When Mario met Jean-Claude

By Mike Peacock
August 6, 2014

European Central Bank President Draghi and Eurogroup President -Juncker talk during a news conference in Nicosia, Cyprus

A day before the European Central Bank’s monthly policy meeting, ECB President Mario Draghi will travel to Luxembourg for talks with incoming European Commission president Jean-Claude Juncker. Oh to be a fly on the wall.

Some in the ECB are concerned that ultra-low sovereign borrowing costs and Draghi’s “whatever it takes” promise has relieved pressure on euro zone governments to carry on with structural economic reforms.
Juncker has signalled he is comfortable with a Franco-Italian drive to focus on growth and job creation rather than cutting debt.

ECB policymakers would probably be happy with that if it came in tandem with reforms to make euro zone economies more competitive. But it is worried about slippage.

Italian Prime Minister Matteo Renzi said last month the Bundesbank should not comment on Italian government policies, after its chief, Jens Weidmann, said Rome should complete structural reforms before calling for increased budget flexibility.

Italian second quarter GDP data are due and forecast to show paltry growth of 0.2 percent, well below Spain’s 0.6 percent which increasingly looks like it is pulling ahead.

Despite a big win in May’s EU elections and still-strong poll ratings things look very difficult for Renzi. A lack of growth will push Italy closer to breaking its budget deficit limits, his plan to strip the Senate upper house of parliament of most of its powers to make the system of government more workable is bogged down … in the Senate, and precious little progress has been made in reining in public spending.

German industrial orders, just out, suffered their biggest monthly fall in nearly three years in June, dropping a whopping 3.2 percent on the month. It appears that geopolitical risks (ghastly phrase which presumably means Ukraine and the Middle East) are starting to make companies more cautious about taking out contracts.

On to those myriad risks… Russia is beginning to fight back against EU/U.S. sanctions, threatening on Tuesday to restrict or ban European flights to Asia over Siberia, which could be seriously costly for the airlines. More broadly, President Vladimir Putin has ordered his government to prepare retaliatory measures against the West.

He has also ordered large scale military exercises on the Russian side of the Ukrainian border. Polish foreign minister Radoslaw Sikorski said last night Russia had gathered military forces at the border with Ukraine to either put pressure on the neighbouring country or to enter it.

A 72-hour ceasefire, called in Gaza yesterday, appears to be holding unlike previous efforts. Israel has withdrawn its ground forces from the strip and sent officials to join talks in Cairo to cement a longer-term deal during the course of the truce. Hamas and Islamic Jihad also dispatched representatives from Gaza.

Senior Iranian officials told Reuters that Tehran believes Iraqi Prime Minister Nuri al-Maliki is no longer able to hold his country together and is looking for an alternative leader to combat a Sunni Islamist insurgency. They admitted, however, that there weren’t many viable alternatives.

Maliki has stayed on in a caretaker capacity since April elections and said he would seek a third term despite widespread opposition  from Sunnis, Kurds, some fellow Shi’ites and now Iran. In the meantime Sunni militants of the Islamic State have captured swathes of northern Iraq.

The Lebanese army and Islamist militants agreed a 24-hour ceasefire on Tuesday after four days of fighting triggered by the rebels’ seizure of a border town, in the most serious spillover of Syria’s three-year civil war into Lebanon.

Turkey’s presidential election is just four days away. Prime Minister Erdogan, hot favourite to win and consolidate his power base, resumes campaigning  after a two-day break for a regular military council meeting. Opposition candidates are also on the campaign trail.

Contrary to expectations, former British finance minister Alistair Darling – heading the campaign to keep Scotland in the UK – performed with gusto in a live televised debate with Scottish nationalist leader Alex Salmond last night. An instant poll of voters afterwards suggested Salmond had lost the debate.

That may not be decisive for the vote which is just six weeks away but with broader polls putting the “No” campaign significantly ahead – not withstanding a big chunk of “don’t knows” – Salmond would have been fervently hoping to wipe the floor with Darling and move the dial. He did not.

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