The FT reported over the weekend that David Cameron will block the EU budget, favouring separate budgets for the eurozone and the EU. The article quoted an unnamed British official as saying that the idea was gathering momentum because it allowed the base EU budget to remain stable, with extra funding from the eurozone for the eurozone. Another official is quoted as saying that Cameron would be delighted to veto an increase in the budget, as this would secure him a hero’s return.
Reuters reports that at a private dinner among the EU ambassadors of several northern European countries, including Britain, Denmark, the Netherlands and Finland, there seemed to be a consensus in favour of a split budget.
(This idea does not surprise us, and is very likely to prevail. The financial needs of a tightly integrated monetary union are of a completely different order of magnitude than what can be provided by the EU budget, which has no macroeconomic relevance whatsoever – which is why we don’t usually cover it here. The inevitability of separate budgets is one of several reasons why the eurozone is not sustainable as a club within the EU, but is likely to develop an organisation that will supersede the EU in the long run.)
As many as 20 French Socialists could vote against the fiscal pact
François Hollande faces a test of his authority on Tuesday when the National Assembly votes on the fiscal pact. There is little doubt that the treaty will be approved in the lower house of Parliament, but Hollande may need to rely on votes from the conservative ranks. The Socialist Party has 299 lawmakers in the National Assembly, where the majority is at 289. French government officials said that under their own informal tally, as many as 20 Socialists lawmakers may defy Hollande’s authority by voting against the treaty, Wall Street Journal reports. The treaty, which all EU countries except the Czech Republic and the UK signed in March, will take effect either when 12 out of the 17 euro-zone countries ratify it, or on Jan. 1. Six member states, including Germany, have already backed it.
Looking back in wonder
French newspapers editorials and blogs today are looking back to the big political surprise last week, how, within days, a campaign of entrepreneurs forced a government U-turn on a capital tax plan. in his blog for Les Echos Dominique Seux came out in favour of the campaign. It only took a few days of intense online campaigning from a collective of web entrepreneurs for the French government to repeal a measure nobody had thought particularly shocking, and which was at the centre of François Hollande’s presidential programme, the pledge to bring capital gains tax (currently 19%) in line with income tax, with a progressive tax up to 45% for entrepreneurs selling their company. The Guardian retells their story, how the so-called “Les Pigeon” movement used Facebook successfully to defend entrepreneurs’ rights.
Protest is gearing up ahead of Merkel’s visit to Greece
Greek protesters are gearing up for Angela Merkel’s first visit to Athens since the financial crisis began with plans for strikes, rallies and a petition demanding reparations from the Nazi occupation,Bloomberg reports. While Greek Prime Minister Antonis Samaras called her visit tomorrow a “very positive development,” opposition leaders are promising a show of anger and frustration after five years of recession. GSEE and ADEDY, the umbrella organizations for private and public-sector unions, have called for a three-hour walkout tomorrow. The Independent Greeks, the fourth largest parliamentary group, are expected to hand over a petition to the German ambassador calling for war reparations and “the return of an occupation loan”. The Greek Finance Ministry has set up a committee to calculate the country’s World War II claim against Germany for the first time. Estimates vary. A group of 28 lawmakers who petitioned parliament on the issue in February said it was €54bn; the Golden Dawn party estimates €510bn.
South-Western Eurozone states want joint banking supervision by January
At a ‘5+5’ (European and African) Western-Mediterranean summit in Malta on Friday, the leaders of France, Malta, Spain, Italy and Portugal had a side meeting out of which came a joint statement calling on the October 18-19 European Council meeting to “pave the way towards” a single European banking supervisor to be “operational by January 2013”, Reuters reports. Barroso also attended the summit, and was quoted by Associated Press (via CBS News) as saying that a “blueprint” for banking union would be presented at the upcoming EU Council summit. Publicoreported that Mariano Rajoy was heckled by Spanish protesters on the streets of La Valetta, with cries of “your people are hungry”.
Monday Eurogroup to discuss banking union and more
The banking union, which Germany wants to delay until well after January, will be discussed again at a Eurogroup meeting on Monday, writes Expansion. Other topics on the agenda include: whether “legacy assets” will be covered by the ESM, as Spain wants but Germany, the Netherlands and Finland don’t; whether Spain will apply for aid triggering ECB bond purchases; the next tranche of aid for Greece, which Antonis Samaras says must come before the end of November lest Greece find itself without cash; relaxing Portugal’s deficit reduction calendar by a year; and a Cypriot application for a bailout ranging from €11bn to €16bn (60% to 100% of GDP).
