MacroScope

Juncker begins to fill in the gaps

By Mike Peacock
July 8, 2014

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European Commission president-elect Jean-Claude Juncker will hold talks with the various political groupings in the European Parliament as he seeks to develop policy positions. Most interesting would be indications about which way he is bending in the growth versus austerity debate.

Italy’s Matteo Renzi, resurgent after a strong performance in May’s EU elections, is pressing for a focus on measures to get the euro zone economy firing and has even managed to get Germany to talk the talk. But any leeway will be within the existing debt rules, not by writing new ones.

We know from the history of the euro debt crisis that Berlin can only move so far, so fast and only last week it proudly proclaimed it would not be a net borrower of zero next year, for the first time in over 45 years. Having said that it has just passed into law a generous national minimum wage and its labour costs are rising, so there is some rebalancing going on.

Euro zone finance ministers met in Brussels late yesterday and affirmed that EU countries can get more time to cut budget gaps provided they deliver reforms with a clear long-term impact. A similar pledge was made by EU leaders at a summit last month.

Juncker is first and foremost a dealmaker so – contrary to his popular billing as the wrong man at the wrong time – he could bring his skills to bear to get everyone on the same page.

The European Central Bank is also urging EU governments to do their bit to improve competitiveness and growth. Demonstrable evidence of that could make it easier for the ECB to do yet more on the monetary policy side if needed to ward off deflation.

But that won’t be easy. No sooner had Mario Draghi dangled the carrot of future QE last week than the German pair at the ECB – Jens Weidmann and Sabine Lautenschlaeger – began a rearguard action.

Draghi has taken the ECB a long way in terms of radical policies which some of its members have found hard to swallow. But printing money could yet prove to be a bridge too far.

We get a clutch of European Central Bank speakers today – Christian Noyer, Peter Praet and Spain’s Luis Linde – while Vitor Constancio and Daniele Nouy are at the Ecofin meeting of EU finance ministers in Brussels.

There has already been a smattering of early morning economic information.

After a sharp fall in industry output reported yesterday, German trade data show that both exports and imports dropped far more than expected in May. Evidence of a softish second quarter is mounting.

France has been soft at best for some time. Its central bank has just forecast growth of 0.2 percent in the second quarter following a stagnant first three months of the year.

The British Chambers of Commerce said overnight that Britain’s economy kept growing at a robust rate in the second quarter, but exports and business investment weakened, clouding the prospects for a balanced recovery.

Having been kicked out of their Slaviansk stronghold, pro-Russian rebels in east Ukraine are putting up barricades in Donetsk, preparing to make a stand in the city of one million people. Thousands of residents have already fled but most have nowhere to go.

Ukrainian President Petro Poroshenko called his security chiefs for a meeting on Monday night and has named a new head of the Anti-Terrorist Operation.

Moscow has not raised any loud objection to Kiev’s fightback, suggesting it would now like a way out of this mess. To focus minds, Barack Obama and Francois Hollande talked last night and reaffirmed their commitment to widen sanctions on Russia if it did not help with de-escalation in eastern Ukraine.

EU officials will meet Ukrainian counterparts in Brussels to discuss what support should be prioritized for the Kiev government.

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