Reform hue and cry

May 16, 2013

Spanish Prime Minister Mariano Rajoy meets labour union and business leaders to discuss reforms to pensions and public institutions. After some fairly brutal cutting, Rajoy has grown more cautious. He is negotiating a new formula for calculating pension payoffs but is wary of going further for fear of sparking greater protest. And all the time, recession put the country’s debt targets further out of reach.

There’s still some pretty serious stuff on the table. Rajoy’s cabinet has proposed a “stability factor” for the pension system, which would periodically adjust pay-outs and retirement age based on economic performance, demographics and other factors. The government is also studying a major reform to public administrations that could mean numerous job cuts in the public sector at a time when unemployment is at 27 percent.

The EU has granted France, Spain and others more time to meet their deficit targets in an attempt to foster some growth. But it is also insistent the pace of structural reforms must be stepped up. The French parliament voted through labour reforms on Tuesday which will make hiring and firing somewhat easier. President Francois Hollande will hold a rare news conference having travelled to Brussels yesterday to declare he would use the leeway to boost competitiveness and growth. Details? There were none. The European Commission will spell out its recommendations at the end of the month.

Labour reform, along with public spending cuts and steps to plug a funding shortfall in France’s pension system, are among measures the European Commission is seeking from Paris in return for granting it two more years this month to bring its public deficit down to below 3 percent of national output.

One of Hollande’s problems has been the mixed messages coming out of his cabinet. Speculation is rising of an imminent cabinet reshuffle after persistent rows between Finance Minister Pierre Moscovici and junior industry minister Arnaud Montebourg. Hollande’s ratings are tumbling, as is the French economy which has slid back into recession.

A Big Berlin conference featuring top euro zone such as Angela Merkel, Wolfgang Scheauble, French premier Ayrault and European Commission president Barroso will keep the debate about debt, growth and reform lively. A separate Brussels shindig later in the day on helping industry also features Barroso and EU trade commissioner De Gucht.

For both France and Spain and others in the euro zone, bond market pressure remains entirely absent with the ECB underwriting now augmented by a swathe of new Japanese money coursing around the world seeking a decent return. So in that respect, the pressure is off. Italy’s successful 30-year bond sale yesterday – its first in four years – emphasized that point.

Turkey is expected to cut its benchmark interest rate by 25 or 50 basis points to try and take the sting out of a climbing lira. There is a trend, nascent so far, here that we should keep a close eye on. Israel pushed through a surprise rate cut this week in response to a too strong shekel. Further afield, the Australians and South Koreans did similar last week. Japan has got a free pass from the international community so far to print money at a furious rate in an attempt to lift a two-decade economic malaise, not least because the Federal Reserve, Bank of England and others have done the same. But in other countries, particularly emerging ones, the pain is starting to be felt.

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