EU leaders meet for a gas

October 23, 2014

France's President Hollande talks with German Chancellor Merkel  during a meeting on the sidelines of a Europe-Asia summit in Milan

A two-day summit of EU leaders is supposed to focus on climate and energy policy including efforts to enhance energy security following the threat of interruptions to gas supplies from Russia.

That is no small issue. Russia and Ukraine have failed so far to reach an accord on gas supplies for the coming winter but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay.

An agreement was reached on the price Ukraine would pay Russia’s Gazprom as long as it paid in advance for the deliveries. But Moscow is still seeking assurances on how Kiev would find the money to pay. It’s likely the EU will have to step in there.

Putin had threatened to cut gas supplies to Europe if Ukraine stole from the transit pipeline to cover its own needs this winter. Any interruption to flows to western Europe, via Ukraine from Russia, would deal another blow to already struggling EU economies.

The EU summit, held a day after the European Parliament confirmed the line-up of the new European Commission under Jean-Claude Juncker, will urge Russia to do more to stabilise Ukraine, according to a draft statement seen by Reuters, but diplomats expect no change in sanctions on Moscow in the near future.

Just as pressing for the EU heads will be an attempt to balance the requirement for some – France and Italy – to reform their economies with help from others to buy them the time to do so.

Juncker, seen by many as the ultimate EU insider, seems to see the big picture. “Citizens are losing faith,” he said yesterday. “Extremists on the left and right are nipping at our heels. We are last-chance Europe. Let’s seize this chance.”

The hope is that a renewed French and Italian commitment to economic reforms will persuade Germany to loosen its purse strings and the European Central Bank to act more forcefully.

But the ECB has denied there is any “grand bargain” in the offing and officials admit that whatever transpires – the aim is for a deal to be done in time for a December summit – may fall short of what is required.

Germany continues to rebuff suggestions from much of the rest of the world that it should use a little of its current account surplus up by increasing public spending to give its own economy, and that of the wider euro zone, a lift.

Berlin insists it will balance its budget next year for the first time since 1969 despite the fact it is flirting with recession. Juncker said he would present details of his previously promised 300-billion-euro plan for investment to bolster growth and jobs by the end of the year but also stressed governments must keep deficits down.

Flash October purchasing managers indices for the euro zone, Germany and France will give a first glimpse of the state of their economies heading into the last quarter of the year. China’s manufacturing PMI edged up but not enough to suggest a fourth-quarter turnaround for the slowing economy.

France and Italy are pressing for more leeway on debt targets to buy time to push through much-needed structural economic reforms but are likely to have their 2015 budgets rejected by Brussels, leading to a scramble to broker a deal.

Germany and France have asked experts in Berlin and Paris to come up with reform recommendations for both countries by December in an apparent attempt to avert a full-blown clash.

The European Commission has until next week to decide whether to reject France’s budget. German officials said the issue would not be discussed at the summit. The Commission is discussing changes with Paris and Rome to their draft budgets in an attempt to avoid having to throw them out. Neither have so far shown any inclination to alter them.

The Italian Treasury will close its offer for a new BTP Italia retail bond aimed at small investors. Previous such issues have romped away but although the market mayhem of last week has calmed, the backdrop looks somewhat different now.

Turkey’s central bank has a policy meeting. Having whacked up rate in January to defend the lira, it cut its overnight lending rate in August and is now expected to keep it at 11.25 percent for some time despite pressure from the government to ease policy.

Inflation is expected to edge higher and finish the year at 9 percent, according to a Reuters poll of economists. To compound matters, an Islamic State onslaught against Syrian Kurds on Turkey’s border has increased uncertainty.

Norway is expected to leave interest rates at 1.5 percent today but the central bank may have something to say about the tumbling oil price.

Iraqi Kurdish lawmakers approved a plan to send fighters to the Syrian town of Kobani to relieve fellow Kurds under attack by Islamic State militants, marking the semi-autonomous region’s first military foray into Syria’s war.

The battle for Kobani has major political significance for the United States – whose air strikes have killed 553 people in Syria, according to a Syrian monitoring group – and neighbouring Turkey, where the siege has sparked protests among Kurds and threatened a peace process with Turkey’s own Kurdish insurgents.

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