MacroScope

EU leaders meet for a gas

France's President Hollande talks with German Chancellor Merkel  during a meeting on the sidelines of a Europe-Asia summit in Milan

A two-day summit of EU leaders is supposed to focus on climate and energy policy including efforts to enhance energy security following the threat of interruptions to gas supplies from Russia.

That is no small issue. Russia and Ukraine have failed so far to reach an accord on gas supplies for the coming winter but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay.

An agreement was reached on the price Ukraine would pay Russia’s Gazprom as long as it paid in advance for the deliveries. But Moscow is still seeking assurances on how Kiev would find the money to pay. It’s likely the EU will have to step in there.

Putin had threatened to cut gas supplies to Europe if Ukraine stole from the transit pipeline to cover its own needs this winter. Any interruption to flows to western Europe, via Ukraine from Russia, would deal another blow to already struggling EU economies.

The EU summit, held a day after the European Parliament confirmed the line-up of the new European Commission under Jean-Claude Juncker, will urge Russia to do more to stabilise Ukraine, according to a draft statement seen by Reuters, but diplomats expect no change in sanctions on Moscow in the near future.

Franco-German meeting

German Finance Minister Schaeuble and his French counterpart Sapin attend news briefing after talks in Berlin

The big question of the week is whether financial market gyrations continue, worsen or calm. European stocks are being called higher at the open.

Greece has been effectively shut out of the bond market. If it and others on the euro zone’s southern flank come under persistent market pressure, in a way that hasn’t happened for two years, the onus on the European Central Bank to act will grow and grow.

None of the countries likely to be in the firing line appear to qualify for the conditions attached to the ECB’s still-unused OMT bond-buying programme, the legality of which is under review by the European Court of Justice.

Market selloff – blip or new crisis?

A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York

A two-day summit of EU and Asian leaders, which was going to be most notable for a meeting between the heads of Russia and Ukraine, risks being overtaken by financial market tremors which have spread worldwide.

There’s a good case that markets, primed with a glut of new central bank money, had climbed to levels which the state of the economies that underpin them did not justify. With the Federal Reserve about to turn its money taps off, investors seem to have woken up to poor growth prospects in much of the world.

On the other hand, yesterday’s sell-off was sparked at least in part by some sub-par U.S. data and it’s hard to argue that prospects for the world’s largest economy have suddenly taken a turn for the worse.

Italian and Greek confidence votes

Greece's PM Samaras addresses the audience during the Economist Conference on "The big rethink for Europe, the big turning point for Greece" in Athens

You wait ages for a no-confidence vote then two come along on the same day. Neither are expected to cause governments to topple.

Greece’s ruling coalition will hold a confidence vote in parliament in an effort to end speculation that the country may be facing snap elections early next year.

Prime Minister Antonis Samaras wants to use the vote to gain support for his candidate in a presidential vote. Under Greek law, parliament must be dissolved if a president cannot be elected. The left-wing Syriza party, which has a sizeable lead in opinion polls, has pledged to block Samaras’s pick.

Turkey poised to intervene?

Iraqi Shi'ite militia fighters stand atop destroyed vehicles belonging to Islamic State militants outside Bo Hassan village near Tikrit

Turkey’s parliament has voted to give the government a green light to order military action against Islamic State as the insurgents tightened their grip on a Syrian border town, sending thousands more Kurdish refugees into Turkey.

There is little sign of it being put into imminent use but the vote gives the government powers to order incursions into Syria and Iraq to counter the threat of attack “from all terrorist groups”. By common consent, western air strikes alone are unlikely to vanquish IS and there is a great deal of doubt that Syrian and Iraqi forces can best them on the ground.

Service sector PMI surveys for euro zone member states, Britain and others are forecast to show France and Italy languishing in contractionary territory while Spain achieves quite strong growth.

