MacroScope

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.

Berlin has said the G8 leaders are likely to discuss the role of central banks and monetary policy, and Angela Merkel will hold bilateral talks with Abe during the summit. President Barack Obama travels to Berlin after the summit for talks with Merkel.

We’ve seen an early version of the draft communiqué which talked of more reforms being needed and welcoming Japan’s efforts to galvanise its economy while warning it to keep an eye on medium-term stability – all fairly predictable stuff. But that was put together by the British hosts before the latest bout of turmoil so it will be interesting to see whether a greater sense of urgency has been injected into proceedings.

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 specifics. But for the markets, this meeting could still yield some 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. Abe will also speak in London and Warsaw during the week.

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. Berlin has said the G8 leaders are likely to discuss the role of central banks and monetary policy, and Angela Merkel will hold bilateral talks with Abe during the summit. President Barack Obama travels to Berlin after the summit for talks with Merkel.

The central banks of Turkey, Switzerland and Norway all have monetary policy decisions to make in the coming week and may have some interesting things to say about the revival of market turmoil after months of calm. The Norwegians have said interest rates are likely to stay at 1.5 percent for months to come and the Swiss National Bank is unlikely to loosen its cap on the Swiss franc which has served it so well, particularly given markets are now back in flux and traders are starting to talk about flight-to-safety moves again. The elephant in the room is the Federal Reserve’s latest policy decision on Wednesday, followed by a Ben Bernanke press conference.

Some interesting events to  ponder over the weekend, though not many of them came from the G8 summit which, as is customary, was strong on rhetoric but bare of any specific policy measures to tackle the euro zone crisis. However, markets seems to have tired of their panicky last few sessions. German Bund futures have opened lower as investors took profits rather than seizing on any positive news. European stocks have edged up.

It does appear that with the ascension of France’s Francois Hollande, the G8 firmament turned into G7 (or maybe 5 since we didn’t hear much from Japan and Russia) versus 1 (Germany) but as things stand we’re still heading for a fairly anaemic “growth strategy” unless euro zone leaders coalesce behind the notion of giving Spain and Greece longer to make the cuts demanded of them. Spain has moved the goalposts further in the wrong direction, revising its 2011 deficit up to 8.9 percent from 8.5 and blaming the overspending regions. That means its already loosened target of 5.3 percent for this year is now even harder to achieve.

Hollande is talking up the case for common euro zone bonds but that will not wash with Berlin for a long time yet. Sources said Monti used the G8 forum to promote a pan-European bank deposit guarantee fund. Good idea but that too will only be conceivable if the European financial sector is on the point of toppling. And who will underwrite it? There is talk too of allowing the EFSF to lend direct to banks to ease the Spanish government’s reluctance to ask for help. That may have a slightly better chance of success but Berlin doesn’t like this idea either.
Look no further than the German Chancellor’s take on the summit – it was all a great success, she said. Everyone agreed that we need both growth and fiscal consolidation.

So we’ve got the fresh Greek elections we expected and markets, despite the inevitability that we would get here, have reacted with some alarm. European stocks have shed  around 1 percent, and the harbour of German Bunds is pushing their futures price up in early trade. The Greeks will try to form a caretaker government today to see them through to elections expected on June 17.

The key question is whether the mainstream parties can mount a convincing campaign second time around, playing on the glaring contradiction in SYRIZA’s position (no to bailout, yes to the euro) and essentially turning the vote into a referendum on euro membership, which the overwhelming majority of Greeks still support. Don’t count on that. SYRIZA remains ahead in the polls.
To be able to pull it off, PASOK and New Democracy will need some help from Europe. There have already been hints from Brussels that if a pro-bailout government is formed, Athens could be given some leeway on its debt-cutting terms. But equally other voices are saying there is no more room for manoeuvre.

France’s Francois Hollande used his presidential debut to frame help for Greece within his push for a European growth strategy last night, saying he hoped that could also foster a return to prosperity there. He and Germany’s Angela Merkel are due in the United States for a G8 summit at the end of the week where doubtless they will come under heavy pressure to make sure Greece doesn’t bomb out of the euro zone or, if it does, that the effect is contained. Easier said than done. Given a Greek euro exit would probably require rapid concerted reaction from the EU, IMF (to shore up Spain?) and the world’s big central banks (remember the global monetary policy response after the collapse of Lehmans?), planning for that could well be bubbling below the surface at the G8.

Police threaded through a growing throng of demonstrators gathering in a downtown Toronto Park on Friday to demand G20 countries do more to fight global poverty and protect woman’s gender rights.

As the number of protesters grew under Canada’s trademark leafy maple trees, pro bono lawyers announced their phone numbers and told protesters to write them down on their hands or arms.

“If you get arrested, call us before you talk to police,” they told the crowd as nervous young women scribbled on their forearms.

G8 host Huntsville has been a picture of quiet in the run-up to the summit, which kicked off on Friday. Reporters that have come up to cover potential protests have had little luck so far uncovering anything beyond bemused residents and hundreds of bored cops.

