France flatlining

May 15, 2014

We get a flood of EU GDP reports today. Germany’s figure, just out, has marginally exceeded forecasts with quarterly growth of 0.8 percent but France is underperforming again and stagnated in the first three months of the year, missing estimates of 0.2 percent growth.

Robust German growth has been driven largely by domestic demand, which could help its European peers with their exports. Where all that leaves the overall euro zone figure, due later, remains to be seen. The bloc is predicted to have expanded by 0.4 percent.

Spain has already come in with 0.4 percent quarterly growth and others could pick up too so once again France is looking like one of the sicker men of Europe. High debtors Italy and Portugal are expected to eke out at least some growth.

To compound France’s problems a public sector strike has been called by the hardline FO labour union over civil service pay freezes – a reminder of the difficulties of enacting economic reform.

The silver lining is the absence of pressure from the markets with borrowing costs for many euro zone countries at record lows. France will sell 7-8 billion euros of fixed-rate, medium-term bonds and 1.0-1.5 billion euros of inflation-linked bonds later.

If the figures come in strong – with the exception of France – it will pose an interesting dilemma for the European Central Bank after five senior sources told us it was preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized firms.

ECB policymakers Vitor Constancio and Yves Mersch are speaking today.

A clutch of foreign ministers headed by U.S. Secretary of State John Kerry will gather in London to meet Syrian rebel leaders. It would be surprising if Ukraine did not feature on the sidelines.

Kerry will also meet Palestinian leader Mahmoud Abbas in London a month after U.S. efforts to broker a Middle East peace deal collapsed when Abbas signed a pact with Hamas. The focus of the talks is the U.S.-Palestinian relationship, the State Department said, a possible reference to whether Washington can keep funding the Palestinian Authority if it carries out a unity agreement with the Islamist faction which the United States views as a terrorist group.

EU energy ministers and Energy Commissioner Oettinger meet to prepare ideas on how to improve energy security which can be put to an EU leaders summit in June. Russia’s Gazprom supplies about 30 percent of the gas consumed in Europe, shipping about half of that via Ukraine.
Russia had said it would demand advance payments for gas from Ukraine starting in June, saying it already owes $3.5 billion. Kiev has said it won’t do that. However, on Wednesday Moscow seemed to soften its stance, saying it would restart gas talks with Ukraine if its new leaders pay off at least part of its gas debt.

Oettinger will meet Russian Energy Minister Alexander Novak on May 19 to pave the way for three-way talks with Ukraine.

With EU elections approaching, EU leaders will be hoping that events in Ukraine will steer voters back towards mainstream parties and provide a narrative for why the project matters. At the very least, despite ongoing divisions, it is clear the bloc will need to work more closely together to secure its energy supplies into the future.

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