Draghi tries to keep show on the road

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The European Central Bank has one of its two offsite policy meetings of the year, in Naples. After a glut of measures last time it’s inconceivable that further action will be taken now but there is plenty to ponder.

A first tranche of cheap four-year loans has been offered to banks in the hope they will lend it on but the take-up was poor. The ECB is playing up the prospects of a second round in December after bank stress tests are out of the way. But having pledged to add the best part of 1 trillion euros to its balance sheet to rev up the euro zone economy, there is a lot of ground to cover.

Draghi will flesh out the ECB’s parallel plan to buy bundled-up loans – asset-backed securities – which has already been viewed with disquiet by Bundesbank chief Jens Weidmann. That may be heightened by the realisation that if the ECB is to open the offer to banks across the euro zone, it may have to take in some rather dicey looking collateral from the likes of Greece and Cyprus.

French budget to fire EU growth debate

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France is unveiling its 2015 budget right now and it’s not making pretty reading, confirming that Paris will not get its budget deficit down to the EU limit of three percent of GDP until 2017, years after it should have done.

The health minister has said the welfare deficit is expected to run nearly one billion euros over budget this year and data on Tuesday showed France’s national debt hit a record high in the second quarter, topping two trillion euros for the first time. It will near 100 percent of GDP next year.

All this is predicated on growth picking up and the proportion of national income going on public spending will fall only glacially.
French President Francois Hollande and Italy’s Matteo Renzi are leading a drive to use the maximum amount of flexibility within EU rules to allow a bit more spending or lower taxes to get growth going – French Finance Minister Michel Sapin has just said the pace of budget consolidation in the euro zone must be adapted to reflect the reality of a stagnant economy.

Euro falling but no impact on inflation yet

Lithuanian 1 euro coins are pictured in the Lithuanian Mint in Vilnius

Euro zone inflation figures are due and after Germany’s rate held steady at 0.8 percent the figure for the currency bloc as a whole could marginally exceed forecasts and hold at 0.4 percent.

One upside for the currency bloc is the falling euro which has broken below its 2013 lows and is down almost nine percent from the peak it hit against the dollar in May. With U.S. money printing about to end next month and speculation intensifying about the timing of a first interest rate rise from Washington, there are good reasons to think that this trend could continue.

If it does, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation. The impact won’t be instant, however, as today’s figures will demonstrate.

Britain to join the fray

A pair of U.S. Air Force F-15E Strike Eagles fly over northern Iraq

The British parliament will vote today on whether UK forces should join U.S.-led air attacks against Islamic State militants. Any action will be confined to Iraq, which has asked for help, not Syria where IS also controls swathes of territory. Prime Minister David Cameron has promised a separate vote on that if it comes to it.

Unlike last year when action to stop Syria’s Bashar al-Assad using chemical weapons against his own people was voted down, all the main parties appear to be broadly in support, probably swayed by the beheading of captives by the Sunni militants.

There shouldn’t be much difficulty arguing that the group poses a threat to Britain and its interests. Iraq’s prime minister said overnight that Baghdad had “credible” intelligence that Islamic State militants plan to attack subway systems in Paris and the United States. The attacks, he said, were plotted from inside Iraq.

A long haul

U.S. Navy handout shows EA-6B Prowler attached to the Garudas of Electronic Attack Squadron 134 landing aboard the aircraft carrier USS George H.W. Bush after conducting strike missions against Islamic State targets, in the Gulf

Having largely sailed through this year’s choppy (to say the least) geopolitical waters, markets are a little discomfited by U.S. air strikes in Syria targeting Islamic State militants … though only a little.

The U.S. military said Monday’s onslaught was just the start, suggesting it could take years to “degrade and destroy” the group, as Washington puts it. It remains to be seen how effective air attacks alone, which have been conducted in Iraq for some time already, will be in that regard.

Many of the potential protagonists will be at the United Nations General Assembly in New York where President Barack Obama will try to rally more nations behind his drive to take on IS.