Schauble and Moscovici explore “creative solutions” (aka a fudge) to secure deal on banking union

• There was once again no deal on banking union at yesterday’s Ecofin meeting, but Wolfgang Schauble and Pierre Moscovici both signalled readiness to compromise;
• the biggest stumbling blocks remains Germany’s insistence on a separate decision-making board outside the ECB’s governing council;
• on the remit, the negotiators are moving towards a compromise to give the ECB direct control over the systemically important institutions with a yet-to-be-defined procedure of access rights;
• Schauble says Bundestag may not approve an agreement to transfer power over all German banks to the SSM;
• Germany is also concerned with banks’ legal redress against SSM decisions;
• Anders Borg also seemed to be more conciliatory than previously;
• finance ministers will meet again December 12 ahead of next week’s summit;
• Angela Merkel warns about complacency in the eurozone (and manages to keep a straight while doing so);
• Olaf Storbeck explains why he will not miss Jean-Claude Juncker;
• Spain’s budget minister implicitly acknowledges that Spain will miss the deficit target this year;
• Samaras and Stournaras meet to nail down new tax code;
• an Athens court stopped the collection of property taxes through the electricity bill;
• the Greek government plans a law to bypass mayors who are refusing to send their lists for the redundancy schemes;
• Portugal says we are not Greece, and do not seek the same conditions as Greece;
•  to meet deficit targets, Slovakia ends the flat income tax system, which it had boasted about for many years;
• Pier Luigi Bersani insists on electoral reforms, while Berlusconi resists;
• a study shows that Italians will use their Christmas bonuses to repay debt, rather than go shopping;
• Marco Onado says EU banks are nowhere near ready for Basel III;
• the ILO predicts further increases in structural unemployment in the eurozone periphery;
• Spain cuts benefits for home carer;
• more and more Italian children are dropping out of middle school;
• in Greece, meanwhile, hospitals can no longer afford basic hygiene, like surgery gloves.

There were quite different emphases among European newspapers on yesterday’s failure by finance ministers to agree on a banking union. Frankfurter Allgemeine and Suddeutsche both produced a relative upbeat assessments, suggesting that an agreement may well be in reach next week. FAZ reports that they are edging closer to an agreement on the remit of the banking union – that would include only the systemtically relevant banks, but with yet to be defined access rights to the whole banking sector. The ECB would then have the right to wrest ultimate control from national supervisors, but can do so only following clear procedures. The most difficult issue remains the governing structure. Germany continues to insist on a board separate from the governing council of the ECB. Germany’s position is that the ECB’s governing council cannot have final decision rights, because bank supervision must ultimately be subject to political control. Germany does not dispute the ultimate decision authority of the SSM, but questions whether this should be the governing council or a separate mechanism. Schauble has hinted that a banking union, properly constructed, might require treaty change.

Suddeutsche added a comment from Pierre Moscovici, who said this was the time to be creative, a sentiment that was shared by Schauble, too, the paper reports, detecting a new readiness to make compromises. Suddeutsche also reports that Schauble is likely to prevail with his demand to restrict the SSM only to the systemtically relevant banks – while allowing the SSM to broaden its remit under clearly defined criteria. The paper also quotes officials as saying they are keen keep this issue out of the summit to spare Angela Merkel the need to grapple with technical issues of banking supervision at 3am in the morning.

Boersenzeitung also adds the issue for Germany is whether banks can have legal redress against decisions by the SSM.

And Reuters added that Sweden’s Finance Minister Anders Borg appeared to soften his stance, saying compromise was possible if non-euro countries were treated fairly and national regulators retained autonomy.

The Financial Times, by contrast, seemed more sceptical, and spoke of a brick wall in the negotiations. The paper quoted Schauble as saying the German parliament may not approve a compromise which would leave 6000 German banks in the hands of the SSM. The paper wrote that Schauble’s stance had unsettled diplomats, who had previously been cautiously optimistic about a deal.

(The key test for this banking union is not whether it can be agreed this week or next week, but whether the framework is sufficiently robust. There will probably be some sort of an agreement next week – there always is – possibly even at 3am during the summit. The question is what credibility will a banking union have if Germany maintains control over the savings banks and mutual banks. With two thirds of the German banking system outside a banking union, people may soon question the meaning of a banking union.)

