MacroScope

It’s ECB day and it could be a big one, not because a shift in policy is expected but because journalists will get an hour to quiz Mario Draghi on the Italy conundrum after the central bank leaves monetary policy on hold.

To explain: The story of the last five months has been the bond-buying safety net cast by the European Central Bank which took the sting out of the currency bloc’s debt crisis. But now it has an Achilles’ heel. The ECB has stated it will only buy the bonds of a country on certain policy conditions encompassing economic reform and austerity. An unwilling or unstable Italian government may be unable to meet those conditions so in theory the ECB should stand back. But what if the euro zone’s third biggest economy comes under serious market attack? Without ECB support the whole bloc would be thrown back into crisis and yet if it does intervene, some ECB policymakers and German lawmakers will throw their hands up in horror, potentially calling the whole programme in to question.

In Italy, outgoing technocrat premier Monti is due to meet centre-left leader Bersani, the man still harbouring hopes of forming some sort of government. Whether he succeeds or not it seems unlikely that any administration can ignore the dramatic anti-austerity vote delivered by the Italian people.

Draghi will doubtless stonewall on all this but there’s plenty else to chew on. New economic forecasts by ECB staff will presumably look grim and increase speculation about an interest rate cut. But the ECB keeps saying that its focus is getting already record low rates transmitted to all parts of the euro zone and those high debt corners where banks, businesses and people cannot access anything like those low rates. That begs the question what difference would a quarter-point rate cut really make, which leads on to another: what else can the ECB do?

On the nerdy front, a further loosening of collateral rules, which banks can offer up in return for ECB liquidity, is in the pipeline. More profoundly if things continue to get worse, something similar to last year’s deluging of banks with more than one trillion euros of ultra-cheap three-year money could come onto the table (though not yet).

Mark these words. Not only is Britain going to avoid a triple-dip recession, but the economy won’t shrink again as far as the eye can see.

If that sounds ridiculously optimistic, don’t tell the more than 30 economists polled by Reuters last week, none of whom predict even a single quarter of economic decline from here on.

Even the Bank of England, not exactly famous these days for its accuracy in economic forecasting, has said for a long time that a quarter or two of contraction here and there is to be expected. That was underlined by Wednesday’s unexpected news some policymakers voted for more bond purchases this month.

Britain’s economy shrank an estimated 0.3 percent at the end of 2012 and every major media outlet says it points to a big risk of a triple-dip recession.

And equally predictably, some economists have already pointed out it’s a preliminary report, so maybe the economy isn’t as weak as the stats show. Negative figures have been revised away in the past.

While both points may well be true, they really amount to a squabble over whether your football team is going to go 4-0 down or 5-0 down. As Markit Economics pointed out, Friday’s figures mean that UK GDP remains some 3.2 percent lower than the peak of Q1 2008.

One of two stories will probably emerge from Friday’s first reading on how the British economy fared at the end of last year.

If it shrank 0.1 percent in the fourth quarter as the consensus of economists polled by Reuters expects, or worse, we will hear it raises the disastrous spectre of a third recession in four years, or a “triple-dip”.

If it defies expectations by growing slightly, that risk is averted and the government will say it shows the economy is getting back on its feet.

Finally, finally, finally we get the much-vaunted David Cameron speech on Britain’s relationship with Europe.

So, what will Cameron say? Most bluntly he will promise a straight in-or-out EU referendum if he wins an election in 2015 and after he has negotiated a “new settlement”. He correctly notes that public disillusionment with Europe is at an all-time high, which is precisely why offering a referendum could lead to Britain leaving the bloc, something even Cameron doesn’t want, although he argues a vote could lance that boil.

A new EU must be built upon five principles, he says: competitiveness, flexibility, power flowing back to member states, democratic accountability and fairness. But there appears to be no detail on the powers he would attempt to claw back, after which he says he would campaign to stay in the bloc.

Is Italy about to add some bite to its bark as far as the euro zone is concerned? Quite possibly. An opinion poll last night showed Silvio Berlusconi’s centre-right coalition is charging up along the rails, increasing the chances of a messy election result with the front-running centre-left unable to form a stable government.

