Extraordinary summit in November?

The Wall Street Journal quotes Greek government officials saying that Europe might hold an extraordinary summit in November to approve the €31bn aid instalment, most of which will go toward recapitalizing the country’s banks.  Greece has enough cash reserves to last until the end of November. But further delaying the cash injection to the banks is starving the economy of much-needed liquidity. A further delay in the aid disbursement also means the government won’t be able to start paying off some €7bn it owes private-sector contractors.

Portugal announced new tax hikes, new strikes announced

Portugal announced new austerity measures to help narrow its budget gap, raising income taxes after a popular uproar prompted the government to back away from an earlier proposal to reconfigure payroll taxes.  Wall Street Journal quotes Vítor Gaspar saying  all earners will pay an extraordinary additional tax of about 4% on their annual income next year. The government will also reduce the number of tax brackets to five from eight, effectively raising average tax rates, and increase taxes on luxury goods and cigarettes by an unspecified amount . He said the tax measures, combined with a new “solidarity tax” of 2.5% of income on top earners, will raise an estimated €2bn in additional measures. The measures come as the country’s largest union confederation called for a general strike on Nov. 14 to protest the government’s plans.

Germany positive on van Rompuy’s draft

There was a bit more on the van Rompuy draft on economic union, which is potentially the most important political development that arises out of this crisis. Frankfurter Allgemeine confirmed yesterday’s FT story that the draft foresees a common eurozone budget, of as yet uncertain remit, and contractually agreed economic reforms. Herman van Rompuy will produce an interim report in the October European Council, followed by a final proposal in December. The paper says that the Council resolution in October will set the tone for the ultimate report. As the FT reported yesterday, the draft has no details on how a common budget is financed. The paper cites sources according to whom the most likely source of funding would be national contributions, or a share of eurozone tax receipts. The paper also includes a demand for strong democratic controls, which, according to the author, would suggest that the eurozone would have its own parliament (or rather, as we suspect, a more explicit role of the European Parliament and national parliaments).

The paper speculates that Germany is likely to react positively to this draft despite its wide-ranging demands. Germany can happily live with a common eurozone budget, though not with eurobonds. Germany is likely to insist that the common budget should be used to give countries incentives for reforms. The European Commission also seems to be positive about the van Rompuy paper.

Everybody is happy, except Frankfurter Allgemeine

Holger Stelzner of Frankfurter Allgemeine is predictably negative about this draft, which he said was short on detail. He writes there is no reason to believe why such a common budget would help countries to reform. His fear is that Mr van Rompuy will emulate the way Germany funded unity, through a solidarity tax. (If they go for a contributions based budget, instead of a common bond, that would indeed be the case though we doubt it would ever be as transparently brutal as Germany’s solidarity surcharge).

Luke Baker is also not optimistic

In his Reuters commentary, Luke Baker says van Rompuy’s draft is more of a wish-list of topics that needs be addressed in the coming months if the EU is serious about reforming the eurozone. It is a hugely complex tasks that interacts with banking union, national budgets, changes to the EU treaty, and the Liikanen process. He writes that diplomats were already playing down the chances of any breakthrough at the October summit, calling it a “stock-taking exercise”. It is also possible that the debate may be hijacked by some other issues – a Spanish application to the ESM. It quoted one diplomat as saying that behind every single discussion point, there is the basis for an “extended dispute between Germany and France, Finland and Spain, Ireland and Germany and pretty much any other country you care to mention.”

The latest stress tests show an increase in bank capitalisations

Spiegel Online reports that 71 banks have increased their capital base by €200bn since the end of 2011 to prepare themselves against further financial turbulence. Four banks failed to reach the envisaged 9% core tier-1 capital ratio, with only four banks failing the targets – Monte dei Paschi di Siena, as well as banks from Slovenia and Cyprus. The EBA expressed relief that the increase in capital ratios has not led to a credit crunch, as many had feared at the time.  The article says the twelve German banks had reached a core tier one capital ratio of 10.7%.

France to revise company taxation after massive protests

France is preparing to lower  costs for companies after last weeks budget galvanised protest from businesses.   Les Echos reports that the government explores now ways to dampen the effect of the capital gains tax increase. Under the 2013 draft budget,  capital gains taxes would be taxed like income, which -at the upper band of 45%- results in taxes three times as high as the 19% currently in place. Le Monde reports that the government is also planning to lower  labour costs massively over the next five year. According to Le Monde information companies could benefit from a cost reduction of about €40bn spread over five years through reductions in the general social contributions (CSG).

