MacroScope

Today sees the release of the European Commission’s annual review of its members’ economic and debt-cutting policies. It’s a big moment.

This is the point at which we get confirmation that France, Spain, Slovenia and others will be given more time to get their budget deficits down to target. We already know that France will get an extra two years, while Spain will get another two extra years (to 2016) to bring back its deficit below 3 percent. That comes on top of the 1-year leeway given last year.

This is the austerity versus growth debate in action. But let’s be clear, whatever the rhetoric, this is anything but an end to austerity. What it is, is an invitation to cut more slowly for longer. And in return, there will be extra pressure to press ahead with structural reforms to make economies more competitive and help create jobs. Spain already has, France has barely started and it is there that a lot of the concern rests. If Europe’s second largest economy fails to revitalize itself it will be a big blow to the EU project and further erode France’s political ability to drive it in tandem with Germany.

The European Commission is likely to ask France to tackle its labour laws which makes it difficult to fire someone on a permanent contract, making employers reluctant to hire. It also has the highest minimum wage in Europe and will be asked to open up closed professions like taxi drivers, the legal professions and the health sector, and allow competition into railways and electricity. Paris is under internal pressure too. Yesterday its central bank governor, Christian Noyer, said it must cut public spending after Standard & Poor’s declared that a further rating downgrade was probable absent further deficit-cutting measures – this at a time when the economy has just slid back into recession. Noyer also said it was inevitable that the French would have to work longer. That adds up to something of a perfect storm for a Socialist government already facing stiff opposition from its allies.

Outside the euro zone, Brussels could announce that Hungary can exit its excessive deficit procedure, which would be another political coup for Prime Minister Viktor Orban and his unorthodox policy approach. Budapest is working on a standback on the apparent success of Orbanomics, defying all expectations. The man he appointed to run the  central bank will hold a news conference on his plans to boost growth. Yesterday, he and his colleagues cut interest rates for the 10th consecutive month and flagged more to come.

European Central Bank chief Mario Draghi felt it necessary yesterday to depart from the script at a ceremony awarding an honorary degree to reiterate his message from last Thursday – that the ECB could cut interest rates again and was looking at pushing the deposit rate which it charges banks for holding their funds overnight into negative territory in an attempt to get them to lend again.

Nothing new in the message obviously but the fact he felt the need to repeat it at a forum at which nobody would expect him to could be telling. Draghi has form here. It was at a pre-Olympics conference in London last July that he delivered his “whatever it takes” to save the euro pledge that fundamentally shifted the terms of the currency bloc’s debt crisis.

That the recession-plagued euro zone economy could do with a shot in the arm is beyond question though Draghi insisted countries must not let up on their debt-cutting. Very different tone from the prime ministers of Italy and Spain who demanded action to cut unemployment though Italy’s Enrico Letta said growth could be boosted without increasing debt.

It’s European Central Bank day and we have it on very good authority that a quarter-point interest rate cut is on the cards, which will take rates to a record low 0.5 percent. A plunge in euro zone inflation to 1.2 percent, way below the target of close to but below 2 percent, has cemented the case for action.

In terms of reviving the euro zone economy this is pea shooter and elephant territory. The ECB has consistently diagnosed the key problem that already ultra-low interest rates are not transmitted to high debt corners of the euro zone, where lending rates are much higher and credit restricted. A rate cut won’t change that. It also illuminates the gulf in approach with the Bank of Japan and Federal Reserve who continue to print money at a furious rate.

The Fed said on Wednesday it would continue buying $85 billion in bonds with new money each month and added it would step up purchases if needed to protect the economy, dousing recent suggestions that the programme could be wound up in the months ahead. Nonetheless, a euro rate cut will help at the margins.

It’s May Day and most of Europe, barring Britain, is taking a holiday so maybe it’s a day to take stock.

But first, a nervous glance at little Slovenia. Last night Moody’s cut its debt rating to junk, forcing Ljubljana to abandon a planned bond issue which looked set to raise several billion dollars and making a fifth euro zone sovereign bailout much more likely. Given the ham-fisted effort to rescue Cyprus didn’t put markets into a spin, it’s unlikely Slovenia will upset the euro zone applecart but it’s a reminder that this crisis isn’t over and won’t be until the currency bloc gets serious about creating a banking union. Slovenia’s problems, like Cyprus’s, are rooted in the banking sector, which is stifled by about 7 billion euros in bad loans.

One bullet was dodged when the Cypriot parliament narrowly approved its bailout late yesterday, which will avert bankruptcy but at a painful cost.

The Cypriot saga has thrown the spotlight on Slovenia, which is also a small euro zone country struggling with an over-burdened banking sector.

Slovenia’s mostly state-owned banks are nursing some 7 billion euros of bad loans, equal to about 20 percent of GDP, underpinning persistent speculation that the country might have to follow other vulnerable euro zone countries in seeking a bailout.

According to Standard Bank’s head of emerging market research Tim Ash:

The latest crisis in the euro zone, this time in Cyprus, continues to raise questions as to possible contagion effects throughout the region, and in particular which economies could be next.