Although it retains a strong lead, the way votes are carved up in the Senate could easily rob it of a majority in the upper house. The huge media coverage Berlusconi can command via his empire may be starting to tell. Technocrat premier Mario Monti, who could yet play a key part in a centre-left administration if his centrist grouping is needed in a coalition, responded to the polling evidence by launching a stinging attack on Berlusconi.

Markets have so far been utterly sanguine about the late February election but if Berlusconi’s resurgence continues, that could change abruptly. The favoured outcome would be a PD (centre-left) government supported by Monti who would act as guarantor of economic reforms needed to increase Italian competitiveness and growth. But a chunk of the Democrat Party (PD) want a sharp change of course from Monti’s austerity path, and its main coalition partner on the left, the SEL, are implacably opposed to his policies. So nothing is certain.

After a long, long wait, Britain’s David Cameron is poised to make his big speech on his country’s future ties with Europe.

It was supposed to be delivered in the autumn but has been delayed as the realization has dawned that there is no obviously good outcome for the ruling Conservative party’s leadership which faces implacable eurosceptics within its rank-and-file, many of whom want out of the EU completely. Cameron almost certainly doesn’t want out but may be pushed in that direction if he cannot deliver the repatriated powers from the EU that he has suggested are possible.

It’s hard to see other European leaders playing ball, particularly since Cameron took the unusual step of wielding Britain’s veto at a summit just over a year ago. Whatever he says, a bout of internecine warfare in his party is quite possible on an issue that has ripped it apart before.

An unusual thing happened on Wednesday amidst all the shouting over British finance minister George Osborne’s autumn budget update which, depending on who you asked, outlined an increasingly dire or healthy state of the UK economy.

On the very near-term economic  outlook at least, officialdom actually sounded more pessimistic than most of even its harshest critics.

Britain’s independent Office for Budget Responsibility said it expects the UK economy will contract in the period ending this month by 0.1 percent — a gloomier forecast than the consensus of economists polled by Reuters, for 0.1 percent growth.

Budget statements from Britain and Ireland take top billing today with UK finance minister George Osborne cutting an increasingly lonely figure in policymaking circles as an advocate of cutting your way back to growth. While the economic policy room for manoeuvre is limited this is a huge political moment. With elections due in 2015, a feeling of recovery must be entrenched in the public’s mind well beforehand if the Conservatives are to entertain hopes of governing alone next time. So measures now and in the 2013 budget in the spring are the best opportunity to change the game.

Osborne has already said he is sticking to his austerity plan – and having made it the government’s central policy plank he has little choice although the opposition Labour party have staked out the opposite ground and hopes to capitalise. Even so, Osborne is likely to have to admit that he will miss his debt-cutting targets so that the pain will have to last for longer, well into the latter part of this decade.

As the euro zone has shown, without growth cutting debt is nigh on impossible. Osborne came into government in 2010 saying the austerity drive would be complete by the time of the 2015 election. He is expected to say today that it will stretch to 2018. Labour’s significant opinion poll lead is widely seen as “soft” but it might not be for long.

The EU budget summit, which could turn into a marathon as it tries to nail down monies for the next seven years, begins today. With the euro zone repeatedly failing to nail down a Greek deal, the EU would be well advised not to let this negotiation fall apart too. Having said that, there is little sign of great concern in market pricing – presumably the ECB’s pledge to buy government bonds in whatever amount it takes to steady the bloc continues to suppress investor nerves and short sellers.

Net contributors to the budget including Germany, France and Britain want to cut 100 billion euros from the European Commission’s draft budget proposal, but differ over which areas to cut. Meanwhile, the main beneficiaries of EU funding such as Poland, Hungary and the Czech Republic oppose cuts. The meeting is intended to lay the groundwork for political agreement on the budget by EU leaders at their final summit of 2012 in December. It will last two days, maybe more and it could well be that no agreement is reached. Officials say only a cut in real terms – for the first time ever – is likely to do the trick.

Back to Greece and prime minister Samaras will meet Eurogroup chief Juncker in Brussels although he is now largely a passive, angry bystander in this process. While Juncker’s assertion in the early hours of Wednesday morning that a deal was only held up by complex technical matters has some truth to it, there is a far deeper split to be closed.