Italy is mulling to sell ENI and ENEL stakes

The Milan-based financial daily Milano/Finanza claims the government is mulling to sell its participations in energy companies ENI and ENEL if it is economically sensible. Vittorio Grilli denied the story in a hearing in Lower House. He the stakes in ENI were strategic and linked to energy security. The government owns a 30.3% golden share in ENI, and 13.9% of ENEL. Another 17.4% stake of ENEL is in the hands of the State-run bank Cassa Depositi e Prestiti. During his speech, Grilli also said that in the coming months several measures would be put into place to exploit state assets and sell others, including public properties and shareholdings. Grilli reiterated he wanted to obtain about €20bn a year from sales to reduce Italy’s public debt to GDP ratio by 20% from 2013 to 2017.

Growth-promoting EU programs running out of cash

The European Commission will be applying to the member states for a Supplementary Budget to prevent several high-profile EU programmes from running out of cash, EurActiv reports. Affected programmes include the European Social Fund. The spokesman for Budget Commissioner Janusz Lewandowski, Fabrizio Fiorilli, confirmed the cash crunch and blamed the Council and Parliament for approving a budget for 2012 well below the Commission’s proposal and which they knew would not be enough.  EurActiv points out that “the budget has run dry precisely in areas where EU leaders committed to boost, like education, research and youth, in order to promote growth”.

Financial transaction tax on the agenda of next week’s eurogroup meeting

EU finance ministers hope to proceed with the implementation of the financial transaction tax at their meeting next week. However, the project will not go ahead unless at least eight eurozone members sign up. The Finnish coalition government leaders are currently discussing their position, with the Social Democrats keen on such a tax and the National Coalition party not,  the Finnish news agency YLE reports.

Negative economic trends in Spain

Reuters reports that Spain’s revenue from corporate tax has dropped by 2/3 since the start of the crisis due to numerous small business failures and large businesses doing more business “abroad to compensate for the prolonged downturn at home”. The second negative trend is the continued increase in unemployment reported by El Pais (English Edition). Nearly half a million more people are unemployed than a year ago. Month-to-month, social security registrations are down by more than unemployment is up, suggesting a reduction of the labour force. The secretary of state for employment sought a silver lining in that the additional unemployment over the past three months was substantially smaller than for the same period of 2011.

Almunia on banking

Spiegel (English Edition) has an interview with Competition Commissioner Joaquin Almunia. In it, he praised the Spanish government’s reforms, which he said “should be better explained to the public in other European countries”. He also said that the Spanish banking rescue would be carried out in a way to ensure “banks themselves, as well as their shareholders and hybrid capital holders” share the burden of restructuring. Also, responding to a comparison with the case of German bank WestLB which was liquidated, Almunia didn’t prejudge the outcomes in Spain but did stress if restructuring an institution seems more expensive than liquidation, it should be liquidated. Finally, in reference to Germany’s reluctance on the banking union, Almunia said “individual nations need to do what is necessary to save Europe as a whole”.

Poland edges further to euro membership

The FT quotes Poland’s finance minister Jacek Rostowski as saying that Poland would join the eurozone provided it can be stabilised and reformed. He said the eurozone has yet to take a number of important decisions. He said he was concerned by the political instability in Spain, and the delay in Spain’s application for a rescue programme.

The Liikanen’ report is the first step for a new Eurozone, Onado argues

The Liikanen report could be the first step to a new paradigm, according to Marco Onado, professor of Banking regulation at Bocconi University. In an editorial published on Il Sole 24 Ore, Onado remarks that avoiding future bank bailouts at taxpayers’ expense and the protection of the real economy are the important lessons from this crisis. According to Onado, at least two of the five proposals of the Liikanen’ report should be considered simultaneously. First of all the creation of an efficient crisis-resolution mechanism and, secondly, higher capital requirements for trading activities. Unfortunately, The Liikanen report does not say that separation is “a sufficient condition to prevent new banking crises or to protect the part of banking activities that are of service to the real economy,” he writes. The national supervisory powers should be in the hands of the ECB, also the supervision on proprietary trading and the control of separation between investment and commercial banking activities. Short circuits like Bankia should be avoided in the future’ structure, Onado remarks.

