EUROINTELLIGENCE DAILY BRIEFING, 17 de Outubro de 2012. Enviado por Domenico Mario Nuti.


Schäuble/Lamers déjà vu

  • Wolfgang Schäuble rattles colleagues in Brussels and elsewhere with his own proposal for a fiscal union;
  • forecasts a strengthening in the role of the economic commissioner;
  • would have veto rights over national budgets though no line item veto;
  • would have the right on launch excessive deficit procedure without interference from the Ecofin;
  • reports claim that Schäuble had consulted with Angela Merkel;
  • reactions were predictably negative, with one EU source saying they were conceived in the air, but unlikely to reach the ground;
  • Schäuble seemed disillusioned with the progress of the Group of Four;
  • Alexander Graf Lambsdorff and Jorg Asmussen support Schäuble;
  • France opposes such a strong shift of power to the Commission;
  • Daniel Brossler says Schäuble’s proposal also constitutes a challenge to the German constitutional court;
  • Gunther Nonnenmacher says Schäuble undermined his own proposal by ruling out Grexit;
  • for the third time in a week, Italy revises its stability law, introducing more cuts;
  • Francesco Giavazzi and Alberto Alesina say the budget is too heavily weighted towards tax increases, and will thus prove recessionary;
  • the Bank of Italy has produced an implausibly optimistic forecast for Italy in 2013;
  • a survey claims that the financial transactions tax will have a catastrophic impact on Italy;
  • markets react positively to rumours that Spain is about to apply for a precautionary credit line;
  • Greek government and troika are hopeful to reach deal on reforms, but there is a disagreement over labour reforms;
  • Le Monde takes a detailed look at what happens when a region secedes, concluding that the result is a legal mess;
  • Irish Central bank criticises banks for wait-and-see attitude in mortgage crisis;
  • Portuguese government signals possible changes amid opposition from coalition partner;
  • Mediapart says IMF is hypocritical criticising austerity, and yet imposing it;
  • Martin Wolf says the eurozone should heed the warnings of the IMF;
  • Eduardo Cavallo and Eduardo Fernandez-Arias, meanwhile, says the eurozone should heed the lessons of the Latin American debt crisis.

Ok, without Karl Lamers this time. Wolfgang Schäuble has made another of his famous federalist proposals in defence of a fiscal union. The proposal includes a strengthening of the role of the economic commissioner, who should be a veto right over national budgets, and the rights to launch an excessive deficit procedure by himself/herself without an Ecofin vote. He also proposed the establishment of a formal eurozone caucus within the parliament with exclusive voting rights on eurozone issues.

The most extensive coverage this morning in Suddeutsche Zeitung, which says that Schäuble’s plan far exceed what is being discussed in Brussels now. Schäuble said the Group of Four discussions (European Council, Eurogroup, ECB, and Commission) that are currently taking place were too vague and set the wrong emphasis, which is why he decided to push ahead with his own proposals for reform – ahead of this week’s EU summit.

The paper said Schäuble had consulted with Angela Merkel. The proposals would require extensive treaty change. To that effect, Schäuble wants to set a constitutional convention this December. If there is no majority among the EU-27, Schäuble said the changes should be done among the Eurozone-17 (presumably on the legal basis of enhanced cooperation).

Suddeutsche said the reaction from Brussels was muted. There are several articles in the paper dealing with Schäuble’s proposal. One said Schäuble was alarmed by the lack of ambition of the Group of Four, while the article remarked that this was strange given the close coordination between Merkel and Herman van Rompuy. Schäuble seems concerned that the Europeans could miss a unique chance for reform. Once the turbulence is over, member states are likely to lose the readiness to change. Schäuble had informed the eurogroup ahead of the presentation of his plans during a on plane with journalists in Asia. One EU diplomat commented dryly that the plans had been created up in the air, and are unlikely ever to reach the ground. Suddeutsche also makes the point that Merkel’s strategy is to let him dream while pursuing her own policy of pragmatism. The article contains other downbeat references from EU diplomats.

