MacroScope

Acid test of EU’s resolve over Russia

Emergencies Ministry member walks at the site of a Malaysia Airlines Boeing 777 plane crash near the settlement of Grabovo in the Donetsk region

EU leaders said over the weekend they would be prepared to impose tougher sanctions on Russia, giving Vladimir Putin one more chance to douse the violence in eastern Ukraine and help investigators do their work at the site of the crashed Malaysian airliner or face the consequences.

A statement from the British government said Germany’s Angela Merkel, Britain’s David Cameron and France’s Francois Hollande agreed on a telephone call that their ministers should be ready to announce a fresh round of sanctions at a meeting of the European Union’s Foreign Affairs Council on Tuesday.

There is already scope to toughen measures announced last week to hit Russian companies that help destabilise Ukraine and to block new loans to Russia through two multilateral lenders. The EU foreign ministers are tasked with preparing a first list of people and entities from Russia that would be targeted. The number of individuals and companies to be penalized is up for grabs.

The weekend round of diplomacy sounds like a more dramatic move is possible. Could that be the “sectoral” sanctions that Washington has pushed for which could deliver a really serious blow to the already flatlining Russian economy and start shutting it out of international trade and commerce?

Not quite sure. The threats so far have been general rather than specific. Russia provides up to a third of the EU’s energy needs and Germany has particularly strong trade ties.

A turning point?

Emergencies Ministry members work at the site of a Malaysia Airlines Boeing 777 plane crash in the settlement of Grabovo in the Donetsk region

Could the shooting down of a Malaysia Airlines plane over Ukraine be a fundamental turning point in the crisis that has pitted Russia against the West? And if so which way – towards rapprochement or a further escalation?

Kiev accused militants fighting to unite eastern Ukraine with Russia of shooting down the Boeing 777 carrying nearly 300 people from Amsterdam to Kuala Lumpur with a Soviet-era ground-to-air missile. Leaders of rebels in the Donetsk People’s Republic denied any involvement, although around the same time their military commander said his forces had downed a smaller Ukrainian transport plane.

A Ukrainian Interior Ministry official took to Facebook shortly after the plane came down, saying that rebels had used a Buk anti-aircraft system given to them by Russia, and appealed to the West to act. That doesn’t make the situation much clearer since Russia, Ukraine and the separatists all probably have the missile in their arsenals.

Draghi in London

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European Central Bank President Mario Draghi will deliver an evening keynote speech in London – the scene for his game-changing “whatever it takes” declaration in 2012.

He is unlikely to come up with anything so dramatic this time but is clearly trying to convince that the ECB could yet start printing money if required to avert deflation.

Draghi has taken the ECB a long way in terms of radical policies which some of its members have found hard to swallow. But QE could yet prove to be a bridge too far. Shortly after Draghi held out the prospect last week of printing euros to ward off deflation, Bundesbank chief Jens Weidmann and his German ECB colleague Sabine Lautenschlaeger mounted a rearguard action.

Juncker begins to fill in the gaps

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European Commission president-elect Jean-Claude Juncker will hold talks with the various political groupings in the European Parliament as he seeks to develop policy positions. Most interesting would be indications about which way he is bending in the growth versus austerity debate.

Italy’s Matteo Renzi, resurgent after a strong performance in May’s EU elections, is pressing for a focus on measures to get the euro zone economy firing and has even managed to get Germany to talk the talk. But any leeway will be within the existing debt rules, not by writing new ones.

We know from the history of the euro debt crisis that Berlin can only move so far, so fast and only last week it proudly proclaimed it would not be a net borrower of zero next year, for the first time in over 45 years. Having said that it has just passed into law a generous national minimum wage and its labour costs are rising, so there is some rebalancing going on.

Balance tilted in Ukraine?

slaviansk.jpgUkrainian forces pushed pro-Russian rebels out of their stronghold of Slaviansk on Saturday. Its re-capture represents Kiev’s most notable military victory in three months of fighting in which more than 200 Ukrainian troops have been killed as well as hundreds of civilians and rebels.

The regions of Donetsk and Luhansk are likely to be next in the government forces’ crosshairs.

Talks between Iran and the six world powers –  the United States, Britain, France, Germany, Russia and China – over its disputed nuclear programme stretch through the week, leading up to a July 20 deadline which has been set for a definitive deal.
Most diplomats involved in the talks expect that date to lapse though we reported exclusively that Iran has reduced demands for the size of its future nuclear enrichment programme.

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.

A call to arms

The prospect of U.S. and Iranian intervention in Iraq looms larger.

Baghdad has asked the United States for air support to counter Sunni militants who have seized major cities in a lightning advance that has routed the Shi’ite-led government army. And Iranian President Hassan Rouhani has signalled that Tehran was prepared to intervene to protect Iraq’s great Shi’ite shrines.

As of last night, ISIL fighters were in control of three-quarters of the territory of the Baiji refinery north of Baghdad and some international oil companies were pulling out workers.

Even if the two adversaries find common cause in Iraq, it doesn’t appear to have transferred to negotiations over Tehran’s nuclear programme, for which the West has imposed stiff sanctions.

The Mark and George show

The Mansion House dinner in the City of London is one of Britain’s big set-pieces of the year featuring speeches by Bank of England Governor Mark Carney and finance minister George Osborne.

Carney will be speaking a week before the Bank’s Financial Policy Committee meets and is expected to road test its new tools to calm the housing market. Among other measures, the BoE could recommend caps on the size of home loans granted in relation to a property’s value or a borrower’s salary.

There have been some signs of demand for mortgages slowing of late but London – the real hotspot – is being fuelled by an influx of foreign money which does not require a home loan to buy. The FPC could also suggest the government curbs its “Help to Buy” scheme which helps Britons get on the property ladder.

EU’s top two — oh to be a fly on the wall

Who are the two most important people in the EU? It’s hard to argue against Angela Merkel and Mario Draghi and they meet today in Berlin.

It’s supposed to be a private meeting but of course we’ll be digging, particularly for any signs that the German leader is for or against the European Central Bank printing money if it is required to beat back deflation.

The German media responded negatively to last week’s measures, defaulting to the country’s historic fear of inflation stretching all the way back to the 1920s Weimar Republic although there is virtually no inflation in Europe’s largest economy at the moment. Merkel has given Draghi a fair wind in the past to initiate “unorthodox” policy measures.

ECB aftermath; how firm is opposition to QE?

After the European Central Bank opened its toolbox and deployed pretty much everything it had left, bar printing money, the question is if and when QE becomes a live possibility.

ECB chief Mario Draghi pointedly said at his monthly news conference that all policy options had not been exhausted.
German resistance to such a move will remain, however, and Draghi’s deputy, Vitor Constancio, has already intimated that it will take until late this year to judge whether the latest gambits have made a difference before moving onto the next stage.

Bundesbank chief Jens Weidmann is already out today saying the ECB has ventured onto new ground and that governments need to treat the move as a wake-up call to continue with economic reforms. He added that there was a risk that long-term inflation expectations could be de-anchored – ECB speak for deflation.