Democracy itself is at stake in southern Europe

Mark Mazower argues in the Financial Times, the politics, not economics, was now the main area of concern in the eurozone crisis. What is at stake is not just a monetary union, but democracy itself. He said the shrinking of the two large democratic parties in Greece was extremely worrying – with Pasok now at 12% in the recent elections. If the Samaras governments fails the same will happen to the centre-right. He says the rise of Golden Dawn was a marker of a very disturbing social disintegration. New violence was emerging on the streets and in daily life. It is an open question whether the two-party system transforms itself and the state, or will it collapse and bring anarchy.

Wolfgang Münchau on Peer Steinbrück

In his column in Spiegel Online, Wolfgang Münchau has a go at Peer Steinbruck, the former finance minister, now nominated as SPD challenger to Angela Merkel. He writes that Steinbruck laid the ground for the eurozone’s miserable crisis policies, by insisting on national bank resolution programmes back in 2008. He says if Merkel’s strategy comes apart before the election, Steinbruck is the least useful candidate imaginable, given his own past, and his proximity to the chancellor. If her strategy does not come apart, there is no need for Steinbruck either, given that voters can have the real thing. The Steinbruck nomination only makes sense if you believe that Merkel implodes over a non-euro related issue, not a very likely prospect. Munchau concludes that the ultimate problem is the SPD’s lack of courage and its political failure to agree a crisis strategy that is distinct from Merkel’s.

Manasse calls for an Italian taxation reform

On his blog, Paolo Manasse notes some interesting points of Italian tax system. The inefficiency of this system is based on two issues. The first is the tax evasion, but less known and just as important problem are the formal exemptions. According to Manasse, the ratio of actual revenues and potential in Italy is 41%, compared with 58% in the OECD average. That’s not due to poor compliance (avoidance and evasion estimated at 30%, according to Manasse), but derives above all from the lower tax-base due to exemptions. These byzantine tax rules cost 2.5% of GDP to Italy while tax evasion 2.6%. The second issue is tax expenditures. According to Manasse, supported by IMF Technical Assistance Reporton tax reform figures, there are over €167.3bn, or 10.7% of Italian GDP, of missing revenues from taxes. Why? Because Italy has several tax laws, since 1971, that allow deductions, exclusions, exemptions, deferrals, preferential tax rates. That’s why Monti’s government has asked the IMF support for its taxation reform.

The Economic Consequences of Mr. Rajoy

Paul Krugman makes a comparison between the situation in Spain and Britain’s return to the gold standard – also the subject of chapter three in the IMF’s World Economic Outlook. He says the latest estimates are that Britain returned to the gold standard with an overvalued currency by about 20%, and a large legacy debt burden from WWI. Under the gold standard it ran primary surpluses of 7%  – internal devaluation through deflation. The IMF shows this not only suffered prolonged stagnation, it failed even to make a dent in the debt overhang. Spain is similar – though not as yet quite so extreme. On Krugman’s estimate, the extent of Spain’s overvaluation today is about 15%, with similar policies now pursued. He concludes:

“History suggests that unless Spain gets serious help from a broader euro boom, and in particular some inflation in creditor countries, it faces a near-impossible task.”

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

 

Spreads are rising again.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.746	0.754	0.753
Italy	3.572	3.726	3.718
Spain	4.299	4.376	4.404
Portugal	7.430	7.318	7.505
Greece	17.699	17.727	-1.45
Ireland	3.611	3.686	3.740
Belgium	1.098	1.080	1.075
Bund Yield	1.457	1.443	1.451
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.289	1.2923
Yen	100.820	101.58
Pound	0.800	0.8025
Swiss Franc	1.210	1.2117
ZC Inflation Swaps
	previous	last close
1 yr	1.89	1.85
2 yr	1.7	1.68
5 yr	1.8	1.8
10 yr	2.04	2.04
Euribor-OIS Spread
	previous	last close
1 Week	-7.286	0
1 Month	-5.414	-3.114
3 Months	4.143	6.143
1 Year	56.729	56.629
Source: Reuters