MacroScope

What do Poland, the European Union’s brightest economic light, and Greece, its dimmest, have in common? Both have plans to cut their budget deficits to the Union’s  prescribed 3 percent level by 2012, and both of those plans depend on a lot of ifs.

I can already hear cries of protest from Poland, the only EU member to show any growth at all last year. It that has taken great pains to distance itself from more troubled EU states and is extremely proud of its growth results, with Prime Minister Donald Tusk recently telling the Financial Times: “Who would have thought we would see the day when the Polish economy is talked about with greater respect than the German economy?”

But the comparison still works, not only because Poland and Greece have promised to shrink their deficits so quickly — Greece from an expected 12.7 and Poland from around 7 percent this year — but also because they are depending on growth forecasts that may not materialise. Both stories are also emblematic of a theme sweeping across Europe — an effort by governments to build confidence over fiscal consolidation plans in an uncertain recovery.

Tusk, and Poland, have a lot to crow about. While Greece is struggling to maintain credibility and tackle its huge public debt load, Poland is expected to grow by 2.5-3.0 percent by many economists. Warsaw has a relatively low debt pile of around 50 percent of gross domestic product, compared with  around 120 percent for Greece. Investors have flocked to Polish stocks and bonds, driving the zloty currency 27 percent higher from mid-crisis lows hit last year. And they see more upside on the horizon because, with a living standard of only 56 percent of the EU’s average, the country is seen as a sure bet for eventual convergence to near the levels seen in more developed EU states.

Greece is clearly a different story. Its economy is expected to shrink this year and the government has embarked on a programme of eye-watering budget cuts that have prompted strikes and protests among civil servants. While Poland has had no trouble borrowing on international markets and at home, Athens must still borrow 20 billion euros before May at much higher interest rates than before the crisis.

In the space of a few weeks, the idea of creating a European Monetary Fund to rescue financially troubled EU member states has gone from being a high-level brainwave from a pair of economists to a major policy initiative backed by powerbroker Germany. In EU terms, that's Formula One fast.

Yet while German Chancellor Angela Merkel appears to be behind the concept, even if she has concerns about a possible need to change the EU's treaty, no one has put much flesh on the bones of the idea apart from the original proponents -- Daniel Gros of the Centre for European Policy Studies and Thomas Mayer, the chief economist of Deutsche Bank.

Gros and Mayer set out their proposal in an academic paper and synthesised it in a column in The Economist last month. In essence the idea -- and it remains to be seen if EU policymakers take it up wholesale or develop something along different lines -- is fairly straightforward.

Member states of the European Union like to think of themselves as partners, sharing in a common future. But when it comes to business, things tend to go by the board. Consider, for example, the scramble to outdo each other in attracting  investment from outside the bloc.

Jose Guimon, a lecturer in international economics at the Universidad Autonoma de Madrid, reckons this should change. In a new paper for the Vale Columbia Centre on Sustainable International Investment, Guimon says it is time for an EU Investment Promotion Agency.

What he has in mind is something along the lines of  Invest in America, the U.S. government’s attempt to coordinate promotion of the United States as a desitination for foreign direct investment.

Low public debt would usually be a good thing, but it might throw a spanner in the works of Estonia‘s quest to join the euro zone.

The small Baltic country has a stable currency, its deficits and inflation meet European Union rules, and its top policymakers exude confidence the country will adopt the euro next year.

But with government debt below 10 percent of gross domestic product (GDP), Estonia has not needed to issue a benchmark bond — a government bond issued in Estonian kroons for at least 10 years — which it could use to show it has low and stable interest rates, one criteria for euro candidates.

“I’d be Carrie, I guess, since I like to write,” he told the Finnish newspaper Helsingin Sanomat when asked about which character in the show he most resembles.

In the TV series, the promiscuous Bradshaw searched for true love and its meaning in the contemporary world in her newspaper column.

But while Bradshaw — played by Sarah Jessica Parker — thought her native New York was the centre of world and felt out of place in Paris, Rehn set her straight.  “The world revolves around Mikkeli,” Rehn said, referring to his hometown with a population of 49,000 in southeastern Finland.

Any doubts about financial markets’ faith in European Central Bank  President Jean-Claude Trichet’s cure-all ability should have been put to rest  after a euro flurry over Trichet cutting short a visit to Sydney to return to Brussels for a meeting of European Union leaders.

The euro recovered from 8-1/2 month lows against the U.S. dollar after the Reserve Bank of Australia said Trichet would leave anniversary celebrations early, as traders bet that his  rush to Brussels meant an increased chance of  European leaders agreeing  a rescue deal for struggling  Greece.

When the ECB later clarified that Trichet had been invited to the Thursday meeting last month and had adjusted his flight plans at the last minute to make a connecting flight, the single currency slipped back 20 ticks to just under $1.37.

The reality of  ‘political economy’  is something that irritates many economists – the ”purists”, if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 – Barack Obama’s proposals to rein in the banks is rooted in public outrage; reading China’s monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring’s UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe’s single currency — the new milennium’s posterchild for political economy.

For many, the euro simply should never have happened –  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European’s single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

Juergen Stark , Germany’s ECB executive board member, is well known as a true believer in tight fiscal discipline, so his reported comments in Italy’s Il Sole 24 Ore about not bailing Greece out of its financial difficulties are not out of character. But the market reaction must have at least given pause for thought to EU leaders wondering how far to go in coddling their wayward child.

Within moments of Stark’s reported musings that markets were “deluding themselves” if they thought member states would “put their hands in their wallets to save Greece”, hitting the foreign exchange rooms, the euro was on a tumble.  It hit a low of $1.4285 from a day’s high of $1.4371 – which doesn’t sound like a lot, but is, especially over a very short period of time.

It is true that it recovered very quickly and that other EU notables have hinted that EU member states will indeed bail out Greece if needed (they are unwilling to say so explicitly for fear of taking too much pressure of the Greek government and the Greek public). And it is not really up to the ECB anyway.

Wolfgang Munchau, co-founder and president of Eurointelligence, has raised an uncomfortable prospect for investors in Greece. In a Financial Times column today, the long-time Europe commentator argues that Brussels may not be willing to bail Greece out if it were to default on its debt à la all-but sovereign Dubai World is about to.

The EU’s authorities, rightly or wrongly, are more afraid of the moral hazard of a bail-out than the possible spillover effect of a hypothetical Greek default to other eurozone countries. If faced with a choice between preserving the integrity of the stability pact and the integrity of Greece, they are currently minded to choose the former.

Munchau reckons that outright default is unlikely, but wonders whether the current spread between Greek and benchmark German bonds really reflects the risk that investors are taking.  It is currently around 178 basis points after recovering from a blow out on Dubai worries last week.

How well is your finance minister doing as the global economy comes tumbling around your ears? Finns, at least, can hold their heads up with pride: Jyrki Katainen (pictured on ice) has topped The Financial Times’ annual rankings of European finance ministers.

Nineteen ministers were judged on their economic performance, political performance and their country’s financial stability. The latter was based on the cost of buying insurance against default on money borrowed by the government, politics on what a panel of economists saw as lucidity, leadership and so on, and economics on a wide range of macro factors. Katainen triumphed primarily on economics with the FT citing a projected healthy budget surplus next year.

Results for the G7 members of the group were mixed. Germany’s Peer Steinbruck came second, despite a poor showing on politics, and France’s Christine Lagarde was seventh. Britain and Italy languished at 14 and 16, respectively, although at least UK Chancellor of the Exchequer Alistair Darling can boast of coming first in politics. Something to do with élan, apparently.