MacroScope

After “get in the hole!”, Europe remains in a hole

Team Europe golfers pour champagne over captain Paul McGinley as they celebrate retaining the Ryder Cup at Gleneagles

Who says Europe is broken? The Ryder Cup stays here again and even Nigel Farage, leader of Britain’s anti-EU party, said he wanted Europe’s golfers to win.

The euro zone is not winning the economic competition however, despite the European Central Bank’s best efforts (it should be noted that only 3 of the 12 Ryder Cup team come from euro zone countries).

Prior to the ECB’s monthly policy meeting on Thursday, we get German inflation for September data today.

One upside for the currency bloc is the falling euro which has broken below its 2013 lows and is down almost nine percent from the peak it hit against the dollar in May. With U.S. money printing about to end next month and speculation intensifying about the timing of a first interest rate rise from Washington, there are good reasons to think that this trend could continue.

If it does, it would push the prices of imports up while making it easier for euro zone countries to sell abroad which should have an upward impact on both growth and inflation.

Britain to join the fray

A pair of U.S. Air Force F-15E Strike Eagles fly over northern Iraq

The British parliament will vote today on whether UK forces should join U.S.-led air attacks against Islamic State militants. Any action will be confined to Iraq, which has asked for help, not Syria where IS also controls swathes of territory. Prime Minister David Cameron has promised a separate vote on that if it comes to it.

Unlike last year when action to stop Syria’s Bashar al-Assad using chemical weapons against his own people was voted down, all the main parties appear to be broadly in support, probably swayed by the beheading of captives by the Sunni militants.

There shouldn’t be much difficulty arguing that the group poses a threat to Britain and its interests. Iraq’s prime minister said overnight that Baghdad had “credible” intelligence that Islamic State militants plan to attack subway systems in Paris and the United States. The attacks, he said, were plotted from inside Iraq.

Not really that close

Scotland's First Minister Alex Salmond speaks at the "Yes" Campaign headquarters in Edinburgh, Scotland

So what was all the fuss about?

A first rough draft of history would suggest the one opinion poll that gave the independents a lead nearly two weeks ago scared the Bejesus not only out of the British establishment but a significant chunk of Scottish voters too.

Prime Minister David Cameron has addressed the nation, promising to deliver new powers to Edinburgh to a very tight timetable, drafting laws in January in order to have it done after the 2015 general election.

He also promised more devolution for Northern Ireland, Wales and England, which is tantamount to a fiendishly complicated constitutional overhaul. It is not clear that the opposition Labour party is on the same page.

Q3 rebound but at cost of price cutting?

A woman walks past a shop in Madrid

Manufacturing PMI surveys across the euro zone and for Britain are due. The emerging pattern is of an improving third quarter after a generally poor second three months of the year.

The UK economy continues to romp ahead – growing by 0.8 percent in the second quarter – but on the continent there are signs of a new slowdown. The Bundesbank now forecasts no Q2 growth at all in Germany and though the euro zone flash PMI, released a week ago, showed the currency area rebounding in July, that largely came at the cost of companies cutting prices further, thereby pushing inflation lower still.

France continues to languish but Spain is one brightening spot, posting 0.6 percent quarterly growth in Q2, not stellar but healthy and adding to 0.4 percent growth in Q1.

EU cuts off Russian banks, puts ball in Moscow’s court

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

True to its word, the EU agreed sweeping sanctions on Russia yesterday, targeting trade in equipment for the defence and oil sectors and, most crucially, barring Russia’s state-run banks from accessing European capital markets. The measures will be imposed this week and will last for a year initially with three monthly reviews allowing them to be toughened if necessary.

There was no rowing back from the blueprint produced last week – having already agreed to exempt the gas sector – and the United States quickly followed suit, targeting Russian banks VTB, Bank of Moscow, and Russian Agriculture Bank, as well as United Shipbuilding Corp.

That is important. Both sides are striving to shut down alternative sources of capital for Russia’s financial sector although there has already been some reaching out to Asia. Gazprombank held a two-day roadshow with fixed-income investors in Seoul last week.

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.

Sanctions tighten

Britain's PM Cameron, Portugal's PM Passos Coelho, Germany's Chancellor Merkel and Finland's PM Stubb attend an EU leaders summit in Brussels

EU leaders failed to get anywhere on sharing out the top jobs in Brussels last night but did manage another round of sanctions against Russia.

This time they will target Russian companies that help destabilize Ukraine and will ask the EU’s bank, the European Investment Bank, to suspend new lending for Russia and seek a halt to new lending to Russia by the European Bank for Reconstruction and Development.

That represents a significant stiffening of its measures though still some way short of the United States which yesterday imposed its most wide-ranging sanctions yet on Russia’s economy, including Gazprombank and Rosneft as well as other major banks and energy and defence companies.

ECB: talk but no action

EThe European Central Bank holds its monthly policy meeting and after launching a range of new measures in June it’s a racing certainty that nothing will happen this time. However, ECB President Mario Draghi has plenty of scope to move markets and minds in his news conference.

We are still waiting for details of the ECB’s new long-term lending programme which is supposed to be contingent on banks lending the money on to companies and households. Last time they got a splurge of cheap money, the banks largely invested in government bonds and other financial market assets. With euro zone yields now at record lows, the ECB would not like to see a repeat.

Draghi will certainly be asked to clarify what looked like a new attempt at forward guidance. Last month, the ECB offered up new four-year loans to banks, and extended its offer of unlimited liquidity to the end of 2016.

Of Iraq and Ukraine

Barack Obama’s message that any military support for Iraq’s besieged government is contingent on Prime Minister Nuri al-Maliki taking steps to broaden his Shi’ite-dominated government may be having an impact.

Just hours after Maliki’s Shi’ite allies vowed to boycott any cooperation with the biggest Sunni party and his government had accused Sunni neighbour Saudi Arabia of backing “genocide”, Maliki broadcast a joint appeal for national unity alongside Sunni critics of his Shi’ite-led government.

They have tried and failed to come together before but Shi’ite, Sunni and Kurdish leaders met behind closed doors and then stood somewhat frostily before the cameras as Maliki’s predecessor read a statement denouncing “terrorist powers” and supporting Iraqi sovereignty.

Signs of European dash for growth

The ripples of EU election results are being felt, no more so than in France where the National Front topped the poll.

The day after the results, Prime Minister Manuel Valls promised further tax cuts for French households. The government is already committed to a 30 billion euros cut in labour taxes to help business but insists all this can be done while meeting its EU deficit commitments.

Brussels has already given Paris an extra two years to get its deficit down to three percent of GDP. Today, the European Commission will produce updated country recommendations.