MacroScope

Back to banking union

The G8 produced little heat or light on the state of the world economy but if there was one clarion call it was for the euro zone to get on with forming a banking union – the last major initiative needed to draw a line under the euro zone debt crisis.

With the European Central Bank effectively underwriting the bloc’s governments with its bond-buying pledge, a cross-border mechanism to recapitalise or wind up failing banks would do the same for the financial sector.

The trouble is, not unreasonably, Berlin does not want to fall liable for the failure of a bank in a weaker country. Instead, it is pressing for a “resolution board” involving national authorities to take decisions on winding up failed banks, which sounds like the onus would remain on governments to sort out their own banks rather than pooling risk which would convince investors that a proper backstop was in place.

In other words, the “doom loop” of weak banks and sovereigns weighing on each other would be unbroken.

U.S. President Barack Obama, whose administration has been urging progress on this front, is in Berlin today for a lot of ceremony and some talks with Angela Merkel.

G8 — plenty to worry about

The week kicks off with a G8 leaders’ summit in Northern Ireland. Syria will dominate the gathering and the British agenda on tax avoidance is likely to be long on rhetoric, short on binding specifics.

But for the economics file, this meeting could still yield big news. For a start, Japanese prime minister Abe is there – the man who has launched one of the most aggressive stimulus drives in history yet has already seen the yen climb back to the level it held before he started.

The financial backdrop could hardly be more volatile with emerging markets selling off dramatically since the Federal Reserve warned the pace of its dollar creation could be slowed.

ECB in court

The major euro zone event of the week starts on Tuesday when Germany’s top court – the Constitutional Court in Karlrsuhe – holds a two-day hearing to study complaints about the ESM euro zone bailout fund and the European Central Bank’s still-unused mechanism to buy euro zone government bonds.

The case against the latter was lodged by more than 35,000 plaintiffs. Feelings clearly run high about this despite the extraordinary calming effect the mere threat of the programme has had on the euro debt crisis. Some in Germany, including the Bundesbank, are worried that the so-called OMT could compromise the ECB’s independence and would be hard to stop once launched.

A verdict won’t be delivered until later in the year but already there is already jockeying for position. Germany’s Spiegel reported that a limit had been set on the amount of bonds the ECB could buy – directly contradicting what Mario Draghi has said. That was swiftly and categorically denied by the ECB, then Executive Board Member Joerg Asmussen warned there would be “significant consequences” if Germany’s constitutional court rules the bond-buying programme was illegal.

Mixed evidence from Germany

German trade data, already out, showed both exports and imports rose more than expected in April – up a sharp 2.3 and 1.9 percent respectively. That suggests that its fabled industrial base is in reasonable shape but also that domestic demand is holding up, possibly helped by some above-inflation pay deals. The figures represent a significant bounce from the first quarter when Europe’s largest economy just managed to eke out some growth.

Let’s not get carried away, though. Germany’s PMI survey earlier this week showed a slight decline in export orders in May and the Bundesbank has just released its latest set of economic forecasts, cutting its 2013 growth forecast to 0.3 percent, adding that risks are largely skewed to the downside. It expects a healthy bounce in growth in the second quarter then a marked throttling back.

Trade figures from France, Britain and Portugal give an opportunity to see if there is any “rebalancing” going on within Europe – the argument being that the euro zone in particular can only thrive if Germany’s massive surpluses shrink a little just as the high debt countries try to pare their deficits. That requires Europe’s largest economy to buy a little more from its currency area peers. The German data showed imports from states in the single currency bloc up 5.4 percent year-on-year in April so maybe there are glimmers of movement.

France under the spotlight

An IMF team will conclude its annual review of the French economy and hold a news conference this morning.

It’s a safe bet that the Fund’s prescription will be similar to that of the EU and most other interested observers – the two extra years France has been given by Brussels to meet its debt-cutting targets must be used to liberalise and reform its economic structures. That was certainly Angela Merkel’s message to President Francois Hollande last week and also implicit in the Franco-German position paper which is intended to lay the ground for an EU summit at the end of the month.

The paper apparently contained a string of concessions from Germany – such as accepting a full-time president of the Eurogroup of euro zone finance ministers and paving the way for the next stage of a European banking union by accepting a “resolution board” to deal with restructuring or winding up failed banks, although that would be based on national authorities not the central body advocated by the European Commission and European Central Bank.

Something must be done, but what?

With little sign of economic recovery in Europe and governments incrementally loosening their austerity drives (Britain being the exception) the focus turns to the big central banks on our patch and what more they might be able to do to foster some recovery.

