MacroScope

Hollande’s search for an elusive winning formula

After a local election drubbing, French President Francois Hollande duly sacked his prime minister last night and tempered his economic reform drive, vowing to focus more on growth and “social justice”. A fuller cabinet reshuffle is expected today.

Interior minister Manuel Valls, anything but a left-wing firebrand whose appointment could stir unrest on the left of the ruling Socialist party, takes the premiership with a mandate to pursue cuts in labour charges for business but also tax cuts to boost consumer spending and employment.

Hollande said France would still cut public spending to pay for a 30 billion euro reduction in labour charges on business, part of a “responsibility pact” with employers he launched in January. But he said Sunday’s elections also showed the need for a “solidarity pact” offering workers tax cuts and assurances on welfare, youth training and education.

Brussels would have to cut it some slack with its budget deficit, he said. Paris has already been given until the end of 2015 to bring the deficit below the EU limit of 3 percent of GDP. Data released on Monday showed the deficit stood at 4.3 percent in 2013, higher than the government’s 4.1 percent target.

Some of the euro zone and EU finance ministers meeting in Athens, which has the EU presidency for six months, may well look askance at all that. Southern European countries have endured sharp economic pain to reduce their debts while Germany remains doubtful of the austerity/growth trade-off which Hollande is pushing.

IMF stumps up for Ukraine

The International Monetary Fund has announced a $14-18 billion bailout of Ukraine with the aim of luring in a total of $27 billion from the international community over the next two years.

Ukrainian officials say they need money to start flowing in April. The U.S., EU and others in the G7 would row in behind an IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding. In total, Kiev has talked about needing $35 billion over two years so they are pretty close.

A comprehensive slate of economic, energy and financial reforms have been attached and the Fund appears to be content that whatever hue of government is in charge after May elections will adhere to the programme.

IMF verdict on Ukraine due

G7 leaders didn’t move the dial far last night, telling Russia it faced more damaging sanctions if it took any further action to destabilize Ukraine.
They will also shun Russia’s G8 summit in June and meet ”à sept” in Brussels, marking the first time since Moscow joined the group in 1998 that it will have been shut out of the annual summit.

There were some other interesting pointers. For one, the G7 agreed their energy ministers would work together to reduce dependence on Russian oil and gas. Could this lead to the United States exporting shale gas to Europe? A committee of U.S. lawmakers will hear testimony on Tuesday from those who favour loosening restrictions on gas exports.

Sanctions imposed so far may be limited but they are hitting investment and Russia’s currency and stock market. The economy is barely growing and the government said yesterday it now expected net capital outflows of up to $70 billion in the first quarter of the year.

G7 test of mettle

Another crunch week in the East-West standoff over Ukraine kicks off today with Barack Obama in the Netherlands for a meeting of more than 50 world leaders at a nuclear security summit in the Netherlands. There, he and his fellow G7 leaders will hold separate talks on Ukraine.

Obama upped the ante on Vladimir Putin last week with sanctions that hit some of his most powerful allies and strayed firmly into Russia’s banking and corporate world. The EU acted more cautiously but is looking at how financial and trade measures would work, getting ready in case Putin escalates the crisis further.

There is certainly no signs of de-escalation. Over the weekend forced Russian troops forced their way into Ukrainian military bases in Crimea and took them over. NATO’s top military commander said Russia had built up a “very sizeable” force on its border with Ukraine and may be eyeing up a region in the ex-Soviet republic of Moldova too.

Osborne stakes out election ground with little fiscal leeway

The annual UK budget is always a big set piece but it’s hard to remember one where there have been fewer advance leaks – indicative of a steady-as-she-goes approach by George Osborne.
Having put so much political capital into reducing the deficit, to switch now at a time when the economy is recovering strongly would be politically risky. And with debt falling only slowly there is little fiscal leeway.

That’s not to say this isn’t a big political moment. Yes there is the finance minister’s autumn statement and another budget before May 2015 elections but this is the moment when the narrative for the economy and Britons’ wellbeing is staked out.

So expect a further increase in the threshold at which income tax starts to be paid, to help the poorer, and measures to boost business investment in an attempt to rebalance the economy.
Osborne will also extend his “help to buy” housing scheme, questionable at a time when property prices are rising strongly. On the thrift front, he will announce details of a ceiling on welfare spending.

