The numbers don’t lie

May 31, 2013

Euro zone unemployment figures will emphasize just how far the currency bloc is from recovery while inflation data due at the same time could push the European Central Bank closer to new action. If price pressures drop further below the target of close to but below two percent we’re moving into territory where the ECB has a clear mandate to act, although the consensus forecast is for the rate to push up to 1.4 percent, from 1.2 in April.

Market attention is focused on the ECB cutting its deposit rate – the rate banks get for parking funds at the ECB – into negative territory to try and get them to lend. But will that do much? Despite being in a world awash with central bank money and stock markets in the ascendant, the fact that safe haven bond markets such as Bunds and U.S. Treasuries haven’t sold off much – and are now starting to climb after Ben Bernanke’s hint that the Federal Reserve could soon start slowing its money-printing programme — denotes ongoing nervousness among banks and investors. Data this week showed bank loans to the euro zone’s private sector contracted for the 12th month in a row in April.

Despite the (now waning?) European market euphoria – started by the ECB’s pledge to do whatever it takes to save the euro and given a further shot in the arm by Japan’s dash for growth – the economic numbers look grim. Euro zone unemployment is forecast to edge up to 12.2 percent of the workforce. Last night, official data showed French unemployment hit a new record. Germany is in better shape but even it will barely eke out any growth this year. Retail sales, just out, posted a 0.4 percent fall in April.

French President Francois Hollande takes to the television airwaves during the afternoon, a day after he met Germany’s Angela Merkel, a meeting which laid bare Berlin’s alarm at the sluggish pace of French reform and the Elysee’s irritation at Brussels telling it what to do – not on the face of it a recipe for smooth progress. France was the focus of much of the European Commission’s attention this week.

Hollande pledged to meet his target of balancing the structural budget in 2017 but said it was up to him, not the Commission, how to get there and how to galvanise the economy. Merkel said the two extra years Paris has been given to meet its debt-cutting target had to go “hand in hand” with structural change. In France’s case, that means relaxing labour laws and overhauling the pensions system first and foremost. Back in Berlin, some of Merkel’s acolytes were much more blunt about perceived French shortcomings.

Where the two leaders did agree was on the need for a full-time president of the euro zone finance ministers’ forum and more frequent summits to coordinate economic policy, as well as the need to shell out 6 billion euros in EU funds to fight youth unemployment. That will feed into next month’s EU summit. The thrust for greater integration is alive and well but not necessarily in crucial areas such as banking union of which there was barely a mention. After giving other struggling member states as well as France a green light to take longer to meet their deficit targets – a small amount of leeway which could allow for modest growth measures – EU economy commissioner Olli Rehn may have something more to say when he speaks in Helsinki.

Italy was taken off the EU’s debt warning list this week but will need more slack than that if tax cuts being argued over within a fractious coalition government are to be delivered. EU Council President Herman Van Rompuy meets President Giorgio Napolitano and Prime Minister Enrico Letta in Rome later. The Commission forecasts Italy’s budget deficit at 2.9 percent of GDP this year, just a fraction below the 3 percent ceiling, offering no room for manoeuvre unless rules are changed to allow Rome to exclude some new spending from its deficit calculations.

Greek sentiment appears to be picking up but the bald numbers suggest it is unlikely to get back on its feet without a further debt writedown at some point, which this time will mean a hit for fellow euro zone governments (i.e. taxpayers). Dutch Finance Minister Jeroen Dijsselbloem, who chairs meetings of euro zone finance ministers, is due in Athens for talks with the finance minister and Prime Minister Samaras.

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