The FT reports that the legal service of the European Council said the proposals to create a common bank supervisor in the ECB violated the Treaty. The legal argument is the following: A separate body inside the ECB to deal with banking supervision cannot make any formal decision, as only the ECB’s governing council is in a position to do so. But this raises two specific problems for the non-eurozone members and for Germany. The non-members cannot vote. And Germany does not accept the convolution of bank supervision and monetary policy in a single board. The paper, according to the FT, says it would be possible for an ECB-based banking supervisor to make a recommendation for as long as the governing council takes the final decision. The article quoted unnamed officials who said that it would be problematic to give voting powers to a committee that cannot take decisions – something that fell well short of a realistic political solution. For the non-members, such a regime would not be of any interest. The legal service also challenged a number of other aspects of the proposal, including the right retained by member states to decide how rules on their banks are applied when under the supervision of the ECB.

(This is very sound legal advice in our view, and a reaffirmation that the present Treaties do not allow the kind of crisis resolution that is now required. A treaty change becomes a critical component of crisis resolution.)

Hollande is profiling his Eurozone vision ahead of summit, confronts Germany

Francois Hollande gave interviews to six European newspapers, Le Monde, La Stampa, Gazeta Wyborcza, Süddeutsche Zeitung, El Pais and The Guardian.

One day ahead of the EU summit Hollande maps out his vision for Europe. Asked about the kind of Europe he supports, Hollande says he’s for a Europe “advancing at different speeds, with different circles”, the new Euro-“realism” as coined by Le Monde.

On several issues though, Hollande goes on confrontation course against Germany, echoed by the German press: Instead of  Schäuble’s proposal, granting the Commission a veto-right for national budgets, Hollande favours monthly meetings of the heads of state (“let’s end these so-called last-chance summits”) and the reinforcement of the Eurogroup, Hardly hidden is also his criticism of Germany’s reservation to a common banking supervision to start in January 2013:  “It has not escaped my notice that those who are most eager to talk about political union are sometimes those who are most reticent about taking urgent decisions that would make it inevitable.”

Then Hollande renewed support for Eurobonds, rejected by the German government. He also did not spare a comment on Germany’s surpluses, calling for surplus countries like Germany to raise salaries to help stimulate demand, in the name of European “solidarity”. Finally, he disputes the Germany’s view on the importance of deficit reduction, saying “Recession threatens us more than deficits.”

Hollande also made clear that Greece should be assured of eurozone membership and given the financing it needs by year end “without it being necessary to inflict new conditions other than those which have been agreed by the government of Samaras”, the FT  quotes from the interview. He called for the eurozone rescue funds and the ECB to use their ability to intervene on sovereign debt markets. He said Spain should be given “precise conditions” for gaining access to rescue fund financing as agreed at the June summit without further “weighing down the ship” with new conditions.

Germany wants to restrict future Greek tranches to the repayment of creditors only

Suddeutsche reports that the German government wants to restrict all future payments to Greece to interest and debt redemption payments only – leaving Athens to fund its public spending through taxes alone (in other words to push Greece into an immediate primary balance, which it does not yet have). In addition, Berlin wonders whether the same principle could be applied to future programmes for other countries. Technically, the money would not be handed over to Greece at all, but held in an escrow account.

Belgian government needs to raise €4.5bn extra savings

The Belgian government needs to find €4.5bn, €800bn in 2012 and €3.7bn in 2013, to keep the deficit in check according to the verdict of the government’s expert committee monitoring the deficit,Le Soir reports. The 2013 objective is to reduce the deficit to 2.15% and to reach a balanced budget by 2015. This will not be easy: Local elections risk radicalising the positions of parties that argue against tax increases (VLD and probably CD&V) and those that argue that such a savings amount cannot be achieved by cutting expenditures.

EPP leaders prepare Council summit at Bucharest Congress

Ahead of the European Council summit starting Thursday, El Pais (English Edition) reports Mariano Rajoy and Angela Merkel met for 40 minutes on the side-lines of the EPP congress in Bucharest. According to the paper, Rajoy pressed Merkel to make good of last June’s commitment to a banking union. El Pais headlines “Rajoy resists pressure to bow down to inevitability of bailout”.

Asmussen: unemployment, not inflation, is biggest threat to retirees

Reuters reports on an interview by ECB board member Joerg Asmussen with German radian station Hessischer Rundfunk on Wednesday (see German summary and audio). He assuaged fears that the OMT bond purchases would cause inflation by arguing that ‘sterilization’ would drain liquidity from the markets. In addition, he argued German retirees should fear unemployment more than inflation. Asmussen also advocated having the legal framework for ECB banking supervision in place by year-end, but said it would take longer for the ECB to start supervising banks as it is “more important to do it properly”.