So there was more than a little excitement Friday when not one, but two protests sprang up in the summer resort town’s center. A media stunt by Oxfam involving the group’s famous paper mache “heads” of world leaders drew a throng of reporters and camera crews to a waterfront park in the resort town’s center.

Volunteers sporting the oversized heads and decked out like tourists (T-shirts, shorts, and sandals with white socks) pored over roadmaps apparently trying to find the right way forward on committing funds to eradicate poverty in the developing world.

The following is a guest post by Marc Levinson, a senior fellow for international business at the Council on Foreign Relations. The opinions expressed are his own.

The world’s leaders are stuck on a summitry treadmill. Nothing better could come from this week’s summit meetings in Canada than a way for them to get off.

Consider President Obama’s schedule for the months ahead. On June 25, he heads to the summit meeting of the G8 leaders in bucolic Huntsville, Ontario. A couple of days later, those eight presidents and prime ministers, together with their retinues of finance ministers and central bankers, will join 12 of their counterparts at the G20 summit in Toronto.

Judging from the draft communique of the G8 leaders meeting in L’Aquila, no one is in a particular hurry to talk about ending the domination of the dollar in world  currency reserves.  Our correspondents at the Italian summit report that the debate being pushed by China and others is likely to be played down.

But the genie is out of the bottle. Beforehand, Beijing floated the idea of alternative to the dollar. Russia and Brazil weighed in with some thoughts. The United Nations also acknowledged earlier this year the desire of some countries for a “more efficient reserve system” in a series of proposals for global financial reform.

This issue is laid out in a Q&A here.

What do you think? Is it time to ditch the dollar? Is it doomed as a reserve currency over the long term?

Pope Benedict issued an ambitious call to reform the way the world works on Tuesday shortly before its most powerful leaders meet at the G8 summit in Italy. His latest encyclical, entitled "Charity in Truth," presents a long list of steps he thinks are needed to overcome the financial crisis and shift economic activity from the profit motive to a goal of solidarity of all people.

Following are some of his proposals. The italics are from the original text. Do you think they are realistic food for thought or idealistic notions with no hope of being put into practice?

"There is urgent need of a true world political authority. .. to manage the global economy; to revive economies hit by the crisis; to avoid any deterioration of the present crisis and the greater imbalances that would result; to bring about integral and timely disarmament, food security and peace; to guarantee the protection of the environment and to regulate migration... such an authority would need to be universally recognized and to be vested with the effective power to ensure security for all, regard for justice, and respect for rights." The economy needs ethics in order to function correctly - not any ethics whatsoever, but an ethics which is people-centred..." "Financiers must rediscover the genuinely ethical foundation of their activity, so as not to abuse the sophisticated instruments which can serve to betray the interests of savers. Right intention, transparency, and the search for positive results are mutually compatible and must never be detached from one another." "Without doubt, one of the greatest risks for businesses is that they are almost exclusively answerable to their investors, thereby limiting their social value... there is nevertheless a growing conviction that business management cannot concern itself only with the interests of the proprietors, but must also assume responsibility for all the other stakeholders who contribute to the life of the business: the workers, the clients, the suppliers of various elements of production, the community of reference... What should be avoided is a speculative use of financial resources that yields to the temptation of seeking only short-term profit, without regard for the long-term sustainability of the enterprise, its benefit to the real economy and attention to the advancement, in suitable and appropriate ways, of further economic initiatives in countries in need of development." "One possible approach to development aid would be to apply effectively what is known as fiscal subsidiarity, allowing citizens to decide how to allocate a portion of the taxes they pay to the State."

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Five things to think about this week:

Q3 - CLUES AND CUES
- Global equity markets started the quarter positioned for economic stabilisation after a strong Q2 performance but, even so, EPFR data shows less than a third of the cash that flooded into money market funds in 2008 has exited in the year to date. The Q2 reporting season, which is about to kick off (Alcoa out this week), will show whether there are reasons for investors to draw down their cash holdings further. The U.S. data that came out before the long July 4 weekend held more negative surprises than positive ones, and macroeconomic confirmation of recovery will be needed to tempt more wary investors into equities.

BOND YIELDS
- Benchmark U.S. and euro zone bond yields broke lower after the U.S. non-farm payroll data but the VIX hit some of its lowest levels post-Lehman and a recent compression of intra-euro zone spreads has yet to go markedly into reverse. Which of these trends turns out to be sustainable will become more evident in the next few weeks, particularly as U.S. supply resumes this week with TIPS, 3, 10, and 30 year auctions.

L'AQUILA SUMMIT
- The slow-burning international reserve currency debate could pop up at the G8/G8+5 big emerging powers summit in Italy this week. China's public stance is that it is not pushing the issue but Beijing also reckons a debate on this would be normal at such a forum. It is unclear if any final statement will mention it in a way that would rattle FX markets. But sideline comments on the debate will be closely watched and particular focus will be on which countries, if any, would be willing to join China, Brazil and Russia in their commitment to buying the IMF SDR notes -- for which crucial groundwork was laid down this week.