MacroScope

Europe looks again to Draghi

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Surprisingly low take-up at last week’s first round of cheap four-year loans by the European Central Bank begs a number of questions – How low is demand for credit and what does that say about the state of the economy? Are banks cowed by the upcoming stress tests? Does this make an eventual leap to QE more likely?

The ECB is playing up the prospects of a second round in December after the stress tests are finished. But having pledged to add the best part of 1 trillion euros to its balance sheet to rev up the euro zone economy, it can’t have been happy to see only 83 billion euros of loans taken. ECB President Mario Draghi testifies at the European Parliament today.

After narrowly winning a confidence vote in the National Assembly in a manner that doesn’t exactly give him momentum, French Prime Minister Manuel Valls travels to Germany to compare notes on economic reform.

There, he is likely to ask Angela Merkel not to press for EU penalties after Paris admitted it would again break a promise to limit its budget deficit to 3 percent of GDP and would take a further two years to get there.

Draghi’s call in August for euro zone governments to do more to revive growth has widened the debate and could mean France will get leniency from its European Union partners on its deficit as long as it can prove it is serious about making its economy more competitive.

Swedish shift

Opposition leader Stefan Lofven speaks at the election night party of the Social Democrats in Stockholm

Sweden’s centre-left Social Democrats topped the poll in Sunday’s election but fell well short of an overall majority to the extent that it will struggle to form a strong coalition.

The Social Democrats and the Greens and hard Left, who would be natural coalition allies, garnered 43.7 percent of the vote. The anti-immigrant far right emerged as the third biggest party to hold the balance of power with nearly 13 percent.

It looks like there will be plenty of time for market jitters before a government is formed.
What looks more certain is the ousting of the centre-right means years of falling taxes and liberal economic reforms may come to a juddering halt.

An almighty gamble

Britain's Prime Minister David Cameron leaves Downing Street in London

Having woken up to the very real possibility of Scotland going it alone, the leaders of Britain’s main parties have scrapped their parliamentary business and headed north to campaign in what amounts to a huge gamble.

The “No” campaign has been criticized for many things – being too negative (though no is negative by definition), being too aloof, failing to address the hole’s in Alex Salmond’s manifesto. The question is whether it is too late to do anything about it. It is risky to deploy Prime Minister David Cameron who, by his own admission, is not catnip to the Scots.

Labour leader Ed Miliband is anything but a clear vote-winner either. The years when the Labour party ruled Britain with a raft of Scots in senior positions is gone. The party front bench now looks very English.

Nearer the brink

A man walks past cutting boards, that have been painted with images of Russia's President Vladimir Putin, at a street store in the center of St. Petersburg

Ukraine is nearer the brink with Russian forces now pretty clearly operating over the border. The past week has seen Ukrainian forces flee in the path of a new rebel advance which Kiev and its western allies says has been directly aided by Moscow’s forces.

Russian President Vladimir Putin called on Sunday for immediate talks on “statehood” for southern and eastern Ukraine, though his spokesman tried to temper those remarks, that following an aggressive public showing in which Putin compared the Kiev government to Nazis and warned the West not to “mess with us”.

The deputy leader of the breakaway east Ukrainian region said he would take part in talks with representatives of Moscow and Kiev in Minsk today but did not expect a breakthrough. Russian foreign minister Lavrov is out saying the Minsk talks will aim for an immediate ceasefire without conditions although he also said Ukrainian troops must vacate positions from which they can hit civilian targets. Meanwhile, eight Ukrainian seamen have been rescued, two are still missing, after a patrol boat was sunk by artillery.

A turning point?

Emergencies Ministry members work at the site of a Malaysia Airlines Boeing 777 plane crash in the settlement of Grabovo in the Donetsk region

Could the shooting down of a Malaysia Airlines plane over Ukraine be a fundamental turning point in the crisis that has pitted Russia against the West? And if so which way – towards rapprochement or a further escalation?

Kiev accused militants fighting to unite eastern Ukraine with Russia of shooting down the Boeing 777 carrying nearly 300 people from Amsterdam to Kuala Lumpur with a Soviet-era ground-to-air missile. Leaders of rebels in the Donetsk People’s Republic denied any involvement, although around the same time their military commander said his forces had downed a smaller Ukrainian transport plane.

A Ukrainian Interior Ministry official took to Facebook shortly after the plane came down, saying that rebels had used a Buk anti-aircraft system given to them by Russia, and appealed to the West to act. That doesn’t make the situation much clearer since Russia, Ukraine and the separatists all probably have the missile in their arsenals.

Balance tilted in Ukraine?

slaviansk.jpgUkrainian forces pushed pro-Russian rebels out of their stronghold of Slaviansk on Saturday. Its re-capture represents Kiev’s most notable military victory in three months of fighting in which more than 200 Ukrainian troops have been killed as well as hundreds of civilians and rebels.

The regions of Donetsk and Luhansk are likely to be next in the government forces’ crosshairs.

Talks between Iran and the six world powers –  the United States, Britain, France, Germany, Russia and China – over its disputed nuclear programme stretch through the week, leading up to a July 20 deadline which has been set for a definitive deal.
Most diplomats involved in the talks expect that date to lapse though we reported exclusively that Iran has reduced demands for the size of its future nuclear enrichment programme.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

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

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.

ECB aftermath; how firm is opposition to QE?

After the European Central Bank opened its toolbox and deployed pretty much everything it had left, bar printing money, the question is if and when QE becomes a live possibility.

ECB chief Mario Draghi pointedly said at his monthly news conference that all policy options had not been exhausted.
German resistance to such a move will remain, however, and Draghi’s deputy, Vitor Constancio, has already intimated that it will take until late this year to judge whether the latest gambits have made a difference before moving onto the next stage.

Bundesbank chief Jens Weidmann is already out today saying the ECB has ventured onto new ground and that governments need to treat the move as a wake-up call to continue with economic reforms. He added that there was a risk that long-term inflation expectations could be de-anchored – ECB speak for deflation.

We need to talk about Juncker

Swedish Prime Minister Fredrik Reinfeldt will host Germany’s Angela Merkel, Britain’s David Cameron and Dutch premier Mark Rutte at his private residence over two days to discuss reforming the EU and ”achieving a more efficient EU that is focused on creating jobs and growth”. 

After EU elections delivered strong returns for far-right and far-left parties, EU leaders say they have recognized the need to refocus on what matters to their people. But at the same time, the orthodox camp is determined to keep bearing down on debt and the bloc’s heads are arguing over who should take the top jobs in Brussels which set the tone.

Cameron is publicly opposed to Luxembourg’s Jean-Claude Juncker, who he regards as an arch federalist, becoming European Commission President though as the candidate for the centre-right EPP group of  parties which came top in the election he is in pole position.