Rajoy, international man of mystery
The Spanish press took note this weekend of a Charlemagne column in The Economist laden with stereotypes about the character of people from Rajoy’s native Galicia, claiming that “mysterious Mariano” is causing exasperation with his Galician ambiguity over a rescue application. The column also recognizes that Rajoy is having to deal with two simultaneous crises, a possible breakup of the Euro and a possible breakup of Spain.
El Pais has a piece about the “disconcerting” Spanish rescue. An unnamed Eurozone finance minister, a Eurozone diplomat are quoted and “Brussels sources” are quoted ironically denying there are any negotiations, saying that nothing is known, or that “the aid will come in a few weeks”. “Analysts” are reported to take a rescue for granted while both Spain’s and Germany’s governments deny it. El Periodico writes that the majority of the eurogroup “have already decided” that, with market pressure relaxing, a Spanish rescue application is not actually necessary for the time being. On the other hand, according to Reuters last Thursday, “European sources” are considering a proposal by Jyrki Katainen to help Spain though a “Enhanced Conditions Credit Line with investor protection (ECCL+)”, which would involve the ESM insuring 20% to 30% of Spain’s bond issues in order to encourage private investors to bid for the bonds.
Poor prospects for Spain’s ‘bad bank’
Finally, on Friday the Chairman of Kutxabank (a healthier bank resulting from the merger of theCajas from Spain’s Basque region) was quoted by Reuters doubting that private investors would contribute much capital to Spain’s ‘bad bank’. This would be a major upset for the Spanish government which is hoping that at most 50% of the capital will have to come from the FROB bank rescue fund.
In other real-estate news, last Wednesday El Pais (English Edition) reported that French bank Natixis had precipitated the bankruptcy of two large Spanish real-estate investment funds by refusing to roll over a syndicated loan. The Spanish firms are heavily invested in French real estate firm Gecina. The version of the story in the Spanish edition of El Pais has some charts of the mutual exposures.
The Northern League attacks Monti
La Stampa reports from the Northern Leagues’ annual meeting in Venice where general secretary Roberto Maroni attacked the Monti administration, referring to it as the “Fallimonti government.” He went on to say the impact of this government is akin to that of earthquake, something that all of those who got him into power know only too well, a reference to President Giorgio Napolitano. Maroni picked on current Treasury data and made much of the fact that public debt had risen by 4 percentage points, despite the fact that the fiscal stance is the tightest in the world. He said the unemployment rate had risen by 3 points, with youth unemployment now a social emergency. Maroni said this government had proved to be the most hostile ever towards the North. Even more aggressive was Roberto Calderoli, former Italian Minister under Berlusconi’ last government. If we are not given Euro-regions (a semi-independent status), Europe and Italy must give us statehood. Autonomy is something to be seized, the top Northern League politician said.
Giavazzi says Italy has a very long way to go
Italy has a very long adjustment ahead, Francesco Giavazzi writes in his column in Il Corriere della Sera. He says Italian GDP will contract by over 2% this year, while German GDP will increase by over 1%. Unfortunately, HICP will rise in Italy by 2.7% and in Germany by 1.8%. Why? According to Giavazzi, the reason is not the increase in VAT, but a lack of competitiveness. Too many enterprises are working in non-competitive sectors, like energy. Implicit in Giavazzi’s analysis is that the Monti government should brake the vicious link between enterprises, unions and de-facto monopolies. The government has only four months to act, Giavazzi warns, and should use its remaining political capital in the most efficient manner, and not think about the next elections.
Public spending in Italy and Greece? Almost the same model
Italy is not Greece? Not really, Fabio Scacciavillani argues in his blog on Il Fatto Quotidiano. Scacciavillani, Chief Economist at Oman Investment Fund and formerly at IMF, ECB and Goldman Sachs, remarks that Italy and Greece have a similar public structure, made up of inefficiency, corruption and missed opportunities. According to Scacciavillani, Italy is like a car: someone should repair its engine and change the wheels. Is it possible? Actually not. Why? The establishment is more corrupted in Italy than in other countries and wants to continue to receive money from public spending.