(That does not surprise us. But we feel that journalists and politicians have a misconception of the notion of “pragmatism” during a deteriorating debt crisis. If fiscal policy is insufficient to resolve a debt crisis, which is obviously the case in the eurozone periphery, what appears to be pragmatic in the short run, postpones and aggravates the problem in the long-run, making a violent end more likely. And as people expect that to happen, their expectations affect the short run. There is nothing pragmatic about such a policy.)

Alexander Graf Lambsdorff is quoted in FT Deutschland as supporting Schäuble’s call for a constitutional convention, starting December. Frankfurter Allgemeine reports that Jörg Asmussen also supports the plans of his former boss. He was quoted as saying that we have to share sovereignty in Europe in order to support a single currency. He supported in particular the idea of a veto right over national budgets. But he added that a veto right should only be linked to the budget as a whole (i.e. no line item veto).

The FT’s coverage on the story includes a more detailed look at the French position, which remains hostile to a treaty revision, favouring a centralised budget, eurobonds (of the debt redemption variety), and funds to deal with specific asymmetric shocks. Germany is cautious on a single budget, while France is cautious about contractually agreed structural reforms – but the positions seem to be fluid. One further difference is to restrict this regime to the EZ-17, favoured by France, or to the EU as a whole, with opt-in gateways for non-eurozone members, the option favoured by Germany.

Against Brussels, London and Karlsruhe

In a comment in Suddeutsche, Daniel Brossler writes that Schäuble’s plan constituted a challenge to the consensus in Brussels, London, and the German constitutional court. A fiscal union as defined by Schäuble would be completely unacceptable to the British (and push them further out); and it ultimately usurps the entire body of the constitutional court’s ruling, which has hitherto insisted on the national parliament’s absolute sovereignty.

Günther Nonnenmacher says Schäuble has torpedoed his own proposal by ruling out Grexit

FAZ editor Günther Nonnenmacher says Schäuble’s proposal is unlikely to find a majority. He says the purpose is simply to cement exiting law, to which member states have already signed up. But Schäuble has weakened his own position by ruling out a Grexit.

(The article also includes a highly revealing misunderstanding which especially political commentators tend to have in relation to economic reforms. Nonnenmacher writes that savings are not an end in themselves. The idea is to have structural reforms that can generate growth. He considers savings and reforms as the same thing, which they are usually not.)

Italy revises its last Stability Law, for the third time in a week…

The Italian government has launched the Stability Law with revisions, including retroactive cuts to tax benefits, Il Messaggero reports. Benefits for the disabled are also under review. At the same time, the tax rate will drop to 22% from 23% for those people earning less than €15,000 per year, and to 26% from 27% for salaries between €15,001 and €28,000. A 1% reduction in income tax for the first two rates will result in revenue losses of €4.2bn in 2013, states the technical report linked to the bill, to be sent to both houses of Parliament for the approval. The bill calls for increasing the VAT by 1% starting in the second half of 2013 for the VAT sales bracket of 21% and 10%.

Giavazzi and Alesina say the budget will make the recession worse

Writing in Corriere della SeraFrancesco Giavazzi and Alberto Alesina have done the math on the Italian budget, and do not like what they see. Over 2012 and 2013, government revenues are expected to grow €82bn, expenditures to go down by €43bn. Of these cuts, €23bn consist of lower transfers to municipalities, provinces and regions. If these entities, as it is happening, compensate for the reduction in the funds they receive from the state by increasing local taxes, the overall result will be €105bn of higher taxes and spending cuts of €20bn. Giavazzi and Alesina have been arguing for some time that it is important to distinguish between budgetary measures focusing on spending cuts and those on tax increases in their impact on growth. If austerity comes mostly in the form of tax increases, the fiscal mulitiplier is indeed in the order of 1.5, they argue in this article. They conclude by saying that Monti has a choice to go down in history as a prime minister to enforce rigor, or as a prime minister of reform. The second would be more difficult, but more rewarding.

