MacroScope

Signs of European dash for growth

By Mike Peacock
June 2, 2014

The ripples of EU election results are being felt, no more so than in France where the National Front topped the poll.

The day after the results, Prime Minister Manuel Valls promised further tax cuts for French households. The government is already committed to a 30 billion euros cut in labour taxes to help business but insists all this can be done while meeting its EU deficit commitments.

Brussels has already given Paris an extra two years to get its deficit down to three percent of GDP. Today, the European Commission will produce updated country recommendations.

It may be too early to throw the book at France and President Francois Hollande has reacted aggressively to any attempts to do so before. Members of his Socialist party are already lobbying to resist tightening in future budgets.

The other follow-on from the EU parliament elections is the lobbying for top jobs in Brussels with attention centred on Luxembourg’s Jean-Claude Juncker and his claim on the European Commission presidency.

As the candidate for the centre-right EPP group of parties which topped the poll, most in the parliament believe the job is his as of right but the rules state that the heads of government must only take into account the election results.

Britain’s David Cameron has lobbied against the arch federalist’s candidacy but a weekend report that he had said Juncker’s anointment would force him to bring forward an in-out referendum on the UK’s EU membership was wide of the mark.

Angela Merkel’s position is, as always, pivotal. Having appeared to all but pull the rug from under Juncker after an EU leaders meeting last week, her tone shifted to suggest that she would back Juncker, though maybe not to the hilt.

Juncker is not taking any of this lying down, being quoted in a German newspaper as saying Europe must not allow itself to be blackmailed.

But Cameron may find himself an ally in Italian Prime Minister Matteo Renzi, who won handsomely in the EU elections and said over the weekend that Juncker had no automatic right to the job.

Renzi also talked up his reforms to cut red tape and encourage investment while Spanish premier Mariano Rajoy announced on Saturday a 6.3 billion euro plan to create jobs and  cut the main rate of corporate tax to 25 percent from 30 percent to make companies more competitive.

The big European event of the week is the European Central Bank’s policy meeting on Thursday at which it is expected to cut all its interest rates – including taking the deposit rates paid to banks to park money at the ECB negative for the first time — and produce targeted measures aimed at boosting lending to small- and mid-sized firms.

Today, manufacturing PMI surveys from euro zone countries and Britain will give the central bank one of the final pieces in its economic jigsaw to assess.

Flash readings for the euro zone as a whole, German and France showed business activity was strong last month but only drastic price cuts helped stop a further slide, after a sharp slowdown in factory growth took the shine off an unexpected pickup in the service industry. The slowdown kept alive worries about dangerously low inflation.

Earlier, China’s PMI hit a five-month high and the equivalent U.S. figure is due later.

A more direct reading of Europe’s deflation threat will come from preliminary German inflation figures which are forecast to show the rate in Europe’s largest economy edging down to just 1.0 percent in May. None of that is likely to deter the ECB from acting.

Both Yves Mersch and Ewald Nowotny speak today although ECB policymakers should be in pre-meeting purdah preventing any meaningful discussion of policy.

Talks over Russian gas supplies to Ukraine – and through Ukraine to Europe – are set to continue but could be eased after Ukraine’s Naftogaz paid Russia %$786 million over the weekend.

Gazprom has said Ukraine’s debt for gas supplies will have risen to about $5.2 billion by June 7 unless Ukraine begins to pay it off, while Kiev has countered that Gazprom owes it natural gas because of Russia’s seizure of Crimea.

Ukraine insists on a price of $268.50 per 1,000 cubic meters while Russia stands by its demand for $485. EU energy commissioner Oettinger is trying to get the two sides to agree in the middle.

Merkel meets Georgia’s prime minister in Berlin.

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