MacroScope

What’s it all about?

By Mike Peacock
May 9, 2013

G7 finance ministers meet London on Friday and Saturday. Since they and many more met in Washington only three weeks ago and not much has changed since, it’s tempting to ask what is the point of this British gathering. There have been mutterings from some of the travelling delegations to that effect.

If there is an angle, it is the unusual focus on financial regulation (usually not part of the Group of Seven’s remit) with some feeling that more than four years after the collapse of Lehman Brothers, efforts to put in place structures to prevent similar events spinning out of control in future are flagging. That puts the euro zone’s fluctuating plans for a banking union firmly in focus, which in turn puts German Finance Minister Wolfgang Schaeuble right in the spotlight.

On Tuesday, he said elements of a banking union would have to be pursued without lengthy and arduous treaty change, something he’d previously said would be necessary. Was that a softening of his position? Er, probably not. More likely, the subtext is 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. If so, Schaeuble can expect some strong representations from his G7 counterparts over the next couple of days as he did at the G20 meeting in Washington.

The United States has already said it will put the emphasis on the need to revive growth, particularly in the euro zone. Today, several of the key participants – including IMF chief Christine Lagarde, Schaeuble and Canada’s Jim Flaherty – will attend a London global investment conference.

The summit is also likely to be another venue for the great austerity versus growth debate to get an airing. It’s the first outing for Italy’s new economy minister, 70-year-old Fabrizio Saccomanni, who along with his boss is pressing the case for growth. As in Washington and Moscow prior to that, it’s pretty clear there is no pressure on Japan over its money-printing drive and the destabilizing effects that could have on exchange rates and emerging markets, not least because the United States is still doing the same thing.

The Bank of England has had no qualms about printing money either, though it’s temporarily called a halt since its last bout. Today’s policy meeting falls in a month where the Bank produces its latest forecasts in a quarterly inflation report, which has often heralded a policy shift. Our polling strongly suggests not this time though the consensus is that another 50 billion pounds will be magicked out of thin air before the BoE is done. Don’t completely rule it out this time.

Spain will sell up to 4.5 billion euros of a range of bonds and will presumably continue to meet demand from investors slavering for yield. The disconnect between Madrid’s ability to raise money and the state of its economy remains profound. Industrial output figures earlier in the day are likely to illuminate the gap.

Slovenia will present a new reform package and we already know that it will show the budget deficit will almost double to 7.8 percent of GDP this year. Higher taxes and a privatization drive to bring that down next year and avoid the need for a bailout are expected to be outlined. The government has floated plans to sell its biggest telecoms firm and second largest bank.

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