EU’s top two — oh to be a fly on the wall

By Mike Peacock
June 11, 2014

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.

Having unleashed a variety of measures last week, QE will not be unleashed soon – the ECB line is that the impact of the latest action will not be fully measurable until the year-end. But if inflation keeps falling from an already rock-bottom 0.5 percent, the pressure will mount well before then.
If German (and particularly Bundesbank) opposition to creating money is a crucial part of the jigsaw, so too is the range of opinion on the ECB Governing Council.

We’ve already seen glimpses, with ECB number two Constancio, Finland’s Liikanen, Belgium’s Coene and Makuch from Slovakia all saying more could be done – as did Draghi last week – while Bundesbank chief Jens Weidmann declared it would be absurd to start talking about new measures now.

This is possibly the biggest question for markets right now, with the Federal Reserve apparently content to keep U.S. interest rates near zero into next year and a feared sharp slowdown in China not materialising so far. In the short-term at least, the ECB has done the trick in terms of pushing the euro down towards $1.35, which should ease downward inflation pressures and aid economic activity a little.

Draghi may say nothing public today but his colleagues Yves Mersch, Ewald Nowotny and Ardo Hansson are all due to speak.

After appointing a new finance minister earlier in the week, Greece is expected to announce a new central bank governor, with the man who was finance minister until yesterday – Yannis Stournaras – widely expected to get the nod.

With the International Monetary Fund warning of reform fatigue, the appointments are likely to be seen as continuity picks which should soothe investors. New Finance Minister Gikas Hardouvelis is an economist and technocrat who is unlikely to rock the bailout boat but is likely also to push for growth by cutting taxes.

Having run the rule over Greece, the IMF is expected to issue a statement on Bulgaria’s fiscal and economic situation after a week-long staff visit, just as the ruling Socialist Party bows to pressure from its coalition partner and the opposition to call for elections as early as July.

Talks between Russia, Ukraine and the European Union will resume today, seeking to resolve a gas pricing dispute which threatens to disrupt supplies to Ukraine, and through it to the EU, which relies on Russia for up to a third of its energy needs. Russia’s Gazprom has moved a deadline for Ukraine to start paying in advance for natural gas supplies to next Monday, which suggests the will remains to do a deal.

Iran nuclear talks, which have been taking place in Geneva, appear to have stalled with Tehran calling for a six-month extension to a July 20 deadline to reach a definitive deal and France declaring that talks on curbing uranium enrichment have “hit a wall”.  The six powers and Iran will meet again in Vienna next week for another round of negotiations.

In Iraq, an al Qaeda splinter group has seized the northern city of Mosul on Tuesday, putting security forces to flight in a spectacular show of strength against the Shi’ite-led Baghdad government.

The jury in the seven-month trial of two ex-Rupert Murdoch editors, one the media mogul’s head of British newspapers and the other a former close aide to Prime Minister David Cameron, is expected to retire to consider its verdict before long.

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