MacroScope

Today in the euro zone

By Mike Peacock
March 14, 2012

The Greek bailout is done and Spain and the EU have struck a face-saving compromise over what deficit Madrid should aim for this year, so all is well with the world. That certainly seems to be the market mood this morning with safe haven German Bund futures opening sharply lower and European stock futures pointing to further gains.
In fact, the tone is more to do with the Federal Reserve, which sounded somewhat more upbeat about the U.S. economic outlook last night and said most banks (with the exception of Citi!) had passed tough stress tests, though it’s also true that there is nothing on the euro zone horizon today to spoil the party.

Italy comes to market with its latest bond auction. Investors flush with cheap European Central Bank funds are expected to pile in, pushing three-year borrowing costs below 3 percent. Rome is taking advantage of the current benign conditions to try and sell up to six billion euros of debt.

More interesting may be tomorrow’s Spanish auction. Italian premier Mario Monti remains the euro zone’s austerity poster boy, in contrast to Mariano Rajoy. Although the new Spanish prime minister has successfully negotiated a looser deficit target with Brussels, the downside of that deal is that Madrid might come under more scrutiny, particularly if it looks like missing that softer target.

Nonetheless, if we wind the clock back to the beginning of the year, everybody was fretting about Italy facing a mountain of refinancing (with the same true of Spain to a lesser extent) and now it looks like no more than a small bump in the road thanks to the ECB’s largesse.

The level of hope pinned on Monti to keep Italy out of the mire (failure to do so would push the currency bloc back into existential threat territory) allows him to press his case for strong growth measures to run alongside the austerity drive. He did so again with Angela Merkel last night. That still requires more domestic spending by Germany, Europe’s largest economy.

French President Nicolas Sarkozy (who latest polls suggest should certainly not be written off at next month’s presidential election) seems to be on the same page as Monti saying this morning, with reference to Spain: “The choice is not between deficit reduction and growth, the choice is growth and deficit reduction.” Even with its new target, Spain, already in recession and with almost half its youth out of work, is going to have to find deep cuts this year which are likely to make things worse. The same applies in spades to Greece.

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