Merkel warns on euro crisis complacency

This is a verbatim Reuters headline – and makes us wonder how one can write this with a straight face, given Merkel’s own complacency since the start of the crisis. At the CDU party congress, where she was re-elected as party leader with an absurd majority of close to 100%, she expressed herself as “truly worried about my goal to develop a common approach towards the financial sector, especially the regulation of banks, shadow banking and financial markets.” But is it not Germany’s reticence on the banking union that stops the progress at the moment? Whom is she warning?

Olaf Storbeck will not miss Jean-Claude Juncker

With this comment, Olaf Storbeck really puts the boot into poor Jean-Claude Juncker. The Reuters Breakingviews columnist says Juncker will not be missed, and in fact bears some responsibility for the crisis. Storbeck said he was one of the principle architects of the flawed Maastricht Treaty, with its failure to focus on the private sector. Furthermore, in the early stages of the crisis, he focused too much on shooting messengers like rating agencies, rather than seeking effective solutions. His conclusion is that the job is ultimately difficult, if not impossible, given that the real decisions are taken bilaterally between Berlin and Paris.

(All true, of course, but the same goes for Merkel, Sarkozy, van Rompuy and everyone else. They had massively underestimate the crisis, and it took them several years until they started to even consider a crisis response, with yet uncertain outcome. It is only quite recently that the top officials have begun to understand the deeper causes of this crisis, and what it takes to resolve this. Sadly, Juncker was never among them.)

Spain says it will miss deficit target

Reuters reports that Spain’s budget minister Cristobal Montoro implicitly acknowledged that it would miss the 6.3% deficit target for this year, refusing to reiterate the old target, while emphasising the European Commission’s forecast of 7%. “We shouldn’t focus too much on this magic figure of 6.3,” Reuters quotes him as saying. Montoro said the autonomous regions had a running deficit of 1.14%, after extraordinary items, by end-Q3, against a full year target of 1.5%. He says it was not guaranteed that they would meet the target (given the drastic deterioration in the Spanish economy in Q4).

Samaras and Stournaras meet to nail down new tax code

Antonis Samaras is meeting his Finance minister today in a bid to nail down the contents of a draft tax code that has become a source of friction within the premier’s fragile coalition. The draft is believed to include increases in income tax for the middle class but tax breaks for families with children. According to Kathimerini sources the proposal likely to be presented to the coalition partners foresees an increase for those earning between €25000 and €48000 to be taxed at 36% and incomes of more than €48000 to be taxed at 45%. It also proposes replacing the existing €5000 income tax-free threshold with a €1950 reduction in tax that would apply for everyone and would be increased by 5% for each child in a family. The tax breaks proposed for those with large families – three or more – are expected to be more generous than those in Stournaras’s original proposal.  Still, it remains unclear whether they will appease the objections of Samaras’s coalition partners.

Meanwhile, an Athens court deemed the collection of a special property tax through electricity bills illegal. The ruling can be appealed but until it is, the Public Power Corporation will be unable to cut the electricity supply of those who do not pay their bills.

Greek government to bypass mayors to select employees for redundancy scheme

As dozens of mayors continue to resist government plans to put thousands of civil servants into a redundancy scheme, Administrative Reform Minister Antonis Manitakis on Tuesday resorted to passing an emergency law that will bypass the need for mayors to approve the inclusion of their employees in the scheme, Kathimerini reports. Of the 2,000 civil servants that the government has promised its foreign creditors to put in a fast-track program for redundancy, 1,000 are from municipal and regional offices and the other 1,000 from state entities.

Portugal is not seeking same conditions as Greece

Portugal will not seek changes to obtain lower interest rates on its bailout loans as Greece received and is respecting targets laid down by creditors, Passos Coelho said on Tuesday. AFP quotes Passos Coelho saying that “Greece had been through some very difficult times for more than five months of negotiations which led up to the release of financial support. I do not want Portugal to have to go through the same type of negotiation.”

