MacroScope

Hollande talks the talk

Francois Hollande managed to bat off questions about his private life (how successful he is in holding that line depends on the attitude of the French media which yesterday was nothing but respectful) and focus instead on a blizzard of economic reforms.

Skating past the French president’s call for an Airbus-style Franco-German energy company which left everyone including the Germans bemused, there was some real meat.

Hollande reaffirmed his “responsibility pact” to cut taxes and red tape for companies, saving them 30 billion euros, in return for a commitment to hire more people and increase training.
He also promised a further 50 billion euros in spending cuts in 2015-17 on top of a planned 15 billion this year, saying they could be achieved by making national and local government more efficient while preserving France’s generous social model.

Of course, it’s all about delivery rather than rhetoric and it will be some trick to pull off hefty spending cuts that do not undermine the social model. But it will be interesting to see whether Berlin and Brussels in particular think Hollande is now moving in the right direction, having been underwhelmed by his labour and welfare reforms so far.

Is this his Mitterrand moment echoing his political hero’s abrupt shift in the 1980s to halt a policy of nationalisation and stronger worker benefits as public finances crumbled? It’s probably not that dramatic though doubtless it is more than enough to enrage the unions. Either way, for this presidential term at least, it feels like a now or never moment. Falter and the euro zone’s recovering economies will start looking like better bets. 

Lew’s comes to Europe airing concerns

U.S. Treasury Secretary Jack Lew moves on to Berlin then Lisbon after spending yesterday in Paris. There, he urged Europe to do more to build up its bank backstops and capital, a fairly clear indication that Washington is underwhelmed by the German model of banking union which has prevailed.

Lew may also press for more German steps to boost domestic demand, after indirectly criticising Berlin for its policies during his last visit in April. If he does, he can expect a robust response from Schaeuble, at least in private.

Lew moves on to Portugal later in the day with Lisbon’s planned exit from its EU/IMF bailout presumably top of the agenda when he meets Prime Minister Pedro Passos Coelho.

That sinking feeling

Euro zone inflation, or deflation, is the focus of the moment.

Germany’s HICP rate fell to 1.2 percent last month, Italy’s hit 0.6 percent and Spain’s just 0.3 in December (not to mention Greece’s -2.9 percent). Today we get the figure for the euro zone as a whole. Forecasts for it to hold at 0.9 percent may now look a little toppy.

It’s too early for any dramatic moves but the European Central Bank, which has a policy meeting on Thursday, may well be pushed into easing policy if inflation refuses to pick up and/or the banks clam up ahead of this year’s health tests.

A shock fall in euro inflation to 0.7 percent prompted an interest rate cut to 0.25 percent in November followed by a chorus of denials that deflation was a threat. ECB chief Mario Draghi adhered to that last week but added that he and his colleagues had to make sure inflation didn’t get stuck in the “danger zone” below one percent.

Data to shape ECB week

Euro zone service sector PMIs and German inflation (with the euro zone number to follow on Tuesday) will lay the ground for the European Central Bank’s first policy meeting of the year.

The surveys are likely to show the currency bloc ended the year on a reasonably robust note with Germany leading the way as always, Italy and Spain showing signs of life and France looking worryingly weak.

Ireland’s reading is already out and has posted its fastest services growth in seven years. Much more importantly for the world, growth in China’s services industries slowed in December, confirming that the world’s second-largest economy lost steam at the end of last year.

S&P’s year-end broadside

Any sense of euphoria EU leaders felt about agreeing a plan to underpin Europe’s banks – which should have been muted anyway – may be tempered by S&P’s decision to cut the bloc’s credit rating to AA+ from AAA.

In global terms that’s still rock solid but the rationale – flagging “rising risks to the support of the EU from some member states” has some resonance. On the upside, the agency affirmed its rating of Ireland following its bailout exit and kept its outlook positive. Presumably, S&P is clearing the decks before Christmas because it also reaffirmed the UK’s top notch AAA rating, and reaffirmed South Africa too.

The EU quote packs a punch following a banking union deal where Germany successfully saw off plans for euro zone countries to help each other in tackling problem lenders.

Timber!

A deal on European banking union was finally struck overnight. Already the inquests have begun into how robust it is.

As we exclusively reported at the weekend, EU finance ministers agreed that banks will pay into funds for the closure of failed lenders, amassing roughly 55 billion euros which will be merged into a common pool in 2025. Yes, 2025.

Until then, if there is not enough money, a government will be able to impose more levies on banks. If that does not suffice, it would put in public money and if that is unaffordable, it could seek a bailout from the euro zone’s ESM bailout fund with conditions and stigma attached.

Banking union … timber not steel

A day after she was sworn in for a third term and a day before she attends an EU summit in Brussels, Chancellor Angela Merkel delivers a speech in the Bundestag lower house. She will then head to Paris in the evening for a meeting with French President Francois Hollande. That bilateral could be the moment that the seal is set on banking union, in time for the Thursday/Friday EU leaders summit.

In parallel, the bloc’s 28 finance ministers will meet in Brussels to try and finalise a common position on the detail. “For the acceptance of the euro on financial markets, the banking union is very important,” Merkel said on Tuesday.

For the markets, it will be impossible to look beyond today’s Federal Reserve policy decision which might, or might not, start the process of slowing the pace of money-printing which has been churning out $85 billion a month. But banking union is hugely important too.
Euro zone finance ministers made progress overnight, essentially agreeing the blueprint Reuters reported exclusively over the weekend.

Decision day for Kiev … and Moscow

Decision day for Ukrainian President Viktor Yanukovich as he heads to the Kremlin seeking a financial lifeline while demonstrators in Kiev gather again to demand he steps down.

Vladimir Putin seems set to agree a loan deal, and possibly offer Ukraine a discount on the Russian natural gas.
It seemed he was the only game in town after an EU commissioner said the bloc was suspending talks on a trade agreement with Kiev. But yesterday, European Union foreign ministers said the door remained open, which in a way makes Yanukovich’s predicament harder.

Does Russia really need this? Politically yes, but economically? Ukraine is seeking help to cover an external funding gap of $17 billion next year and is in no position to pay for its gas.

Germany back in business

Germany’s Social Democrats voted overwhelmingly to join a “grand coalition” with Chancellor Angela Merkel’s conservatives. The government will offer broad continuity with some tweaks, the reappointment of Wolfgang Schaeuble as finance minister testifies to that. But could it unlock some euro zone policy doors after three months of limbo?

The big item on the agenda of an EU summit late this week is banking union. What results will dictate whether the seeds of a future financial crisis have been sown. Thanks to our exclusive at the weekend, we know that the latest proposal will see the cost of closing down a euro zone bank borne almost fully by its home country while a euro zone fund is built up over 10 years.

Key euro zone finance ministers will meet in Berlin today (as they did without success 10 days ago) to try and reach agreement in time for the summit. A full meeting of euro zone finance ministers is slated for Wednesday but it could take a bilateral meeting with the newly anointed Merkel and French President Francois Hollande to break the logjam.

Confidence in Italy?

Emboldened by the splitting of Silvio Berlusconi’s party and the media mogul’s expulsion from parliament, Prime Minister Enrico Letta has already won one confidence vote in parliament. Today, he has called another to cement his coalition’s standing.

Letta is expected to win with the help of a centre-right group which split from Berlusconi but tensions are rising between his centre-left PD, now by far the biggest party in the coalition, and the small group led by Interior Minister Angelino Alfano.

That’s partly because there’s a new man in town who may press for more left-wing policies that would enrage the centre-right.