MacroScope

Battle lines drawn

Germany's Minister of Finance Wolfgang Schauble speaks during a discussion during the World Bank/IMF annual meetings in Washington

The predictable battle lines were drawn at the G20/IMF meetings in Washington – most of the world urged Europe to do more to foster growth while Germany warned against letting up on austerity. The argument will doubtless be reprised today when euro zone finance ministers meet in Luxembourg.

Given a ghastly run of German data last week and sharp cuts to its growth forecasts by the IMF and Germany’s economic institutes, Berlin’s stance looks increasingly odd but Finance Minister Wolfgang Schaeuble continued to make it abundantly clear he will not countenance any more public spending in the one European country that could really afford it.

Writing cheques won’t fix Europe, he stated bluntly.

If there was anything new it appeared to be the intensity of the response. This from European Central Bank chief Mario Draghi: “For governments that have fiscal space it makes sense to use it. You decide to which countries this sentence applies.”

Jyrki Katainen, the former Finnish premier poised to become the EU’s top official for growth and jobs, said Germany, France and Italy must focus on public investment to revive their economies.

Most outspoken was former U.S. Treasury Secretary Larry Summers, sharing the stage with Schaeuble. Europe risked sliding into an era of Japan-style deflation without a “substantial discontinuity in policy”, he said. Europe, and Germany in particular, should follow recent advice from the IMF to invest in infrastructure projects.

Greek confidence vote

A Greek and an EU flag flutter in front of the temple of the Parthenon during the takeover ceremony of the six-month rotation of Greece's EU Presidency in Athens

Greece’s ruling coalition will hold a confidence vote in parliament this evening in an effort to end speculation that the country may be facing snap elections early next year.

Prime Minister Antonis Samaras wants to use the vote to gain support for his candidate in a presidential vote. Under Greek law, parliament must be dissolved if a president cannot be elected. The radical leftist Syriza, which has a sizeable lead in opinion polls, has pledged to block Samaras’s pick.

Athens has begun talks with the EU and IMF inspectors on life after its bailout. The coalition is hoping an exit will rally Greeks fed up with years of austerity, but it faces a series of hurdles in pulling that off, including convincing EU/IMF lenders it can finance itself without problems.

Italian and Greek confidence votes

Greece's PM Samaras addresses the audience during the Economist Conference on "The big rethink for Europe, the big turning point for Greece" in Athens

You wait ages for a no-confidence vote then two come along on the same day. Neither are expected to cause governments to topple.

Greece’s ruling coalition will hold a confidence vote in parliament in an effort to end speculation that the country may be facing snap elections early next year.

Prime Minister Antonis Samaras wants to use the vote to gain support for his candidate in a presidential vote. Under Greek law, parliament must be dissolved if a president cannot be elected. The left-wing Syriza party, which has a sizeable lead in opinion polls, has pledged to block Samaras’s pick.

Shocking German figures

A new Mercedes AMG GT super sports car rim is seen during a factory tour for journalists at the Mercedes AMG headquarters in Affalterbach

After a stunning fall in German industrial orders for August – the 5.7 percent monthly drop was the largest since the global financial crisis raged in 2009 – industrial output for the same month has just plunged by 4.0 percent, also the biggest fall in five years.

After Europe’s largest economy shrank in the second quarter there had been hope of a pick-up in the following three months but the thrust of recent data suggests it will be lucky to achieve any expansion at all.

At the same time, the government – particularly finance minister Wolfgang Schaeuble – vehemently rejects calls from euro zone and G20 peers for greater efforts to get growth going.

Turkey poised to intervene?

Iraqi Shi'ite militia fighters stand atop destroyed vehicles belonging to Islamic State militants outside Bo Hassan village near Tikrit

Turkey’s parliament has voted to give the government a green light to order military action against Islamic State as the insurgents tightened their grip on a Syrian border town, sending thousands more Kurdish refugees into Turkey.

There is little sign of it being put into imminent use but the vote gives the government powers to order incursions into Syria and Iraq to counter the threat of attack “from all terrorist groups”. By common consent, western air strikes alone are unlikely to vanquish IS and there is a great deal of doubt that Syrian and Iraqi forces can best them on the ground.

Service sector PMI surveys for euro zone member states, Britain and others are forecast to show France and Italy languishing in contractionary territory while Spain achieves quite strong growth.

French budget to fire EU growth debate

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France is unveiling its 2015 budget right now and it’s not making pretty reading, confirming that Paris will not get its budget deficit down to the EU limit of three percent of GDP until 2017, years after it should have done.

The health minister has said the welfare deficit is expected to run nearly one billion euros over budget this year and data on Tuesday showed France’s national debt hit a record high in the second quarter, topping two trillion euros for the first time. It will near 100 percent of GDP next year.

All this is predicated on growth picking up and the proportion of national income going on public spending will fall only glacially.
French President Francois Hollande and Italy’s Matteo Renzi are leading a drive to use the maximum amount of flexibility within EU rules to allow a bit more spending or lower taxes to get growth going – French Finance Minister Michel Sapin has just said the pace of budget consolidation in the euro zone must be adapted to reflect the reality of a stagnant economy.

A reminder that all is not well in the euro zone

Bank of Portugal Governor Costa arrives to read a statement in Lisbon

A reminder that while the euro zone crisis may be in abeyance, it still has the ability to bite.

Portugal will blow 4.4 billion euros of the 6.4 billion euros left from Lisbon’s recently exited international bailout programme shoring up troubled lender Banco Espirito Santo which will be split into “bad” and “good” banks. Junior bondholders and shareholders will be heavily hit.

BES’s tale of woe is so specific that there is no obvious reason to think it will be replicated. But it is a reminder that bank stress tests later this year could throw up other nasties and more immediately the saga leaves Lisbon short of rescue funds should anything else blow up. The bond market is likely to react adversely. The 4.4 billion euros will come in the form of a state loan to a bank resolution fund which the government insists will be paid back.

Still room for improvement with the BoE’s forward guidance, says IMF

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There was plenty of support for the Bank of England’s stance on interest rates from the International Monetary Fund in its latest report on the British economy.

But it seemed a little less sure on how forward guidance – the Bank’s cornerstone policy since Governor Mark Carney took charge last year – has fared so far.

While it still backed forward guidance as a step towards greater transparency, the IMF’s report posed two questions: How effective has forward guidance been, and what improvements could be made?

The long and winding road to sanctions

Russia's President Vladimir Putin talks to reporters during a meeting in Brasilia

If it’s true to its word, the European Union will impose sweeping new sanctions on Russia this week, targeting state-owned Russian banks and their ability to finance Moscow’s faltering economy.

EU ambassadors will continue discussions on the detail of new measures, most significant of which would be banning European investors from buying new debt or shares of banks owned 50 percent or more by the state.

An embargo on arms sales to Moscow and restrictions on the supply of energy and dual-use technologies is also on the table but it looks like restrictions to supplying technology to Russia will include oil but exclude the gas sector.

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.