What did he mean by that?

May 8, 2013

“What did he mean by that?” 19th century Austrian diplomat Metternich is said to have asked of  Talleyrand when he heard the French statesman had died. The euro zone crisis, and the response of its leaders, has often required the same question to be asked.

There were some carefully chosen words from Germany yesterday with Finance Minister Wolfgang Schaeuble saying that elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary.

Now you could view this as a sign of softening opposition, certainly the French read it that way. However, the subtext could just as easily be that because treaty change takes too long, Berlin will pursue only those elements of banking union that don’t require it – i.e. bloc-wide regulation yes, but forget about a bank resolution mechanism let alone a joint deposit guarantee. That would be a pale imitation of what was proposed nearly a year ago and wouldn’t provide the sort of structure that would foster confidence that a future financial crisis could be contained.

Furthermore, what did Schaeuble mean by an intergovernmental or even bilateral approach where necessary? That doesn’t sound like an overarching euro zone banking structure at all. German daily Suddeutsche Zeitung reports, as we have previously, that consideration is being given to giving the European Commission or the ESM bailout fund the power to wind down stricken banks rather than setting up a separate authority. That would also skirt the need for treaty change.

The bottom line is that Berlin is not keen on the most profound planks of a banking union – a euro zone wide deposit guarantee and a bank resolution structure for the bloc – since the liabilities would be likely to fall disproportionately on Germany. As ECB chief Mario Draghi keeps saying, this crisis won’t be over until a banking union is established and it should be done as a matter of urgency. This is supposed to be sorted at an EU summit in June which both Schaeuble and his French counterpart, Pierre Moscovici, said yesterday remained the aim. But it seems they are either a very long way off or have agreed to settle for the lowest common denominator.

Spanish Prime Minister Mariano Rajoy will make his first appearance in parliament since his government revised its GDP forecast (down) and deficit forecast (up) and presented a new reform plan last month. After a year of deep budget cuts and laws to make it cheaper for companies to hire and fire, the government has turned much more cautious and is trying to chart a somewhat contradictory path between growth and austerity.

With 27 percent unemployment and a crippling recession, Rajoy fears deeper cuts could set off a public backlash. Equally, the growth measures that have been announced, probably don’t add up to much. Fortunately for him, the markets – calmed by the European Central Bank’s opiate – have driven Spanish borrowing costs lower, easing the pressure on Madrid.

There’s a flurry of central bank action with Poland deciding whether to cut interest rates further from its all-time low of 3.25 percent. Norway is expected to keep rates at 1.5 percent. It said last month that policy would be on hold for longer than it previously expected, until well into 2014 and that a cut was not impossible. Romania’s central bank releases its new inflation report.

Here’s an interesting sign of the times. The Queen’s Speech – the pomp-heavy ceremony that unveils the British government’s annual slate of legislation – used to be a big moment butut this year it’s hard to find a single headline. It reaffirms that the fate of the British economy rests firmly with the Bank of England rather than the Treasury. On that front, the British Retail Consortium survey out overnight showed sales posted their steepest fall in a year last month. In Germany, industrial output figures follow on from a big jump in industry orders reported yesterday.

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