Slovakia’s flat income tax scraped in austerity drive

Slovak lawmakers voted to sacrifice the country’s flat income tax system, as the centre-left government is struggling to meet a commitment to cut its deficit below 3% next year. Slovakia will raise corporate income tax – introduced at 19% in 2004 – to 23% next year and to 25% for Slovaks with monthly income above €3300.  The president, ministers and parliament deputies will be subject to an additional 5% income tax on top of the approved hike. A 15% tax on dividends would also be introduced. Corporate income tax in the neighbouring Czech republic, Hungary and Poland currently stands at 19%.

Bersani insists on electoral reform, but Berlusconi says No

The negotiations between Italian political parties over the new electoral law has hit gridlock, La Repubblica reports. Pier Luigi Bersani, the leader of the centre-left Partito Democratico, said he is ready to support a new electoral law, while Silvio Berlusconi’ Popolo della Libertà opposes electoral reform. The current electoral law, also nicknamed “Porcellum” (Pigsty) by its opponents, deprives the electorate of the power to choose candidates directly, by forcing them to vote for a fixed list selected by party leaders under a proportional system.

Italians cut Christmas expenditures due to the crisis

The 2012 Christmas season will be difficult, according to retailers’ association Confesercenti, as quoted by Il Messaggero. Insteads Italians will pay off personal loans and mortgages with the help of their Christmas bonuses (which is exactly what you expect to happen in a balance sheet recession). According to Confesercenti survey, more than 70% of Italians plan to reduce festivity expenses. Confesercenti estimates the total spending will fall by 3%.

EU banks are not ready for Basel III, Onado argues

European banks have not solved their funding and liquidity problems and are not ready for Basel III, Marco Onado argues on Lavoce.info. EU banks (and Italian in a particular way) are facing the LTROs paradox: the money did not trickle through to the real economy, but was absorbed by the sovereign debt rollover. And EU banks will have pay it all back at the end of the three-year period. That’s why Eurozone banks needs a faster recapitalization with fresh and innovative forms of capital, like Cocos, and a more comprehensive supervision on banking imbalances.

The dramatic social consequences of the eurozone crisis

Today we picked out a number of articles, highlighting the dramatic social consequences of the eurozone crisis.

ILO says crisis will cement dysfunctional labour market in the eurozone periphery

This is a really worrying outlook presented by the International Labor Organisation. As reported by FT Deutschland, it says the recession has catastrophic consequences for the labour markets in the eurozone periphery. Even if the economic cycle were to turn up, there is no chance that employment will return to pre-crisis levels. The ILO puts Spain’s structural unemployment at 16% – a third higher compared to the beginning of the financial crisis, while in Greece it is 13%, and in the Baltic states it is 12%. Furthermore, the ILO expects the structural unemployment rates to increase all over Europe.

Spain cuts benefits for home carers

In Spain, the government has stopped paying social security contributions to people who stay at home to care for dependents. The government argues that the relationship between the dependents and their carers is ‘familial’ and not ‘labour’, reports Europa Press. At the same time, the German Stern reports on a study forecasting a dramatic increase in the number of citizens with a dependent in need of care in their family, nearly tripling in the next decade from 10 million to 27 million. The report talks about a ‘ticking timebomb’ which will be a major challenge for families and the welfare system.

Italians drop out during middle school due to  crisis

The young are among the biggest victims of the eurozone crisis. La Stampa cites a study by Save The Children, according to which 800,000 young people have dropped out during middle school, raising concerns about the education levels in the Italian population. In addition, 25% of young adults in Sicily and Sardinia did not make it to high school. The unemployment rate among 15-to-24-year-olds in October was 36.5%, the highest since the fourth quarter of 1992, Istat said in its quarter analysis.

Debt-stricken Greek hospitals  take risks with basic hygiene

Greek hospitals are in such dire straits that staff are failing to keep up basic disease controls such as using gloves and gowns, threatening a rise in multi-drug-resistant infections, Europe’s top health official Marc Sprenger told Reuters in an interview. With fewer doctors and nurses to look after more patients, and hospitals running low on cash for supplies, risks are being taken even with basic hygiene. Greece spends €11bn a year on its healthcare system – just over 5% of GDP. The government says the system is around €2bn in debt and spending must be cut drastically. Many health workers have lost their jobs and others say they have not been properly paid for months.

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