The Bank of Italy sees the light at the end of tunnel of Italian recession

It is worth treating economic forecasts with extreme caution at a time like this – that is true especially in countries subject to massive fiscal adjustment (see the Giavazzi/Alesina argument above). The Bank of Italy yesterday came out with a punch-drunk optimistic forecast for Italy’s economy in 2013, forecasting an exit from the recession during that year, as Il Sole 24 Ore reports. The Bank of Italy forecasts an overall annual GDP contract of 0.7%. The public deficit is expected to drop from 2.6% of GDP in 2012 to 1.6% in 2013. The primary surplus is put at 2.9% of GDP this year and projected to rise to 4% next year. The Bank of Italy also forecasts an improvement in credit conditions and economic confidence.

The catastrophic impact of the financial transaction tax in Italy

The possible losses for Italian stock and derivatives markets after the introduction of the Financial Transactions Tax are over €5bn, according to an independent study revealed by Milano/Finanza. The Italian Stability Law, predicts FTT revenues of €1.1bn in 2013. The FTT is also expected to reduce the volume of stock and derivatives transactions by 30% and 80% respectively. The expected capital flight from Italian stock market is not predictable, but likely to be very high.

Markets react positively to Spanish bailout rumours

The Spanish stock market rallied and the country’s risk premium narrowed in reaction to reports that Spain would soon apply for a ‘precautionary credit line’ from the ESM, writes El Pais (English edition). The Financial Times quotes a single unnamed official from Spain’s Economy Ministry, that Spain would be “comfortable” requesting a credit line form the ESM in order to trigger the ECB bond buying, but insisted that Spain would not actually need to tap the credit line. The official said Spain would not seek a yield cap from the ECB, contrary to earlier press reports, and also that the application itself might result in lower yields without ECB purchases. In addition, Bloomberg reports that two prominent CDU parliamentarians, budget spokesman Norbert Barthle and deputy parliamentary group leader Michael Meister, expressed support for the idea of Spain’s application, even as Meister criticized the Spanish government’s communication strategy with “the Spanish government is going to extreme lengths in terms of consolidation and reforms, but doing a very good job of hiding it from the public”.

In addition, Moody’s kept Spain’s government bond rating, but with a negative outlook, reports Reuters, to general relief among Spanish commentators. Moody’s estimates that the ECB’s willingness to purchase Spain’s bonds in principle improves the likelihood that Spain will retain market access. Moody’s takes the usual schizophrenic approach to austerity policies, listing the “commitment to fiscal and structural reform” as a positive, and “downside risks to the baseline scenario” as a negative. Moody’s continues to consider a Greek exit as “a major event irsk for all weaker euro area member states”.

Despite disagreement over labour reforms, troika and Greek government see deal soon

Greece’s coalition partners hope to agree on the detailed measures contained in the €13.5bn austerity package demanded by the troika, but the two junior partners said they cannot accept the labour market reforms, Kathimerini reports. These reforms include scrapping automatic pay increases for employees in the private sector and a reduction in compensation and notice period for dismissed workers. Kouvelis opposed these measures and said his party would not vote for them in Parliament. Venizelos said that if the Democratic Left does not support the reforms, PASOK would not be in a position to back them either. What has been agreed are the spending cuts and tax measures demanded by the troika, also that 2,000 civil servants will be dismissed immediately, receiving 75% of their salary for a year before being made redundant. Another 11,000 dismissals will follow in 2013.

“Our aim is still to receive our next loan instalment within November,” said Finance Minister Yannis Stournaras, reflecting the government’s hope that a deal will be reached with the troika following the EU summit. Troika respresentatives leave Athens today, with Poul Thomsen insisting that most policy issues have been agreed and there is little to be covered soon.

What happens if a region split from its country but want to stay in the EU?

Catalonia, Scotland or Flanders:  Le Monde raises the question what happens with its EU membership if a region declares itself independent? So far the rule seem to be that an independent region should make a new application, which requires unanimous vote by all member states. Thus an independent Catalonia could be integrated into the EU with the approval of Madrid. But lawyers put forward the argument that in reality European citizens cannot be deprived of their rights they enjoy today. The European Commission should thus consider that European law remains valid for a new born state. There is another complication. The Lisbon Treaty offers the possibility not of secession but only for a termination of EU membership. So what exactly would happen if a region leaves a country but wants to join the EU?

