 6- 7% this year. In 2011 the economy shrank 7%.

 

Greece has a new finance minister and lost a deputy minister

 

Greece has a new finance minister, Yannis Stournaras, an economist and head of a business think tank, former government adviser and outgoing development minister in the caretaker government, the FT reports. Stournaras, 55, helped steer Greece into the euro in 2000 as chief adviser to the finance minister and Greek representative to the EU monetary committee.  Stournaras teaches economics at Athens University and is head of IOBE, an independent economic and business think-tank supported by the Greek federation of industrialists.  Kathimerini writes that it is unclear when Stournaras would be sworn in with outgoing Finance Minister Giorgos Zannias expected to represent Greece at the EU summit in Brussels Thursday and Friday.

 

Deputy Merchant Marine Minister Giorgos Vernikos, meanwhile, resigned after being linked to an offshore firm. Vernikos, a businessman who was one of Venizelos’s choices for the Cabinet, quit after SYRIZA pointed out that he was breaking a 2010 law by taking up a ministerial position.

 

Barnier says banking supervision should include smaller banks

 

Talking to Financial Times Deutschland Michel Barnier said the future European banking supervision should not limit itself to the biggest systematically important banks but rather be extended to smaller banks as well. “It is not only the big systemic banks that are causing problems”, the internal markets EU commissioner told the paper and referred to Bankia, Dexia and Royal Bank of Scotland that would not be in the 25 systemically important banks that the ECB has in mind but that created huge problems for the European banking sector. “It is therefore logical to have a close look at all banks.” Barnier said the ECB was “extremely credible and ready to act” and therefore a natural candidate for taking over the task of the bank supervisor. But the Frenchman stressed that there were also other options such as the EBA and the creation of a specific authority.

 

Negotiations start with Cyprus as it takes over EU presidency

 

Cyprus may need a bailout that is more than half the size of its €17.3bn economy, euro zone officials told Reuters on Tuesday even though the government declined to speculate on the amount. Work on determining exactly how much aid Cyprus needs will start next week when officials from the European Commission and the ECB – and probably the IMF too – travel to Nicosia. Two euro zone officials said that a package of up to €10bn was being considered. Cyprus takes over the EU presidency on Sunday. 

 

Euro banking supervisor could be located in Frankfurt

 

 

According to Handelsblatt and Les Echos, the new euro area banking authority will probably be located in Frankfurt which is already home of the ECB, the European Systemic Risk Board (ESRB) and the EU insurance supervisor EIOPA. Both articles speculate that in exchange the future EU patent court will go the Paris. There has so far been a bitter fight between Paris, London and Munich, which already hosts the European patent office and is the home base of a large number of European patent lawyers, about the future court. Herman Van Rompuy had recently proposed to split the court among the three cities which in the opinion of all three governments would be absurd.

  

Bad economic news for Francois Hollande

 

If there needed to be a proof that there was no political honeymoon for Francois Hollande, today’s really bad economic news delivered it. Unemployment in France on a year to year comparison rose by 215.000 (+8%) to a 31 months high, Le Figaro reports. Labour minister Michel Sapin said this was “Sarkozy’s heritage”. Nevertheless, the news is particularly unwelcome since the government yesterday also announced that it will raise the French minimum wage by 2% as of July, and many economists predict the measure will further raise unemployment among those who get the minimum wage. On the other hand the government can point to the fact the purchasing power in France will decline by 1.2% in 2012, the strongest decline since 1984 as Les Echos points out. The paper explains this decline is among other things the result of the tax increases the preceding conservative government of Francois Fillon had to introduce in order to get the deficit under control. The last bit of bad news is that the French statistical office Insee predicts growth to be at 0.4% only in 2012 after 1.7% in 2011, Les Echos writes. The news if particularly worrying for the Jean-Marc Ayrault’s government because all the economic assumptions including that of reaching the deficit target of 3.0% in 2013 are built on the assumption that growth in France will be at least 0.5%. The consensus among independent economists is even lower with only 0.3%.

 

The Padoa-Schioppa Group Report calls for a banking union and eurobonds

 

The Padoa-Schioppa group has made some wide-ranging proposals for the solution of the crisis. The group consists of nine members, co-ordinated by the German economist Henrik Enderlein. The group proposes four measures: to complete the single market to allow real exchange adjustment to work better; to create an automatic cyclical stabilisation fund outside the EU; the creation of a European Debt Agency to fund debt up to 10% of a country’s GDP, and to support sovereigns during crises; a banking union, with a common supervision authority with micro-prudential powers, and Federal Deposit Insurance Corporation (FDIC), combining the function of a banking resolution agency and a deposit guarantee scheme. For the original report, see the Notre Europe website. We have a summary of the challenges and conclusions here on Eurointelligence.

 

Martin Wolf on a path between federalism and breakup

 

In his FT column, Martin Wolf sketches a path between full federalism and a break-up. Such an approach would have the following components.

 

“… clear plans for resolution of banks largely at the expense of creditors, instead of relying on recapitalisation by fiscally stressed states – an approach that would automatically share more of the pain between creditors and debtors; a strong commitment to symmetrical economic adjustment across the eurozone, instead of today’s debtor-focused adjustment; recognition by the ECB of its obligation to sustain demand; and enough conditional financing to give governments committed to reform the ability to manage their economies without entering calamity. This could be described as ‘status quo plus’. It would be far from a desirable path. But it might be enough to be politically acceptable and economically workable.”

 

(It is all very sensible, except that Germany won’t have that either, and especially not without any political framework that could force a different type of adjustment than the one we are seeing. The eurozone crisis would never have escalated if these principled had been voluntarily adhered to.)

 

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

 

Getting much worse again;

 

 

Spanish 10-year yield close to 7% again.

 

 

10-year spreads
	Previous day	Yesterday	This Morning
France	1.121	1.137	1.130
Italy	4.557	4.825	4.789
Spain	5.176	5.382	5.444
Portugal	8.256	8.236	8.226
Greece	25.580	25.428	#VALUE!
Ireland	5.683	5.667	5.693
Belgium	1.787	1.778	1.791
Bund Yield	1.465	1.497	1.533
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.252	1.2503
Yen	99.660	99.34
Pound	0.801	0.7995
Swiss Franc	1.201	1.2009
ZC Inflation Swaps
	previous	last close
1 yr	1.13	1.17
2 yr	1.1	1.12
5 yr	1.5	1.5
10 yr	1.87	1.87
Euribor-OIS Spread
	previous	last close
1 Week	-6.886	-7.086
1 Month	5.043	4.743
3 Months	32.821	32.721
1 Year	97.021	97.321
Source: Reuters