Trade Unions call for Europe-wide protests on November 14

According to El Pais (English edition) there will be a general strike in Spain on November 14, coinciding with general strikes also called in Portugal, and expected in Cyprus and Greece. This responds to a “call for a day of action and solidarity” issued by the European Trade Union Confederation on Wednesday. The ETUC refers to the IMF admission that the contractionary effects of austerity were underestimated, and recalls the Treaty on European Union’s article 3 commitment to “aiming at full employment and social progress”.

Matteo Renzi – the new star in Italian politics

Matteo Renzi is the leading candidate for centre-left Partito Democratico primary election, which itself is the party leading in the polls. Renzi has met the Italian financial establishment in Milan to present a plan to save the country, Il Foglio reports. Renzi, who is currently mayor of Florence, wants to succeed Mario Monti as PM but to continue the reform process in Monti’s spirit – “Montismo” as this is known in Italy. His co-collaborator is Davide Serra, the founder of Algebris, a London-based hedge fund. Serra has been the mastermind of Renzi’s economic strategy – which includes a spending review, labour reforms, public asset sales, and corporate tax cuts. Renzi-Serra scheme plans to cut the number of deputies in the Italian Parliament by 50%. As Il Foglio noted, Renzi could have enough power to do this. In the last IPSOS poll, Renzi is at 46%, but he must win the centre-left primary first.

The social effects of Italian crisis

The economic crisis is driving more Italians to seek financial help and other kinds of support, says the social justice group Caritas, as La Stampa reports. There has been an increase in 178% since 2009 in the number of Italian housewives turning to Caritas to help their families. It found that requests for help from native Italians jumped by 20.4% in the first half of this year.

The importance of national identity in a monetary union

Writing in Il Sole 24 Ore Franco Debenedetti says that a monetary union where one country massively exports capital and others import it cannot survive for a long time, without solidarity. The EU is founded on the principle of the rule of law and treaties explicitly prohibit the bailout and reiterate the irreversibility of euro membership. The award of the Nobel Prize must be the occasion to reflect on the problem of democracy in Europe. There is now a widespread feeling of helplessness, of having lost sovereignty to finance the spread and bodies. This feeling cannot be answered by offering new forms of representation in Strasbourg, or the direct election of a EU president, Debenedetti said. According to Debenedetti, the solution is to strengthen national identity and “patriotism.” It is at the national level that we find the energy and the will necessary to overcome the impasse.

José Ignacio Torreblanca on what Spain needs from Europe

In an Op-Ed in the Financial Times, Spanish political scientist Jose Ignacio Torreblanca argues that Spain needs “a smart rescue not obsessed with deficit targets” to help Spain “make structural reforms work, revitalize its economy, heal its society and keep the country together”. Recalling the century-old adage “Spain is the problem, Europe the Solution”, Torreblanca notes that Spain is one of the EU countries where the EU has a more negative image, which didn’t use to be the case. He also argues that, if Catalonia breaks up from Spain, “historians will surely conclude that the wrong set of austerity policies played a part”.

Wolfgang Münchau on the two Wolfgang Schäubles

In his Spiegel Online column, Wolfgang Münchau recalls the Schäuble/Lamers plan of 1994, widely derided at the time, but quite prescient in terms of its understanding of the political and economic logic of a core Europe. He writes that Schäuble’s latest plan is to be lauded only for its recognition that a monetary union requires a much deeper political infrastructure what the Group of Four is currently ready to propose. But the finance minister is focusing on the wrong problem. Strengthening the powers of the economic commissioner is not going to bring resilience to the eurozone – and would not have prevented the crisis, had these powers been granted ten years ago. The proposal is based on a wrong diagnosis of the crisis – that it is caused by fiscal indiscipline, rather than through financial friction.

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

Spain’s spreads improve as Moody’s keeps rating unchanged. Euro strong at $1.31.

10-year spreads
	Previous day	Yesterday	This Morning
France	0.559	0.501	0.503
Italy	3.398	-1.641	-1.637
Spain	4.283	3.843	3.983
Portugal	6.446	6.057	6.111
Greece	16.050	15.784	-1.64
Ireland	3.217	3.102	3.111
Belgium	0.841	0.778	0.782
Bund Yield	1.54	1.641	1.637
Euro Bilateral Exchange Rate
	Previous	This morning
Dollar	1.311	1.3107
Yen	103.250	103.69
Pound	0.812	0.8123
Swiss Franc	1.210	1.2097
ZC Inflation Swaps
	previous	last close
1 yr	1.92	2.02
2 yr	1.74	1.84
5 yr	1.83	1.93
10 yr	2.03	2.14
Euribor-OIS Spread
	previous	last close
1 Week	-7.957	-7.457
1 Month	-3.871	-4.071
3 Months	1.671	1.571
1 Year	46.357	48.157
Source: Reuters