MacroScope

Can we have a German government please?

By Mike Peacock
October 18, 2013

Angela Merkel’s CDU and the centre-left SPD have agreed to begin formal coalition talks conditional on securing support from a meeting of 200 senior SPD members scheduled for Sunday. The party is scarred by its experience of coalition in the last decade, when its support slumped, but it’s probably the lesser of two evils since a new vote would be quite likely to increase Merkel’s support. She only just missed out on a rare overall majority first time around.

Assuming Sunday’s vote gives assent, talks proper will start on Wednesday. Hold your horses though. An entire policy slate will have to be thrashed out so the betting is an administration won’t be in place until late November at the earliest. In the meantime, euro zone policy negotiations are pretty much on hold.

To prove that point, an EU leaders’ summit on Thursday and Friday is unlikely to break new ground although of course all the hot topics such as banking union will be discussed.

The European Central Bank will announce on Wednesday the methodology which will underpin the health test of about 130 big European banks next year. It is caught between the devil and the deep blue sea. Come up with a clean bill of health as previous discredited stress tests did and they will have no credibility. But if rigorous checks find serious financial gaps, there is no answer yet to the question who will provide the ultimate funding backstop?

France, Spain and Italy want an immediate joint commitment by all 17 euro zone countries to stand by weak banks regardless of where they are. Germany, which fears it would end up picking up most of the bill, has dug in its heels. If a bank’s shareholders, creditors and large depositors can’t fill the gap, national government help may be required and if that is insufficient, what then? An answer to that question is needed fairly urgently and so far there’s not much sign that the “doom loop” of weak sovereigns propping up stricken banking sectors and each dragging the other down will be broken.

A deal is supposed to be signed off by an EU leaders summit in December but if that slips, the harder deadline that the European Parliament must vote through any deal before it faces elections in the Spring hoves into view. The lack of a German government is not helping. The risk is that disaffected European voters could elect the most eurosceptic parliament yet seen which may not be keen on further integration.

For the ECB’s test methodology, a crucial question is how banks’ holdings of sovereign bonds will be treated, following a push by the German Bundesbank to reflect more adequately the varying degrees of risk attached to bonds issued by different governments.

Slovenia appears to be approaching the moment of truth when it has to decide whether to seek a bailout to put right its banks which are beset by 8 billion euros of bad loans – almost a quarter of the entire economy. The central bank head has said outside help may be needed if the country’s borrowing costs don’t fall but the prime minister says no. Jeroen Djisselbloem, the Dutch finance minister who chairs the Eurogroup of euro zone finance ministers, visits Ljubljana on Monday.

It’s a big data week with third quarter British GDP figures topping the list. After a startlingly strong run of economic evidence, quarterly growth of 1.0 percent or even more is not out of the question. Good news for the government but it could pose a further challenge to the Bank of England’s guidance that interest rates will not rise for more than another two years.

Things are altogether more muted in the euro zone, even in Germany whose leading economic institutes are forecasting growth of just 0.4 percent this year. Flash PMIs for the euro zone, Germany and France, plus the Ifo sentiment index will give plenty to chew over.

Turkey’s central bank delivers its latest interest rate decision. It has held a number of dollar-selling auctions since the summer to shore up the lira but has insisted it won’t use official interest rates to that end. Pressure has come from government ministers to keep rates low. Norway and Sweden also have monetary policy meetings. No rate moves are expected. Norwegian inflation has fallen after an alarming jump the month before and in Sweden, growth is lacklustre and inflation low. Rates in both countries are likely to rise next year with the Norwegians moving first.

South Africa’s mid-term budget will be unveiled on Wednesday. In February, Finance Minister Pravin Gordhan projected a budget deficit for 2013/14 at 4.6 percent of GDP and cut the economic growth forecast for 2013 to 2.7 percent. Gordhan told an investment conference in London earlier this month that growth would not now reach the 2.7 percent target this year, but would not fall below 2 percent.

The week is topped and tailed by elections in Luxembourg and the Czech Republic. Luxembourg’s veteran Jean-Claude Juncker, Europe’s longest serving leader, resigned in July, brought down by a spying and corruption scandal. But he may be returned to power given the lack of an obvious successor.

The Czechs hold early elections after the centre-right administration of PM Petr Necas fell in June under the weight of a not dissimilar scandal. The centre-left Social Democrats lead opinion polls with a double digit margin. If they gain support of at least a third of all voters, they said they might create a single-party government with backing from smaller parties in the parliament, particularly the communists. If that happened it would be the first time the communists have a direct influence on government since the party’s totalitarian rule was ended by a bloodless revolution more than two decades ago.

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