MacroScope

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.

That ain’t going to happen – if there is any treaty change it will be focused on binding the euro zone closer together and Britain sits outside that. So if Labour wins next year’s election, or rules in coalition with the pro-EU Liberal Democrats thereafter, there will not be an in/out vote on the UK’s membership of the EU before 2020.

Now I call this important. The Conservative party is wedded to a 2017 vote having tried to repatriate powers from Brussels first. UKIP, the resurgent anti-EU party, had pushing Labour into a referendum commitment as its main goal.

Banking — union or disunion

EU finance ministers face 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. Last night, the Eurogroup of euro zone finance ministers made little progress bar agreeing that they needed to agree quickly.

Intractable issues such as who decides when a bank is failing, how a decision is taken to wind down a failing bank, what is the precise role of the European Central Bank, European Commission and European Parliament and how long it will take to build up a fund from bank levies to pay for failing lenders all have to be sorted out.

Plan A was for the fund to be built up over 10 years and then be pooled but critics say that leaves the bloc’s governments exposed for too long.

Unsterilised ECB?

Foreign ministerial talks in Paris yesterday made little progress on Ukraine. Russia rejected Western demands that its forces in Crimea should return to their bases and its foreign minister refused to recognise his Ukrainian counterpart. Moscow continues to assert that the troops that have seized control of the Black Sea peninsula are not under its command. The West is pushing for international monitors to go in.

Today, at least some of the focus switches to Brussels where EU leaders will hold an emergency summit with a twin agenda of how to help the new government in Kiev and possible sanctions against Russia. On the latter, Europe has appeared more reticent than Washington not least because of its deep financial and energy ties, none more so than Germany and Britain.

The bloc yesterday offered Ukraine’s new government 11 billion euros in financial aid over the next two years, contingent on it reaching a deal with the IMF. It will also freeze the assets of ousted president Viktor Yanukovich and 17 others seen as culpable for violation of human rights – around 80 people were killed in the capital last month as they protested against Yanukovich’s rule. Kiev caused some market wobbles by saying it would look at restructuring its foreign currency debt.

When is a war not a war?

Is it war if no shots have been fired? The Ukrainians say so but Moscow, its grip on Crimea now pretty much complete, says it is merely protecting its people. The rest of the world and its financial markets watch on very uneasily.

There is virtually no chance of any western military response after Vladimir Putin declared he had the right to invade his neighbour – NATO  expressed “grave concern” but did not come up with any significant measures to apply pressure on. But there will be a diplomatic and economic price to pay.

The rouble tumbled by 2.5 percent at Monday’s open and the central bank has already acted to try and underpin it, raising its key lending rate by 1.5 percentage points although the Russian economy is already in poor shape. The main Russian stock index has plunged by about 9 percent with Gazprom doing worse than that and safe haven German Bund futures have jumped.

Escalation in Crimea

Worrying escalation in Crimea. Interfax reports Russian servicemen have take over a military airport in the Russian-speaking region of Ukraine and armed men are also patrolling the airport at Crimea’s regional centre of Simferopol.
Kiev has condemned the moves as an “armed invasion”.

There has been no bloodshed and there are more constructive noises from Moscow to weigh in the balance.

Russian President Vladimir Putin has ordered his government to continue talks with Ukraine on economic and trade relations and to consult foreign partners including the IMF and the G8 on financial aid.

Japan-style deflation in Europe getting harder to dismiss

To most people, the idea of falling prices sounds like a good thing. But it poses serious economic and financial risks – just ask the Japanese, who only now finally have the upper hand in a 20-year battle to drag their economy out of deflation.

That front is shifting westward, to the euro zone.

Deflation tempts consumers to postpone spending and businesses to delay investment because they expect prices to be lower in the future. This slows growth and puts upward pressure on unemployment. It also increases the real debt burden of debtors, from consumers to companies to governments.

In many ways, policymakers fear deflation more than inflation as it’s a more difficult spiral to exit. After all, interest rates can only go as low as zero and if that doesn’t kickstart spending, they’re in trouble. Again, just ask the Japanese.

Cold War chill over Ukraine

Dramatic twist in the Ukraine saga last night with a conversation between a State Department official and the U.S. ambassador to Ukraine posted on YouTube which appeared to show the official, Assistant Secretary of State Victoria Nuland, deliberating on the make-up of the next government in Kiev.

That led to a furious tit-for-tat with Moscow accusing Washington of planning a coup and the United States in turn saying Russia had leaked the video, which carried subtitles in Russian. A Kremlin aide said Moscow might block U.S. “interference” in Kiev.

Nuland is due to give a news conference today after her visit to Kiev.

Vladimir Putin is likely to meet Ukrainian President Viktor Yanukovich in Sochi as the Winter Olympics get underway. It could be awkward for Yanukovich’s opponents if they look like western pawns.

High unemployment putting the ECB in isolation

 

Unemployment in the euro zone is stuck at 12 percent, an already high rate that masks eye-popping rates in many of its struggling member economies.

But in a press conference lasting one hour, European Central Bank President Mario Draghi mentioned the problem of high unemployment only a few times – satisfied with the central bank’s usual stance of imploring euro zone governments to implement structural reforms to their labour markets, on a case by case basis.

Draghi said:

 … although unemployment in the euro area is stabilising, it remains high, and the necessary balance sheet adjustments in the public and the private sector will continue to weigh on the pace of the economic recovery.   

ECB – stick or twist?

 

The European Central Bank meets today with emerging market disorder high on its agenda.

It’s probably  too early to force a policy move – particularly since the next set of ECB economic and inflation forecasts are due in March – but it’s an unwelcome development at a time when inflation is already uncomfortably low, dropping further to just 0.7 percent in January, way below the ECB’s target of close to but below two percent.

If the market turbulence persists and a by-product is to drive the euro higher, which is quite possible, the downward pressure on prices could threaten a deflationary spiral which ECB policymakers have so far insisted will not come to pass.

PMIs on the up

Slowing growth in the Chinese and U.S. factory sectors earlier this week did nothing to soothe frayed market nerves and put a firm focus on today’s service sector PMI surveys in Europe along with the equivalent U.S. report and a weekly jobless number there.

While the world’s two largest economies suffered a hiccup, euro zone factories had their best month since mid-2011 in January. But it is the service sector that dominates in Europe. Flash readings, which are not usually revised much, showed the euro zone services reading hit a four-month high with France lagging Germany again although even its number rose. Today we’ll get the first numbers for Italy, Spain and Britain.

The reports will be the last meaningful pieces of evidence the European Central Bank gets to chew over before Thursday’s policy decision. Emerging market tumult and its possible effect on already vanishing inflation will be bang at the top of its agenda.