MacroScope

Renzi and Schaeuble: Compare and contrast

renzi2.jpgItalian Prime Minister Matteo Renzi will spell out to the European Parliament his priorities for Italy’s six-month tenure of the EU presidency.
Emboldened by a strong showing in May’s EU elections, Renzi is pressing for a focus on growth rather than austerity and has even managed to get Germany to talk the talk.

At an EU summit last week, leaders accepted the need to allow member states extra time to consolidate their budgets as long as they pressed ahead with economic reforms. They pledged to make “best use” of the flexibility built into the bloc’s fiscal rule book – not, you will notice, countenancing any change in the rules.

As always in the EU, this will stand or fall on the attitude in Germany. We could get an early reading on that when German Finance Minister Wolfgang Schaeuble presents 2015-2018 budget plans. Berlin plans to refrain from any net new borrowing from 2015 for the first time since 1969 and will spend projected higher tax revenues on education and infrastructure.

It has come under pressure internationally to consume more as part of an effort to rebalance the world economy but has generally resisted although there are some signs of movement, such as the coalition government’s commitment to a generous national minimum wage and somewhat higher sectoral pay deals than in recent years.

After being held for questioning on Tuesday, former French President Nicolas Sarkozy has been placed under formal investigation on suspicions he tried to use his influence to thwart an investigation into his 2007 election campaign.

Signs of European dash for growth

The ripples of EU election results are being felt, no more so than in France where the National Front topped the poll.

The day after the results, Prime Minister Manuel Valls promised further tax cuts for French households. The government is already committed to a 30 billion euros cut in labour taxes to help business but insists all this can be done while meeting its EU deficit commitments.

Brussels has already given Paris an extra two years to get its deficit down to three percent of GDP. Today, the European Commission will produce updated country recommendations.

Juncker’s star fading?

EU leaders didn’t get far last night in addressing the voter backlash dealt to them in European elections but it seems less likely that Luxembourg’s Jean-Claude Juncker will end up with Brussels’ top job, a first indication that things are on the move.

Britain’s David Cameron has been determined to block the arch federalist from becoming European Commission president and, after the strong showing by far-right and far-left parties, others also seem to see the need for a newer broom, possibly even Angela Merkel.

Juncker is a veteran of EU politics and is a consummate deal-maker, and as head of the centre-right EPP group which topped the weekend polls should be the heir presumptive. But he is very much of the old school.

Evening of reckoning

EU heads of government and state dine in Brussels this evening to discuss their response to a big slap in the face from the bloc’s electorates.

Italy’s Matteo Renzi, who bucked the trend by winning handsomely as an incumbent prime minister, has the wind in his sails and has pledged to change Europe’s focus towards growth and job creation after years of fiscal austerity in response to the euro zone’s debt crisis.

A French official said President Francois Hollande would back Renzi’s call for more pro-growth policies and tell fellow EU leaders that Europe had reached “the alarm level”. Even Germany’s Angela Merkel – the one who really counts – is talking about Europe’s people not caring about treaty change but job security and prosperity.

PMIs next signpost for ECB

Following a mixed bag of euro zone GDP data last week which showed Germany charging on and Spain holding its own but France stagnating and Italy, Portugal and the Netherlands slipping back into contraction, flash PMI surveys for the euro zone, Germany and France certainly have the power to jolt the markets today.

As things stand, there seems little to dissuade the European Central Bank from loosening policy next month. Five senior sources told us it was  preparing a package of policy options for its early June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms.

Bundesbank chief Jens Weidman speaks later. He told a German newspaper it was not yet certain that action would be taken in June. The three PMI readings are not expected to move much from April with the French numbers lagging those of the euro zone and Germany.

France flatlining

We get a flood of EU GDP reports today. Germany’s figure, just out, has marginally exceeded forecasts with quarterly growth of 0.8 percent but France is underperforming again and stagnated in the first three months of the year, missing estimates of 0.2 percent growth.

Robust German growth has been driven largely by domestic demand, which could help its European peers with their exports. Where all that leaves the overall euro zone figure, due later, remains to be seen. The bloc is predicted to have expanded by 0.4 percent.

Spain has already come in with 0.4 percent quarterly growth and others could pick up too so once again France is looking like one of the sicker men of Europe. High debtors Italy and Portugal are expected to eke out at least some growth.

Russian sanctions … and France

After the EU widened its sanctions to include Vladimir Putin’s deputy chief of staff, the commander of Russian paratroopers and two Crimean energy firms, Ukrainian prime minister Yatseniuk is in Brussels today for talks. The EU is looking to shore up the situation to allow national elections to take place on May 25 and, along with Washington, has set any disruption of that vote as a red line.

Vladimir Putin, perhaps fearing significantly tougher sanctions, has belatedly given rhetorical support to the election. Whether it can legitimately take place given the chaos in parts of the country remains an open question.

The latest additions bring to 61 the number of Russians and Ukrainians the EU has slapped with asset freezes and visa bans and for the first time it has targeted companies after foreign ministers agreed to broaden the scope of sanctions. However, only broader trade and financial sanctions would really bite and on that, Washington is much keener than Europe which is heavily dependent on Russia for its energy needs.

Nearer to the brink

De-escalation?  Forget it. Ukrainian forces killed up to five pro-Moscow rebels in the east yesterday and Russia launched army drills near the border in response.

The big question now is whether Russian troops will cross into eastern Ukraine following a constant stream of warnings from Moscow about the security of Russian speakers there.

Foreign Minister Sergei Lavrov is expected to have a telephone conversation with U.S. Secretary of State John Kerry, following last week’s Geneva accord which aimed to pull things back from the brink. Kerry said yesterday that Russia’s “window to change course is closing” and U.S. President Barack Obama said tougher sanctions were ready to go. There is no question of Western military intervention.

Will French numbers add up?

French President Francois Hollande’s cabinet meets to adopt a new debt reduction plan.

After outlining 50 billion euros of savings for 2015-2017 to help pay for consumer and business tax cuts, the government is due to sign off on already delayed deficit reductions to bring it, eventually, to three percent of output as demanded by Brussels.

The European Commission has taken a dim view of any further relaxation, having previously granted Paris two years extra leeway. The French government insists it will meet its targets but appears to be trying to deliver one message to Brussels and another to its electorate, with domestic politics likely to hold sway.

Five days on, Ukraine accord at risk of unravelling

An international agreement to avert wider conflict in Ukraine, brokered only five days ago, is teetering with pro-Moscow separatist gunmen showing no sign of surrendering government buildings and Kiev and Moscow trading accusations over who was responsible for killings over the weekend.

Washington, which signed last week’s accord in Geneva along with Moscow, Kiev and the European Union, said it would decide “in days” on additional sanctions if Russia does not take steps to implement the agreement. U.S. Vice President Joe Biden is in Kiev where he is expected to announce a package of technical assistance.

So far, markets’ worst fears have not materialized but with thousand of Russian troops massed on the frontier with Ukraine and deadly clashes between Ukrainian forces and pro-Russian separatists, it would not take much to change that.