MacroScope

Lew’s comes to Europe airing concerns

By Mike Peacock
January 8, 2014

U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.

Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.

Lew moves on to Portugal later in the day with Lisbon’s planned exit from its EU/IMF bailout presumably top of the agenda when he meets Prime Minister Pedro Passos Coelho.

German trade data, just out, showed exports rose for a fourth month running in November but imports dropped quite sharply, pushing the trade surplus higher. So the imbalances that Washington and others in the G20 have complained about are there for all to see. Having said that the shale gas boon seems to be narrowing the U.S. deficit.

November German industry orders figures follow later. Orders dropped by a dramatic 2.2 percent in October so anything short of the forecast 1.5 percent rebound will be disappointing. Euro zone unemployment and retail sales data for November are likely to offer little cheer, with the jobless rate holding at 12.1 percent.

Greece’s six-month presidency of the European Union commences with joint statements from Prime Minister Antonis Samaras and European Commission chief Jose Manuel Barroso.

This may seem incongruous given the parlous state of the Greek economy but it offers an opportunity for Athens to run an efficient, low-cost presidency and to reassert its “good European” credentials, which could help a little when it comes to negotiate some form of debt relief later in the year.

Spain will spell out its 2014 funding plans after a year in which its debt was snapped up at lower and lower yields. Madrid will have to raise more money this year – a gross target of 244 billion euros from 235 billion in 2013. It has yet to outline how much of that will be in medium- and long-term bonds and how much it will raise through short-term T-bills.

Look at the charts going all the way back to the birth of the euro and they show the borrowing costs of Spain, Italy and Ireland – whose yields lurched lower yesterday after its first post-bailout bond issue was snapped up by investors – are down at the sort of levels seen before the global financial and euro debt crises struck. The question is whether they are there on national merit or more because the market still believes in the European Central Bank’s bond-buying backstop. The answer is probably a bit of both.

There’s a flurry of central banking activity in central and Eastern Europe today with interest rate decisions from Poland and Romania and minutes of Hungary’s last policy meeting at which rates were cut for the umpteenth time.

Poland is expected to keep rates at 2.5 percent at least until late in the year before pushing them higher. Inflation has unexpectedly slowed to a five-month low of 0.6 percent, defying expectations for a pick-up. Analysts expect the Romanian central bank to cut its benchmark interest rate by a quarter point to a record low of 3.75 percent.

Polish Prime Minister Donald Tusk will spell out how his government plans to spend 73 billion euros from EU structural funds over 2014-2022 to create jobs and raise living standards. Tusk may give new growth forecasts and outline policies that would support job creation.

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