Today in the euro zone

By Mike Peacock
March 13, 2012

Top billing of the day probably goes to Germany’s Merkel and Italy’s Monti meeting in Rome, though it is quite late in the day.  The Italian premier remains the austerity poster boy, in contrast to Spain’s Rajoy who was partially let off the hook by Brussels last night for abandoning his deficit target, though he was told to split the difference between the first target and his new, looser goal.

While trying to avoid a blizzard of numbers, Spain was supposed to land a deficit of 6 percent of GDP last year and 4.4 this, en route to the main target of 3.0 percent in 2013. Rajoy’s new government announced that last year the deficit had in fact swelled to 8.5 percent of GDP and as such he would only aim for 5.8 percent this year while sticking to next year’s goal. The Eurogroup told him last night to aim for 5.3 this year, cutting some significant slack but, but by demanding more cuts than Rajoy wanted to deliver, probably avoiding serious market disquiet about Spain becoming the new Greece – forever missing its targets – and undermining the bloc’s new fiscal pact while the ink is barely dry.

Nonetheless, the net result is likely to be to drag Spain deeper into recession this year. Looking at bond yield spreads, the markets don’t smell blood yet.

The Ecofin moves on to other matters – preparatory work on a transaction tax and Hungary’s errant ways. They will also discuss the recent G20 meeting in Mexico and the issue of increasing IMF resources. That feeds straight back to the ESM rescue fund and whether it will absorb the remaining funds of its predecessor, the EFSF. The IMF wants that to happen in order to seek more funds of its own from elsewhere in the world. Germany is reticent for now although  Eurogroup head Juncker said last night he thought the firewall would be increased with a decision to be taken before the month it out.

Sticking with central banks, the Bundesbank’s annual results are likely to illustrate why it is concerned about possible risks to Germany flowing from the ECB’s three-year money spray. In a leaked letter to the European Central Bank’s Draghi last month, Buba chief Jens Weidmann  wrote about the imbalances in the euro zone’s payment system, TARGET2, and the resulting risks for the Bundesbank, which would be exposed in the unlikely event of the euro zone breaking up. Draghi said unequivocally last week that he didn’t believe Weidmann leaked the letter. If not him, then who? It raises the prospect that Weidmann is somewhat stuck in the middle with hardliners in the German central bank trying to drag him back onto their ground.

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