Eurointelligence Daily Briefing, 14 de Agosto de 2012. Enviado por Domenico Mario Nuti.

A potent challenge that may lead to a delay in the ESM ruling

  • A eurosceptic think-tank in Berlin brought a new legal challenge to the ESM, by calling on the Constitutional Court to refer the case to the ECJ;
  • this follows a case in Ireland, which challenges the legality of the ESM and fiscal pact under European law;
  • no decision has yet been made, but ECJ is said to be considering a fast-track procedure;
  • if the German constitutional court followed the same procedure, it would create a legal precedent;
  • Italy had a moderately successful T-bill auction, with short-term interest rates falling below the levels of July;
  • but the latest Bank of Italy data show that the percentage of foreign owners of Italian government bonds has fallen to a recent record low;
  • the Northern League reintroduces the lira as a means of payment during a political rally;
  • Italians are streaming into the Austrian real estate market to avoid property taxes, and over fears of the future of the euro;
  • a poll among economists has a consensus over a 0.2% decline in Q2 GDP for the eurozone;
  • Greek statistical office state decline with 6.2% in Q2;
  • Germany’s current account surpluses is likely to exceed EU threshold of 6%, as a result of which Germany is likely to receive an official warning;
  • the German government says there is nothing wrong with surpluses;
  • Philip Plickert writes that only current account deficits are a problem, but not surpluses, because they reveal a country’s innate strengths;
  • CDU deputy parliamentary spokesman Michael Fuchs says there is no majority in the Bundestag for an ESM banking licence;
  • Greek banks turned to national central bank for liquidity support after ECB stopped accepting Greek bonds as colleteral;
  • Jean Pisany Ferry, meanwhile, says Francois Hollande may have gained some room for manoeuvre by opting against a constitutional deficit rule but now needs additional institutional reforms if he wants to use it.

The main story this morning is the Financial Times’ report of a new legal challenge to the ESM, which could produce a further delay in the decision of the Constitutional Court – scheduled for September 12. The latest case is brought by Europolis, a eurosceptic think tank in Berlin, which calls on the German court to refer to the ECJ, following a recent Irish precedent, where a member of parliament challenged the legality of the ESM under European law. The ECJ is currently considering whether to treat this case through an accelerated procedure, which will still take several months. The German complaint argues that the Irish case leave the German court no choice but to refer to the ECJ. The FT article also makes the point that a referral to the ECJ would create a legal precedent in Germany.

A rare criticism of the German court

Legal opinion in Germany about the relationship between national and European law is not nearly as consensual as the news reporting suggests. Matthias Klum writes in Frankfurter Allgemeine that the court has taken a one-sided interpretation of German constitutional law, which is likely to lead to a dead end. In particular he criticises the court’s decision to pay insufficient attention to Art 23 of the Constitution, which demands that German political institutions contribute to the European integration process. He also makes the point that the issue of whether the ESM/fiscal pact violate the notion of democratic rule had only arisen in Germany, and nowhere else in the eurozone. He says the court should not mechanically reduce its interpretation of democracy to the retention of a minimum number of core policy areas, but should accept that democracy is shared between the national and European levels.

Italy had a moderately successful bond auction, but the foreign share of bond holding is declining

Italy sold €8bn of T-bills as investors remained optimistic about the ECB’s promised bond purchases programme, according to the FT. The Italian treasury sold 364-day bills at an average yield of 2.767%, after 2.697% in July. The bid-to-cover ratio was 1.69. The fall in short-term yields came after Mario Draghi’s intervention promise. But the article cautions that bill auctions are not a good metric of investor sentiment, as most of the buyers are domestic banks. Over the last few days, however, yields on Spanish and Italian debt have crept again.

FT Deutschland reports despite the success of the T-bill auction, the percentage of foreign investors in the Italian capital markets is falling. According to data from the Bank of Italy, the total of investments held by non-Italians had fallen from €827bn in June last year to €597bn in April, a level of 36.5%, the lowest since 2005. The data include ECB  bond purchases, without which the percentage would be below 30%, according to one estimate.

Northern League reintroduces lira at a private rally

According to Repubblica, the Italian party Northern League will hold a rally on next weekend in Avio (Trentino, Italy), at which the Lira will be the currency used for paying for food and drinks. Two Northern League Trentino MPs, Maurizio Fugatti and Sergio Divina, have invited the Italian Prime Minister Mario Monti at rally. Since March the Northern League, in the middle of several scandal of the founder Umberto Bossi, claims for a return of the Lira. “The Euro has ruined Italy,” Bossi said one month ago. Also the former Italian PM Silvio Berlusconi has said that a Lira return is not a blasphemy.

Italians are piling in to the Austrian real estate market

Many Italians are buying properties in Austria, near the Italian border, according to ANSA. Stricter fiscal controls, the new IMU property tax, and fears about the future of the eurozone are the drivers of that trend. The Tiroler Tageszeitung, an Austrian daily, reports that in some places the houses prices are pushed up by as much as 30%. “Several majors are calling for new rules to prevent Italians from purchasing homes near the border.” According to the Tiroler Tageszeitung, there’s a possibility to introduce disincentives to house purchases after the summer holiday. The favourite places by Italians are Kitzbuhel and Innsbruck.

