MacroScope

Evening of reckoning

By Mike Peacock
May 27, 2014

EU heads of government and state dine in Brussels this evening to discuss their response to a big slap in the face from the bloc’s electorates.

Italy’s Matteo Renzi, who bucked the trend by winning handsomely as an incumbent prime minister, has the wind in his sails and has pledged to change Europe’s focus towards growth and job creation after years of fiscal austerity in response to the euro zone’s debt crisis.

A French official said President Francois Hollande would back Renzi’s call for more pro-growth policies and tell fellow EU leaders that Europe had reached “the alarm level”. Even Germany’s Angela Merkel – the one who really counts – is talking about Europe’s people not caring about treaty change but job security and prosperity.

Her prescription of focusing on competitiveness, growth and jobs doesn’t sound a million miles away from what Renzi is saying though they come from very different starting points. With France languishing and Renzi suddenly ascendant, it begs the question whether he and the German leader could provide the twin impetus to move the EU forward. Traditionally, only Germany and France in tandem have managed to do so.

Merkel’s intervention begs a further question — whether the further integration that most economists say the euro zone needs to underpin the single currency is a priority, or even possible, if institutional reform is now on the back burner.

For Britain’s David Cameron that is a double-edged sword. He has gone rather quiet on his previous pledge to repatriate all sorts of power from Brussels and if the anti-EU UKIP’s election win pressures him to go down that road, the absence of broader treaty change will make it all but impossible to achieve.

But on his other clarion call – for economic reform, slashing of bureaucracy and completion of the single market – he will find a growing number of willing allies.

One straw in the wind worth watching is a Berlin conference featuring the German and Dutch finance ministers, Wolfgang Schaeuble and Jeroen Dijsselbloem. If they start sounding softer on the need to control public debt in favour of boosting growth then something could be afoot.

The EU leaders will also discuss who should become the new European Commission president, a powerful role. Luxembourg’s Jean-Claude Juncker is in pole position after his centre-right EPP group came top in the EU elections. He apparently has the backing of Merkel but she has not quite been definitive.

Juncker is a consummate deal-maker but is very much part of the EU’s old establishment. As a federalist he is strongly opposed by Cameron and others. The history of this process is the frontrunners fall by the wayside and a compromise candidate comes up on the rails.

Italian markets climbed on Monday after Renzi’s victory, auguring well for today’s bond auction. In Spain, the IMF will deliver preliminary conclusions from its regular mission review of the country.

IMF chief Christine Lagarde is speaking at a London conference on “Inclusive Capitalism”. It would be no surprise if she had some advice for Europe. There had even been talk of her heading the European Commission though that is highly unlikely. Bank of England Governor Mark Carney is also speaking.

The European Central Bank’s “Jackson Hole” conference in Portugal goes into its last day with some form of policy loosening next week now priced in.

Irish Finance Minister Michael Noonan speaks in parliament after the government suffered bruising election results that could complicate its austerity programme. The leader of the junior coalition Labour party has already resigned.

The EU leaders will also spend time on Ukraine tonight. The fact the country’s election has produced a decisive result and is being deemed a success has probably eased the pressure for much tougher sanctions against Russia.

On the ground, Ukraine launched air strikes and a paratrooper assault against pro-Russian rebels who seized an airport. Newly elected President Petro Poroshenko rejected any talks with “terrorists” and said a robust military campaign in the east should be able to put down a separatist revolt in “a matter of hours”.

It’s the final day of voting in Egypt’s presidential election. Former army chief Abdel Fattah al-Sisi, who deposed elected Islamist President Mohamed Mursi last July, will win.

Supporters of Mursi’s now banned Muslim Brotherhood have branded the election a farce but Sisi, who is running against only one other candidate, is backed by most Egyptians who see him as a strongman who can save their country after years of political turmoil.

Could today be the day Hungary’s interest rate-cutting cycle, which has slashed rates from a high of 7 percent in August 2012, comes to an end? Maybe not. The majority of economists polled by Reuters expected another 10 basis points to be sliced off, taking the key rate to 2.4 percent, below that of Poland’s although the latter has a much stronger economy and higher credit rating.

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