In euro zone terms, two themes will dominate the week: Spain and the size of the euro zone rescue fund (Italy’s labour reforms will play a supporting role).
Yesterday, Spanish Prime Minister Mariano Rajoy won a key regional election in Andalusia although not as handsomely as hoped, raising the possibility that the socialists could rule there if they find a coalition partner. The result could hamper the government’s plan to press the autonomous regions harder to cut public spending. Having ripped up the deficit target agreed with Brussels last month, Spanish borrowing costs are already on the rise. Any further sign of wobbling could be seized upon by the markets. Spain faces a general strike on Thursday and Rajoy’s administration will present its full 2012 budget on Friday.
Also at the back end of the week, EU finance ministers meet in Copenhagen with the thorny issue of how, and by how much, to increase the euro zone’s future ESM rescue fund top of the agenda, which comes into being at mid-year.
Der Spiegel reported that Germany is ready to drop its resistance to a higher bailout fund and will consent to combining the resources of the current EFSF and the ESM for a limited period. One of the major headaches for Chancellor Angela Merkel is that she could have to seek ratification from the Bundestag. Many German MPs are firmly against putting any more resources into a pot to bail out weaker partners. But there are suggestions that by combining the two funds temporarily, the German parliament may not need to have a say.
Merkel’s surprise weekend victory in a regional election in Saarland may embolden her somewhat, although her FDP coalition allies were all but wiped out.