Euro zone triptych

February 22, 2013

Three big events today which will tell us a lot about the euro zone and its struggle to pull out of economic malaise despite the European Central Bank having removed break-up risk from the table.

1. The European Commission will issue fresh economic forecasts which will presumably illuminate the lack of any sign of recovery outside Germany. Just as starkly, they will show how far off-track the likes of Spain, France and Portugal are from meeting their deficit targets this year. All three have, explicitly or implicitly, admitted as much and expect Brussels to give them more leeway. That looks inevitable (though not until April) but it would be interesting to hear the German view. We’ve already had Slovakia, Austria and Finland crying foul about France getting cut some slack. El Pais claims to have seen the Commission figures and says Spain’s deficit will will come in at 6.7 percent of GDP this year, way above a goal of 4.5 percent. The deficit will stay high at 7.2 percent in 2014, the point so far at which Madrid is supposed to reach the EU ceiling of three percent.

2. Banks get their first chance to repay early some of the second chunk of more than a trillion euros of ultra-cheap three-year money the ECB doled out last year. First time around about 140 billion was repaid, more than expected, indicating that at least parts of the euro zone banking system was returning to health. Another hefty 130 billion euros is forecast for Friday. That throws up some interesting implications. First there is a two-tier banking system in the currency bloc again with banks in the periphery still shut out. Secondly, it means the ECB’s balance sheet is tightening while those of the Federal Reserve and Bank of Japan continue to balloon thanks to furious money printing. The ECB insists there is plenty of excess liquidity left to stop money market rates rising much and a big rise in corporate euro-denominated bond sales helps too. But all else being equal, that should propel the euro yet higher, the last thing a struggling euro zone economy needs.

3. Germany’s Ifo index (and a detailed breakdown of its Q4 GDP) follows a stellar reading for ZEW sentiment and a solid PMI earlier in the week. It all confirms that Germany has bounced back in the first quarter while its euro peers – including France – are doing anything but. The German GDP figures are already out, confirming the economy shrank by 0.6 percent but on the debt front the stats office reported a 0.2 percent budget surplus for the year – the first surplus in five years.   Key ECB policymaker Joerg Asmussen is giving Reuters an interview later, his  colleague Benoit Coeure is speaking in Lisbon and Belgium’s ECB representative, Luc Coene, is out saying the current euro level is no threat to growth prospects (growth prospects?).

Italy’s election denouement approaches. We get the final TV appeals by party leaders tonight before campaigning ends. Centre-left leader Bersani, maverick Grillo and Silvio Berlusconi are holding rallies.

German Bund futures are holding around four-week highs with many now moving to the sidelines until the Italian picture is clear. But the ECB payback and Ifo will be a market-moving focus. European stock futures are pointing upwards, mainly in reaction to the nearly 1.5 percent fall on Thursday, prompted by weak euro zone PMI readings (with the exception of Germany).

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