MacroScope

No Let(ta) up for euro zone

By Mike Peacock
April 30, 2013

Fresh from winning a vote of confidence in parliament, new Italian Prime Minister Enrico Letta heads to Berlin to meet Angela Merkel, pledging to shift the euro zone’s focus on austerity in favour of a drive to create jobs. He may be pushing at a partially open door. Even the German economy is struggling at the moment and the top brass in Brussels have declared either that debt-cutting has reached its limits and/or that now is the time to exercise flexibility. Letta will move on from Berlin to Brussels and Paris later in the week.

France, Spain and others will next month be given more time to meet their deficit targets and Berlin does not seem to object. Don’t expect Merkel to join the anti-austerity chorus but there are some hints of a shift even in Europe’s paymaster. Yesterday, it launched a bilateral plan with Spain to boost lending to smaller companies and said it could be rolled out elsewhere too. Details were very sketchy but something may be afoot. The European Central Bank, expected to cut interest rates on Thursday, is considering something similar although that is far from a done deal.

Forgotten about Cyprus, which only last month had financial markets in a lather and threatened to reignite the euro zone debt crisis? Today, Cypriot politicians vote on the terms of the bailout offered by the euro zone. It should pass but it could be tight. No single party has a majority in the 56-member parliament, and the government is counting on support from members of its three party centre-right coalition which have 30 seats in total.

Spain puts out its GDP data significantly earlier than the rest of the euro zone. First quarter figures are due and will show no sign of its recession tailing off. The government has just revised its forecasts and now expects a 1.3 percent contraction this year (worse than the previously predicted 0.5 percent). As a result, the budget deficit will also be higher than previously forecast, hence the need for leeway from Brussels. Madrid’s measures to boost growth, trumpeted in advance, proved to be short on specifics on Friday.

There’s a lot of data besides with German unemployment, euro zone inflation, UK and German consumer confidence/retail sales and French consumer spending reports all due. The German confidence reading is out and is the most upbeat in more than five years. The survey was taken after Cyprus was sorted out and as prospects of rising wages (Germany’s contribution to much-needed euro zone rebalancing) boost a desire to spend. However, actual retail sales edged down in March.

In France, the consumer has always been the driver of the French economy, while in Germany it’s the exporter. Last year consumer spending fell for the first time in two decades. So it’s certainly true that both France and Spain are crying out for measures to galvanise their economies.

On top of that, with German inflation heading down towards 1 percent, if the euro zone figure comes in much below the forecast 1.6 percent it will pretty much cement the case for a European Central Bank interest rate cut on Thursday, not that that will make much of a difference to the recession-hit euro zone economy.

German Bund futures have opened little changed with focus already turning to the ECB and the Federal Reserve meeting that precedes it by a day. European stock futures are pointing upwards.

It seems that the anticipation of serious Japanese money searching for a decent return has augmented the “ECB put”, at least for now. And clearly, the toes put in water over easing up on debt-cutting have spooked nobody in the investment world. Reuters monthly asset allocation polls will give us a flavour of how the serious money is positioning.

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