Irish Central bank criticises banks for wait-and-see attitude in mortgage crisis

The Irish central bank has strongly criticised banks for their slow progress in tackling the mortgage crisis, saying the extent of their efforts to fix the problems showed that “wait and see” had become the strategy of choice for lenders, the Irish Times reports. The head of banking regulation Fiona Muldoon said that the banks were behaving like teenagers in responding to its requests to deal with the problem with mortgages. Muldoon said that of the 168,000 owner-occupier customers in arrears, half of them by value and by number had “no formal arrangement in place”. Progress in tackling problem buy-to-let loans was even slower than on home loans. A fifth of the 150,000 buy-to-let mortgages and 29% by value of the €32bn mortgages are in arrears of 90 days or more.

Portuguese government signals possible changes amid opposition from coalition partner

The Portuguese government is open to discussing changes to next year’s budget plan, an official said Tuesday, amid signs that lawmakers of the governing coalition are unhappy with it, Dow Jones Wires reports. Jorge Moreira da Silva said that the State Budget for 2013 has “very small leeway ”  to replace some revenue and expense measures.

The 2013 budget was heavily criticised and threatened the coalition government. Lawmakers for the junior coalition party, the conservative Democratic and Social Center Party, or CDS, posted comments on their Facebook pages after Vitor Gaspar had said that not approving the plan would mean saying no to the entire bailout programme. “There is no room for manoeuvre”, he said on Monday.  “Parliament has the leeway to change any budget,” CDS lawmaker Joao Pinho de Almeida wrote on his Facebook page. “To deny that is to deny the fundamentals of parliamentarianism and the democratic system.” “Don’t expect that I accept this budget plan as unchangeable,” wrote Adolfo Mesquita Nunes. Three former ministers also came out against the budget, warning that tax reliance will lead to recession, while the economist Manuela Ferreira said that the budget is impossible to execute, according to different articles in the Jornal de Negocios.

French newspaper criticises contradictory approach of the IMF 

The French online newspaper Médiapart criticises the contradictory messages from the IMF with respect to crisis resolution.  On the one hand the IMF warns that the austerity policies in Europe threaten global growth. In the same time IMF representatives impose the same austerity measures on EU countries like Greece.

Martin Wolf on the IMF 

In  his FT column, Martin Wolf defines the role of the IMF as having a right to be consulted, the right to encourage and to warn. He said the IMF’s warning about growth are particularly serious, and especially the industrialised nations, especially the eurozone, should be heed these warnings, especially the warning that fiscal policy is far too tight given the size of the fiscal multipliers. He says the IMF is encouraging the eurozone to adopt a banking union, to agree a programme with Spain and to use the OMT to lower bond yields to about 3%.

The lesson from Latin America

Writing in VoxEduardo Cavallo and Eduardo Fernandez-Arias pick up on an important theme – the inability and refusal by eurozone policy makers to consult with policymakers from regions that have experienced financial crises in the recent past. The following lessons are particularly relevant for the eurozone. 1. Do not be paralysed by the fear of moral hazard. 2. treat sick fundamentals, not symptoms. 3. Cut excessive debt, if necessary through restructuring. 4. Separate banking risks from sovereign risk. 5. Focus on economic growth. 6. Beware of currency redenomination.

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

Euro strong, and bund yields creeping up

10-year spreads
Previous day Yesterday This Morning
France 0.565 0.559 0.566
Italy 3.507 3.479 3.458
Spain 4.344 4.283 4.329
Portugal 6.471 6.446 6.641
Greece 16.067 16.050 -1.56
Ireland 3.286 3.217 3.367
Belgium 0.860 0.841 0.854
Bund Yield 1.479 1.54 1.561
Euro Bilateral Exchange Rate  
  Previous This morning
Dollar 1.300 1.3089
Yen 102.560 102.98
Pound 0.807 0.8118
Swiss Franc 1.209 1.2099
ZC Inflation Swaps
  previous last close
1 yr 1.99 1.92
2 yr 1.8 1.74
5 yr 1.9 1.83
10 yr 2.02 2.03
Euribor-OIS Spread
previous last close
1 Week -8.057 0
1 Month -4.371 -3.971
3 Months 1.843 3.843
1 Year 48.929 47.629
Source: Reuters

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