With the European Central Bank meeting on Thursday, President Mario Draghi is in Shanghai saying the euro zone is on track for only a “very gradual recovery”. It’s hard to tell at a glance whether that is a rhetorical downgrade of the existing forecast for a pick-up in the second half of the year with downside risks attached. Either way, the pressure on the ECB to act again is growing.

However, don’t expect anything at its monthly meeting on Thursday, although a further interest rate cut could come this year and there is still talk of cutting the deposit rate – the return banks get for parking funds at the ECB – into negative territory to try and get them to lend. The big question is would that achieve much? Despite being in a world awash with central bank money, there is clearly a reluctance among banks to push money into the real economy. The latest data showed bank loans to euro zone businesses and households contracted for the 12th month in a row in April.

Although it seems routine, rising euro zone unemployment is still shocking

 

Another month, another rise in the number of jobless in the euro zone.

As expected, the unemployment rate hit a new record 12.2 percent in April, according to Eurostat on Friday, meaning some 19,375,000 euro zone citizens are out of work.

That’s more than the populations of Austria and Belgium combined and almost a quarter are aged under-25.

However, it’s worth remembering that not so long ago, hardly any economists expected to see unemployment climb to these levels.

The numbers don’t lie

Euro zone unemployment figures will emphasize just how far the currency bloc is from recovery while inflation data due at the same time could push the European Central Bank closer to new action. If price pressures drop further below the target of close to but below two percent we’re moving into territory where the ECB has a clear mandate to act, although the consensus forecast is for the rate to push up to 1.4 percent, from 1.2 in April.

Market attention is focused on the ECB cutting its deposit rate – the rate banks get for parking funds at the ECB – into negative territory to try and get them to lend. But will that do much? Despite being in a world awash with central bank money and stock markets in the ascendant, the fact that safe haven bond markets such as Bunds and U.S. Treasuries haven’t sold off much – and are now starting to climb after Ben Bernanke’s hint that the Federal Reserve could soon start slowing its money-printing programme — denotes ongoing nervousness among banks and investors. Data this week showed bank loans to the euro zone’s private sector contracted for the 12th month in a row in April.

Despite the (now waning?) European market euphoria – started by the ECB’s pledge to do whatever it takes to save the euro and given a further shot in the arm by Japan’s dash for growth – the economic numbers look grim. Euro zone unemployment is forecast to edge up to 12.2 percent of the workforce. Last night, official data showed French unemployment hit a new record. Germany is in better shape but even it will barely eke out any growth this year. Retail sales, just out, posted a 0.4 percent fall in April.

Franco-German motor

Today’s big setpiece is a meeting of German Chancellor Angela Merkel and French President Francois Hollande ahead of a June EU summit which is supposed to lay the path for a banking union. The traditional twin motor of Europe has sputtered – not least because the French economy is so much more sickly than Germany’s – but also because of real differences of opinion.

When the Franco-German relationship was running smoothly, the two countries’ leaders routinely met before EU summits to prepare a joint position which more often than not prevailed (much to the annoyance of some of their partners). But Merkel and Hollande have conspicuously not done so on a number of occasions since the latter took power a year ago.

Hollande wanted a banking union including a structure to wind up failing banks and common deposit guarantee. The latter is already dead in the water and Germany is wary of the liabilities the former might impose upon it. The European Central Bank may have taken euro break-up risk off the table – though its pledge to save the euro is still to be tested – but banking union is still a huge issue. Without it the seeds of a future crisis, or even a revival of this one, will have been sown.

Why a German exit from the euro zone would be disastrous – even for Germany

Let’s face it: “Gerxit” doesn’t roll of the tongue nearly as smoothly as a “Grexit” did. While Europe continues to struggle economically, fears of a euro zone break-up have receded rapidly following bailouts of Greece and Cyprus linked to their troubled banking sectors.

Mounting anti-integration sentiment in some of region’s largest economies, raise concerns about whether the divisive monetary union will hold together in the long run. Indeed, the rise of an anti-Europe party in Germany begs the question of what would happen if one of the continent’s richer nations decided to abandon the 14-year old common currency. Never mind that, viewed broadly, the continent’s banking debacle has actual saved Germans money so far.

Billionaire financier George Soros, has argued that Germany should either accept a closer fiscal union with its peers, including so-called debt mutualization – the issuance of a common Eurobond – or give up on the euro. Hans-Werner Sinn, head of Germany’s influential Ifo Institute, strongly disagrees, blaming the crisis on southern Europe’s “loss of competitiveness.”