EU forecasts put France, Italy under the microscope

November 4, 2014

France's President Hollande talks with Italy's Prime Minister Renzi during the Asia-Europe Meeting (ASEM) in Milan

After euro zone inflation ticked up for the first time in many months and the latest PMI surveys showed factory activity expanded only very slightly last month, today the European Commission publishes its autumn economic forecasts.

The exercise is aimed at monitoring budget discipline in the bloc and includes estimates for GDP, inflation, debt, deficit, unemployment and current account for the 28 EU members for the next two years. The French and Italian figures will face particular scrutiny.

Lest we forget, the Commission has provisionally accepted the budgets of France and Italy, saying that no euro zone states had submitted plans for next year that seriously breached EU rules for fiscal stability.

Paris and Rome amended their 2015 budgets in the hope of avoiding censure from the European Union executive but there is still little or no chance that France will reach the EU’s budget deficit limit of three percent of GDP until 2017, four years after it should have.

Italy has said it would scrap some 3.3 billion euros of planned tax cuts. France has been less proactive, claiming it could generate extra budget funds via lower-than-expected interest payment costs and contributions to the European Union’s budget. It faces a tougher hearing than Italy because deficit is well above the EU ceiling while Rome’s is below.

Paris and Rome have been pressing the EU to focus more on measures to boost growth rather than cut debt in order to prevent a slide back into recession and to buy them time to push through structural economic reforms.

The European Central Bank is doing its best to pump more money into the economy but greater government spending – particularly on public works and infrastructure – is more likely to have a direct economic impact in this sort of depressed environment.

All the monetary policy measures are like pushing on a piece of string while demand remains so low yet the country with the current account surplus to spend more – Germany – will not yet entertain that argument.

German Chancellor Angela Merkel and Economy Minister Sigmar Gabriel, who heads her coalition partner the SPD, speak at an employers’ conference in Berlin today with evidence mounting that Europe’s largest economy is not growing, having contracted in the second quarter.

It’s not all doom and gloom. Ireland, having quit its bailout, is growing really quite strongly. Today, it is expected to launch a syndicated 15-year bond issue as it moves to repay part of what it owes to the International Monetary Fund early.

Ukrainian President Petro Poroshenko will hold an emergency meeting with his security chiefs to discuss a shift in strategy to deal with separatists in the east after rebel elections that were denounced by Kiev and the West.

Organisers of the twin ballots said insurgent leaders had emerged victorious in both Donetsk and Luhansk – two Russian speaking areas of eastern Ukraine. Poroshenko denounced the vote as an “electoral farce” and said it violated a deal struck in the Belarusian capital Minsk in early September intended to pave the way for a settlement.

After EU bank stress tests gave a largely clean bill of health to its lenders, the ECB officially takes over from today as the overarching regulator of banks in the bloc. The Bundesbank’s Andreas Dombret is speaking on banking supervision as are the key Bank of England men in this area, Jon Cunliffe and Andrew Bailey.

Hungary’s ruling Fidesz is expected to unveil draft legislation on its scheme to bail out struggling borrowers. Banks are waiting to hear at what rate they will be required to convert Swiss franc mortgages back into Hungarian forints, which will determine how big a hit they will take.

Romania’s central bank holds a rate-setting meeting at which is expected to further cut its benchmark rate by 25 basis points to a new record low of 2.75 percent.

Shi’ite Muslims are gathering at shrines and mosques across Iraq for the Ashoura religious ritual with Iraqi security forces on alert for possible attacks that have inflicted mass casualties during past pilgrimages.

Burkina Faso’s army will quickly cede power to a transitional government and appoint a new head of state, the country’s interim President Isaac Zida said, looking to calm accusations that the military had seized power in a coup. President Blaise Compaore stepped down on Friday following two days of mass protests in the West African nation over his bid to extend his 27-year rule by amending the constitution.

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