Last-ditch talks on Crimea

U.S. Secretary of State John Kerry and Russian Foreign Minister Sergei Lavrov will meet in London, a last chance by the look of it to make diplomatic headway before Sunday’s Crimean referendum on joining Russia which the West says is illegal.

Kerry said he would present “a series of options that are appropriate in order to try to respect the people of Ukraine, international law, and the interests of all concerned” and that sanctions would be imposed against Moscow if the referendum went ahead.

A full NATO meeting will take place in Brussels with the Russian and Ukrainian ambassadors invited. There is no sign yet of Vladimir Putin coming to the negotiating table.

Sanctions loom for Russia

The European Union, as we exclusively reported yesterday, has agreed on a framework for sanctions against Russia, including travel restrictions and asset freezes, which goes further than many expected. The list of targeted individuals is still being worked on but will be ready for the bloc’s foreign ministers to look at on Monday.

Angela Merkel will speak to the German Bundestag about the standoff with Russia. Merkel has been cautious about imposing anything too tough as she tries to convince Vladimir Putin to agree to a “contact group” that would reopen communications between Moscow and Kiev. But yesterday she said measures would be imposed next week – after a Crimean referendum on joining Russia which the West says is illegal – unless diplomatic progress is made.

There is no sign of Vladimir Putin coming to the negotiating table and no question of western force being deployed. In Washington, Ukrainian Prime Minister Arseny Yatseniuk said his government was ready to negotiate over Moscow’s concerns for the rights of ethnic Russians in Crimea – a possible diplomatic avenue? The U.N. Security Council will discuss the crisis in an open meeting later.

Odds on Britain leaving EU shift again

Kiev has appealed for Western help to stop Moscow annexing Crimea, where a referendum on joining Russia will be held on Sunday. Ukrainian Prime Minister Arseny Yatseniuk will take that message to Washington and the United Nations.

The West says the referendum is illegal. U.S. lawmakers are preparing sanctions against Russia and European Union leaders could impose penalties, such as bans on visas for key Russian officials, as early as Monday if Vladimir Putin does not come to the negotiating table. There is no sign that he will and there is no question of western force being deployed.

Germany’s Angela Merkel is in Warsaw for talks with Prime Minister Donald Tusk. Poland has been pressing for more aggressive action while Germany – with its deep economic and energy ties to Russia – is more reluctant. But it appears the EU is moving closer to imposing sanctions.
Ed Miliband, leader of Britain’s opposition Labour party, has stated in today’s FT that he would only hold an EU referendum if there was a new transfer of power from London to Brussels.

Marathon banking union talks

Shots were fired at an international team of monitors in Crimea over the weekend, violence flared in Sevastopol as thousands staged rallies and Angela Merkel, who perhaps has the most receptive western ear to Vladimir Putin, rebuked him for supporting a referendum on Ukraine’s southern region joining Russia. But in truth we’re not much further forward or backwards in this crisis.

The West from Barack Obama on down has said the referendum vote next Sunday is illegal under international law but it’s hard to put the genie back in the bottle if Ukraine’s southern region chooses to break away. The best guess – but it is only a guess – is that barring an accidental sparking of hostilities, there is not much percentage in Russia putting its forces in Crimea onto a more aggressive footing in advance of the vote.

Euro zone finance ministers meet and are joined by their non-euro counterparts for an Ecofin on Tuesday. They have the mammoth task of finalizing everything on banking union that was set out in principle by their leaders at a December summit, since when not much has happened.

Putin unmoved by carrots or sticks

Vladimir Putin said this morning Russia and the United States are still far apart over Ukraine. Moscow, he said, could not ignore “illegitimate decisions” imposed on the east and south of the country and calls for help by ethnic Russians there but the two powers should not sacrifice relations over it.

In an hour-long telephone call last night Barack Obama urged Putin to accept the terms of a potential diplomatic solution to the crisis whereby Moscow would keep its military bases in Crimea while respecting Ukraine’s sovereignty. But he also ordered sanctions – including travel bans and freezing of assets in the U.S. – on people responsible for Moscow’s intervention in Ukraine though Putin himself is not on the list.

Obama also said a Crimean referendum on joining Russia, called for 9 days’ time, violated international law.
Meanwhile, Congress passed a $1 billion loan guarantees package for the new government in Kiev. The European Union has already promised some $15 billion over the next two years, contingent on a deal being signed with the IMF.