MacroScope

Britain back on board for action in Iraq

An Iraqi SWAT trooper covers his ears as he fires a mortar bomb during clashes with Islamic State militants, north of Muqdadiyah

U.S. air strikes in Syria continued overnight with a monitoring group saying at least 14 Islamic State fighters were killed.

Having sat out so far, Britain said it would join strikes against militants but only in Iraq for now – which has asked for such help – not Syria. IS holds swathes of land in both countries.

Parliament is to reconvene on Friday and, unlike last year when action to stop Bashar al-Assad using chemical weapons against his own people was voted down, all the main parties are now broadly in support. Prime Minister David Cameron’s cabinet will meet today to finalise what they will put to parliament tomorrow.

Washington has secured the support of Saudi Arabia, UAE, Jordan, Bahrain and Qatar – crucial Arab support which was largely absent for the 2003 invasion of Iraq.

Turkey appears to be inching toward greater involvement after the IS group freed 46 Turkish hostages but it remains unclear how far it will go. Its long border with Syria make it strategically vital and it is home to a major U.S. base at Incirlik.

What’s it all about, Mario?

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It’s ECB day and after Mario Draghi’s recent dramatic utterances, expectation for fresh action has grown, expectations which are likely largely to be dashed.

Draghi told the world’s central banking elite in Jackson Hole last month that market inflation expectations were falling markedly and the European Central Bank would use everything in its power to stabilize them in order to avoid a deflationary spiral. He also ripped up central banking orthodoxy by calling for more fiscal spending by governments at the same time as redoubling economic reform efforts. How to read that?

Two possibilities spring to mind. Either Draghi (who has talked with a number of EU leaders recently) thinks he can secure fresh a  commitment on structural reform and can use that to go back to his ECB colleagues to argue they should cross the ultimate Rubicon and start printing money in return.

Euro zone recovery snuffed out

A BMW logo is seen the wheel of a car in Mexico City

A glut of euro zone GDP data is landing confirming a markedly poor second quarter for the currency area.

The mighty German economy has shrunk by 0.2 percent on the quarter, undercutting the Bundesbank’s forecast of stagnation. Foreign trade and investment were notable weak spots and the signs are they may not improve soon.

France has fared little better, flatlining again in the second quarter. That has forced the French government to confront reality, saying it would miss its deficit target again this year and cutting its 2014 forecast for 1 percent growth in half. There was no mention of the 2015 goal when France’s public deficit is due to come into line with the EU’s 3 percent of GDP cap, but Finance Minister Michel Sapin said Paris would cut its deficit “at an appropriate pace”.

ECB’s fingers crossed for private loans growth

Mostly bereft of policy options except for outright quantitative easing, European Central Bank President Mario Draghi hopes that hundreds of billions of euros more in cheap loans to banks will boost inflation.

The jury will be out for a long time before we get any decision on whether they have worked.

The first two rounds of cash, worth over one trillion euros and administered as an emergency shock treatment to a patient on the verge of breaking up, helped keep the euro zone alive. 

Draghi vs Weidmann

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European Central Bank President Mario Draghi makes a lengthy appearance in the European Parliament in Strasbourg. He will doubtless reassert that the ECB would start printing money if necessary but, as we reported last week, policymakers are fervently hoping they won’t have to and that a raft of measures announced in June will do enough to lift the economy and inflation.

Bundesbank chief Jens Weidmann fired another broadside over the weekend, saying rates were too low for Germany and policy should remain expansive for no longer than absolutely necessary.

With less than a week to run to the July 20 deadline for a deal, Iran and the six world powers are miles apart on Tehran’s nuclear programme. U.S. Secretary of State John Kerry said on Sunday major differences persist – largely over uranium enrichment —  with Iran and Tehran did not demur.

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.

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.

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.