MacroScope

Austerity light? Maybe a shade lighter

By Mike Peacock
April 26, 2012

There is a groundswell building in the euro zone that austerity drives should be tempered.

France’s Francois Hollande, favourite to take the presidency next month, said last night that  leaders across Europe were awaiting his election to back away from German-led austerity, and even ECB President Mario Draghi called yesterday for a growth pact.

He was rather opaque on how – although he was clear the European Central Bank would not be doing anything more — but his colleague Joerg Asmussen was a little more forthcoming, saying some EU structural funds could be funneled to countries in crisis to boost employment. These sort of ideas are actively part of the mix and could well be enacted at the June EU summit.

Thay also tally with some of Hollande’s policy slate. He is promoting joint European bonds to finance infrastructure projects, greater investment by the European Investment Bank more efficient deployment of EU regional development resources and a financial transaction tax levied help fund youth and education projects. Some of those options are quite likely to happen. Others much less so.

Reality check: The EU’s German paymasters and the ever-present bond market will only tolerate a marginal shift in direction – you need look no further than at what has happened to Spain and its borrowing costs since it upped its deficit target in March — so there will be not much let-up on the debt-cutting front.
 
Nonetheless, there has been a distinct shift in the rhetoric. Even Angela Merkel is pushing for a more broadly-based minimum wage in Germany, which could be construed as a growth tactic.

Dutch finance minister De Jager says multi-party talks about the 2013 budget have been constructive. They will continue today.

The Netherlands is supposed to hand Brussels its budget deficit target next week – the government was targeting 3 percent of GDP but lost its coalition partners, who demanded a softer goal, and collapsed earlier in the week. With elections not due until September, a failure to cobble together a budget deal by the main parties would lead to a dangerous period of uncertainty.

Sueddeutsche Zeitung reports that the ECB and some euro states will consider proposals to enable the EFSF and ESM rescue fund to lend money to troubled banks, something which could clearly help Spain. We know Germany and others have opposed this. Is there a shift? The IMF said last night that Spain’s biggest banks were well-capitalised but that 10 state-supported banks were vulnerable and needed to be cleaned up quickly.

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