Italians to vote for Europe, not only for Italy, Scalfari wrotes
The centre-left has no leader. The centre-right depends on Silvio Berlusconi. In the middle, Mario Monti is waiting for his turn. That’s the Italy’s situation according to Eugenio Scalfari, the veteran political commentator, and founder of La Repubblica. In his Sunday editorial, Scalfari remarks that the political stalemate is the biggest threat for Italy and the eurozone. In the next few months Italy will not only elect a new government, but also the president. According to Scalfari, Italians should recognize Monti’ efforts and vote not only for Italy, but for Europe and for the euro. Italy is one of the EU founder members, but its citizens seems to have forgotten this, Scalfari writes.
Frankfurter Allgemeine’s short introduction to the modern world
This article is remarkable only in respect of where it appears. Frankfurter Allgemeine has, for the first time to our knowledge, acknowledged the existence of economic policy research beyond the 1960s, and told its certainly shocked readers that the relationship between monetary aggregates and inflation may be more complicated than the monetarist dogma once suggested. The article itself discusses empirical evidence about the relationship between monetary aggregates and credit data, and inflation, followed by a round-up of post-monetarist theories, including the fiscal theory of the price level.
Thomas Mayer on why the OMT is not inflation
In his Saturday column in Frankfurter Allgemeine, Thomas Mayer writes that the OMT is unlikely to be inflationary. He goes through the numbers. He says the ESCB’s own capital is around €100bn. In addition, the ESCB’s total reserves are €410bn. That would absorb some losses. But he said the gross reserves and capital are not the main criteria for price stability, but the net assets, which included discounted future profits. This is why central bank with a negative capital ratio can still produce price stability. Mayer cites the central banks of Chile and the Czech Republic as examples. He concludes that the ECB’s help is thus much less costly that a socialisation of all debt.
The failure of austerity in Greece and Spain
In his FT column, Wolfgang Münchau looks at the failure of the austerity policies in Greece and Spain. Greece is piling on one austerity programme on top of another without any turnaround even after six years – as the troika now expects a GDP drop of 5% in 2013. Spain is going now exactly the same route. Munchau says the IMF’s study on historic debt crisis (in its latest WEO), is very clear about the conditions in which debt consolidation can work, in particular that austerity needs to be complimented by a plausible growth channel, which is not the case here. He concludes that the policies are not consistent with the two country’s continued membership in the eurozone. He makes clear that he does not predict an exit – merely states that present policy choices cannot be upheld.
10-Y Spreads, Forex, ZC Swaps and Euribor-Ois
Markets still cannot decided whether Spain is in or out. Euro hovers around $1.30.
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| 10-year spreads |
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Previous day |
Yesterday |
This Morning |
| France |
0.725 |
0.671 |
0.660 |
| Italy |
3.687 |
-1.514 |
-1.536 |
| Spain |
4.463 |
4.191 |
4.259 |
| Portugal |
7.178 |
6.593 |
7.018 |
| Greece |
17.566 |
16.846 |
-1.54 |
| Ireland |
3.616 |
3.520 |
3.695 |
| Belgium |
1.046 |
0.960 |
1.062 |
| Bund Yield |
1.449 |
1.514 |
1.536 |
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| Euro Bilateral Exchange Rate |
|
|
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|
|
|
|
Previous |
This morning |
|
| Dollar |
1.301 |
1.2988 |
|
| Yen |
102.000 |
101.98 |
|
| Pound |
0.803 |
0.8062 |
|
| Swiss Franc |
1.212 |
1.2114 |
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| ZC Inflation Swaps |
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|
previous |
last close |
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| 1 yr |
1.89 |
1.85 |
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| 2 yr |
1.7 |
1.68 |
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| 5 yr |
1.8 |
1.8 |
|
| 10 yr |
2.04 |
2.04 |
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| Euribor-OIS Spread |
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previous |
last close |
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| 1 Week |
-7.957 |
-7.957 |
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| 1 Month |
-4.357 |
-3.857 |
|
| 3 Months |
3.571 |
5.771 |
|
| 1 Year |
54.400 |
54.6 |
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Source: Reuters
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