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.

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.

Banking disunion

The full Ecofin of 28 EU finance ministers meets after Monday’s Eurogroup meeting of euro zone representatives didn’t seem to get far in unpicking the Gordian Knot that is banking union. Ireland’s Michael Noonan talked of “wide differences”.

The ministers are seeking to create an agency to close euro zone banks and a fund to pay for the clean-up – completing a new system to police banks and prevent a repeat of the bloc’s debt crisis.

But a German official rejected a euro zone proposal unearthed by Reuters that would allow the euro zone’s bailout fund, the European Stability Fund, to lend and help finance the cost of any future bank rescues or wind-ups. Berlin does not want to end up footing the bill for failures elsewhere and is still constrained because a coalition deal to form the next government has yet to win final approval from the Social Democrats.

Taking the union out of banking union?

Today’s meeting of EU finance ministers will grapple with banking union and next year’s stress tests though with no German government in place, a leap forward is unlikely.

One German official seemed pretty clear yesterday, saying: “We don’t want a mutualisation of bank risks.” That, some would argue, takes the union out of banking union and is certainly a very different approach to the one promised last year when EU leaders were scrambling to keep the euro zone together.

Some experts argue that with the European Central Bank pledging to support euro zone governments come what may, the urgency has been taken out of banking union and that next year’s health checks and cross-border supervision under the ECB is going far enough. Any holes in bank balance sheets can comfortably be filled by creditors and governments.

Euro chat resumes

After the summer lull, euro zone and EU finance ministers meet in Lithuania. The “informal Ecofin” can often be quite a big deal but with German elections only nine days away, it’s hard to see that being the case this time.

During the election campaign German Finance Minister Wolfgang Schaeuble let slip that Greece would need more outside help which would not include a haircut on Greek bonds held by euro zone governments and the ECB.

Since then, European Central Bank policymaker Luc Coene has said Athens might need two bouts of further assistance and Estonia’s prime minister told us yesterday the popular bailout fatigue he flagged as a danger last year had now faded and he was open to aiding Greece with a third bailout and helping other troubled euro zone nations too.

Another euro zone week to reckon with

Despite Mario Draghi’s game changer, or potential game changer, the coming week’s events still have the power to shape the path of the euro zone debt crisis in a quite decisive way, regardless of the European Central Bank’s offer to buy as many government bonds as needed to buy politicians time to do their work.

The nuclear event would be the German constitutional court ruling on Wednesday that the bloc’s new ESM rescue fund should not come into being, which would leave the ECB’s plans in tatters since its intervention requires a country to seek help from the rescue funds first and the ESM’s predecessor, the EFSF, looks distinctly threadbare. That is unlikely to happen given the court’s previous history but it could well add conditions demanding greater German parliamentary scrutiny and even a future referendum on deeper European integration. For the time being though, the markets are likely to take a binary view. ‘Yes’ to the ESM good, ‘No’ very bad.

Dutch elections on the same day look to have been robbed of some of their potential drama with the firebrand hard-left socialists now slipping in the polls and the fiscally conservative Liberals neck-and-neck with the likeminded centre-left Labour party. But there are no guarantees and Germany could yet be robbed of one of its staunchest allies in the debt crisis debate.

Draghi engineers August lull, but wait for September

Having not enjoyed a summer lull for a good few years, we might as well take advantage of this one which appears set to last for another couple of weeks yet (famous last words).

European Central Bank President Mario Draghi’s pledge to do whatever it takes to save the euro zone continues to underpin markets who view a litany of grim economic evidence as increasing the likelihood of further central bank action, not just from Europe but China and the United States too, thereby leaving them somewhat becalmed. (Remember the Greenspan put?)

The ECB chief’s intervention remains strictly in the realms of the rhetorical for now. The proof will come in September at the earliest – an ECB policy meeting in the first week is likely to set out the parameters as to how it might act to lower Spanish and Italian borrowing costs, a week later the German constitutional court rules on the viability of the euro zone’s permanent rescue fund, then euro zone finance ministers gather in Cyprus for a key meeting. Also in September, the troika of Greek lenders will return to decide whether Athens has done enough to secure its next bailout tranche.

Today in the euro zone – a blizzard of bailout numbers

Brace yourself for a blizzard of numbers.

EU finance ministers gathered in Copenhagen are poised to decide precisely how much firepower their new rescue fund – to be launched mid-year – will have. A draft communiqué suggests that as of mid-2013, presuming no new bailouts have been required in the interim, the combined lending ceiling of the future ESM and existing EFSF bailout funds will be set at 700 billion euros (500 billion pledged to the ESM plus the roughly 200 billion already committed to Greek, Irish and Portuguese rescue programmes).

Up to mid-2013, if 700 billion proves to be insufficient — i.e. someone else needs bailing out — euro zone leaders will be able to bolster it with the 240 billion euros as yet unused in the EFSF, according to the draft, although German Finance Minister Wolfgang Schaeuble said last night that 800 billion should be the absolute limit.

Sorry, there’s more. Because the ESM will not have its full 500 billion euros capacity on day one – it will build up over time – the real available figure for the next year is more like 640 billion euros.
Confused? You should be.

New German finmin wins over EU colleagues

New German Finance Minister Wolfgang Schaeuble is winning over his European Union colleagues with a commitment to reduce Germany’s public deficit at his debut meeting of EU finance officials.************ ”I have great confidence in colleague Schaeuble,” Dutch Finance Minister Wouter Bos said on arrival for the Ecofin meeting in Brussels on Tuesday.******Germany expects its deficit to hit 3.7 percent of gross domestic product (GDP) this year, and roughly 6 percent in 2010, double the European Union limit of 3 percent.******But the veteran of German politics, a tax lawyer, convinced other EU finance ministers he would put Germany’s public finances in order. The 67-year-old told reporters he expected the Commission to propose that Germany would get it deficit within the EU limit in 2013.******”I think when one listens to Minister Schaeuble, one immediately has the impression one is listening to a very credible politician,” European Economic and Monetary Affairs Commissioner Joaquin Almunia said after a meeting late on Monday of euro area finance officials, the so-called Eurogroup.******Schaeuble, in a wheelchair since he was shot and nearly killed by a mentally ill man at a campaign rally in 1990, is seen as one of the most talented German politicians of his generation and may have become chancellor himself had he not become ensnared in the funding scandal that damaged his Christian Democrats (CDU) and former mentor Helmut Kohl a decade ago.******He was not Merkel’s first choice for finance minister but by picking him last month she electrified German media because Schaeuble is expected to be a forceful and possibly uncomfortable presence for Merkel in a cabinet largely devoid of strong personalities.******Spanish Economy Minister Elena Salgado said Schaeuble showed a strong commitment to respecting the EU’s deficit rules, enshrined in the Stability and Growth Pact. “I don’t think there was any doubt on our part as to his absolute commitment to comply with the provisions of that pact,” she said after Monday’s Eurogroup.