Eurozone GDP expect to have shrunk in Q2

Reuters has a survey among economists who have a consensus that GDP is likely to have shrunk by 0.2% in Q2. The most pessimistic forecast a contraction of 0.7%. The article quoted one economist as saying that events in Spain during June had shattered investor confidence. Another economist noted that the small increase in GDP during Q1 was an aberration to a prolonged downward trend.  Only Germany is expected to have registered positive growth during Q2.

Germany’s current account surplus may be so extreme in 2012 that it risks a warning from Brussels

FT Deutschland reports that Germany’s current account surplus is likely to exceed 6% of GDP this year, the threshold which triggers a European Commission warning. The article quotes Steffen Elstner of the Ifo Institute as saying that this threshold will be reached with certainty. Last year, Germany’s surplus was 5.9%. Ifo had previously forecast only a modest increase, but due to weaker import numbers, the surplus is likely to be significantly larger – larger in absolutely terms than China. There was no comment from the Commission yesterday. The German government maintained its position that there was no problem with current account surpluses. On the contrary, the German economics ministry sees this a “very positive” development. The German government spokesman said yesterday that the problem of imbalances was a problem for a countries with large current account deficits.

In defence of surpluses

The German debate on this is unreal. A good example has been a comment by Philip Plickert writes in Frankfurter Allgemeine, who says that the term of a macroeconomic imbalance was questionable in itself. It says it makes no sense to force countries to have balanced current account positions, and it is impossible to control it anyway, except perhaps in China. He also argues that it is absurd to talk about surpluses and deficits in the same way. He says large deficits are a problem because the debt accumulation makes this unsustainable. Germany’s surpluses, however, were the consequences of structural strength of the domestic economy, which is not a problem.

(It is interesting to note that German commentators seem to reduce both economic success and failure to purely structural issues, which is strange given the structure of the German economy has not changed all that fundamentally in the last couple of decades. Yet, they hardly ever pay attention to the real exchange rate.)

Leading CDU member says no banking licence for the ESM

Michael Fuchs, deputy parliamentary spokesman of the CDU, made some headlines yesterday with an interview in which he reiterated the position the Greece would receive no money if it failed to comply with the troika’s programme. In an interview with Handelsblatt he also made the point that there is no majority in the German parliament for an ESM banking licence. The reason is that the ESM could otherwise act without the control of national parliaments, which would weaken the conditionality of the aid. He also said he does not think the ECB should exceed its competences. He said “we will not accept the role of the ECB as a money printing machine for the crisis countries.”

Greece shrank 6.2% in second quarter

Latest data from ELSTAT suggests that the Greece’s economy shrank in the second quarter by an annualised 6.2%, seasonally unadjusted, and after a 6.5% drop in the first quarter. It is bringing cumulative contraction to €9.2bn — or 17.4% — since the second quarter of 2008, the first year of recession. Economists say Monday’s data is roughly in line with a recent forecast from Antonis Samaras for a contraction in GDP of more than 7% this year, according to WSJ.

Greek banks turn to national central bank for liquidity

Greek lenders turned to their country’s central bank for liquidity in July after the ECB stopped accepting Greek government bonds as collateral from July 25, Bank of Greece data showed on Monday. ECB funding to Greek banks fell by €49.67bn in July from a month earlier while emergency liquidity assistance (ELA) from the Greek central bank increased by €44.37bn, according to Reuters. Total ECB lending to Greek banks dropped to €23.99bn, and increased to a total of €106.31bn in ELA assistance from the Greek central bank at the end of July.

Francois Hollande’s choice and its consequences

In Le Monde Jean Pisany Ferry argues Francois Hollande chose a reinforced implementation procedure of existing EU norms over automatism of a constitutional budget rule, but there is a price to pay. Hollande will need to complement this with an ambitious institutional reform if he wants to use the room of manoeuvre gained through his choice. As it is, France cannot afford a counter-cyclical budget in a recession unless it has institutions and procedures in place to ensure a credible budget policy. For this France needs to make its more fundamental choices behind the numeric EU norms. Also, spending ceilings need to be fixed in a multi-annual budget framework by the parliament at the beginning of each legislative period and its implementation supervised; and finally budget relevant forecasts are be produced by an independent body.

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

Sideways, mostly, euro consolidates over $1.23.

10-year spreads
Previous day Yesterday This Morning
France 0.696 0.709 0.710
Italy 4.529 4.598 4.599
Spain 5.571 5.537 5.537
Portugal 8.633 8.878 8.878
Greece 23.013 23.016 #VALUE!
Ireland 4.703 5.020 5.020
Belgium 1.138 1.159 1.220
Bund Yield 1.381 1.42 1.419
Euro Bilateral Exchange Rate
Previous This morning
Dollar 1.227 1.2345
Yen 96.090 96.81
Pound 0.784 0.7867
Swiss Franc 1.201 1.2009
ZC Inflation Swaps
previous last close
1 yr 1.93 1.93
2 yr 1.78 1.79
5 yr 1.81 1.82
10 yr 2.13 2.14
Euribor-OIS Spread
previous last close
1 Week -8.257
1 Month -3.029 -2.929
3 Months 14.221 14.121
1 Year 77.364 77.264
Source: Reuters

Leave a Reply