MacroScope

UK growth robust so what’s eating David Cameron?

Britain's Prime Minister Cameron arrives at the European Council headquarters ahead of a EU summit in Brussels

British GDP data are forecast to show healthy growth of 0.7 percent in the third quarter.

Britain’s economy is growing at a strong annual clip of around three percent, a pace most euro zone countries could only dream of. But the government is worried that the currency area’s new malaise could take the shine off things in the run-up to May’s general election.

Then there is the stunningly low level of wage and income growth, lower even than Britain’s sluggish level of inflation. This is a robust recovery but how many Britons are feeling it?

With elections increasingly in mind, the ruling Conservative party would not have been happy about some of the headlines from Day One of an EU summit in Brussels.

Climate change was the main business and Germany’s Angela Merkel said the EU will discuss a bridging loan to Kiev next week so that the country can pay in advance for Russian gas deliveries, as Moscow has demanded in return for turning the taps back on. That will come as a relief as any interruption to winter flows to western Europe, via Ukraine from Russia, would have dealt another blow to already struggling EU economies.

EU leaders meet for a gas

France's President Hollande talks with German Chancellor Merkel  during a meeting on the sidelines of a Europe-Asia summit in Milan

A two-day summit of EU leaders is supposed to focus on climate and energy policy including efforts to enhance energy security following the threat of interruptions to gas supplies from Russia.

That is no small issue. Russia and Ukraine have failed so far to reach an accord on gas supplies for the coming winter but agreed to meet again in Brussels in a week in the hope of ironing out problems over Kiev’s ability to pay.

An agreement was reached on the price Ukraine would pay Russia’s Gazprom as long as it paid in advance for the deliveries. But Moscow is still seeking assurances on how Kiev would find the money to pay. It’s likely the EU will have to step in there.

Nearing a gas deal

A pressure meter and gas pipes are pictured at Oparivske gas underground storage in Lviv region

Russian and Ukrainian energy ministers are due to meet European Energy Commissioner Guenther Oettinger in Brussels after presidents Petro Poroshenko and Vladimir Putin said they had agreed on the “basic parameters” of a deal to get gas flowing to Ukraine again this winter.

Russia cut off gas supply to Ukraine in mid-June following more than two years of dispute on the price and said Kiev had to pay off large debts for previously-supplied gas before it would resume supply.

Putin also threatened to cut gas supplies to Europe if Ukraine steals from the transit pipeline to cover its own needs this winter. Any interruption to flows to western Europe, via Ukraine from Russia, would deal another blow to already struggling EU economies.

Franco-German meeting

German Finance Minister Schaeuble and his French counterpart Sapin attend news briefing after talks in Berlin

The big question of the week is whether financial market gyrations continue, worsen or calm. European stocks are being called higher at the open.

Greece has been effectively shut out of the bond market. If it and others on the euro zone’s southern flank come under persistent market pressure, in a way that hasn’t happened for two years, the onus on the European Central Bank to act will grow and grow.

None of the countries likely to be in the firing line appear to qualify for the conditions attached to the ECB’s still-unused OMT bond-buying programme, the legality of which is under review by the European Court of Justice.

Putin – is he ready to deal?

Russian President Vladimir Putin and Ukrainian President Poroshenko are due to meet on the sidelines of the EU/Asia summit in Milan today to try to find a way out of the Ukraine crisis.

Germany’s Angela Merkel and French President Hollande will also meet the pair as part of a four-way contact group. The Kremlin has just said Putin and Merkel have “serious differences”.

Although Putin announced this week that Russian forces near the border with Ukraine would be pulled back, Western officials want to see clear evidence that Moscow is withdrawing troops and military equipment from east Ukraine. The Ukrainian and Russian presidents spoke by telephone on Tuesday and discussed measures to restore peace.

Market selloff – blip or new crisis?

A trader watches the screen in his terminal on the floor of the New York Stock Exchange in New York

A two-day summit of EU and Asian leaders, which was going to be most notable for a meeting between the heads of Russia and Ukraine, risks being overtaken by financial market tremors which have spread worldwide.

There’s a good case that markets, primed with a glut of new central bank money, had climbed to levels which the state of the economies that underpin them did not justify. With the Federal Reserve about to turn its money taps off, investors seem to have woken up to poor growth prospects in much of the world.

On the other hand, yesterday’s sell-off was sparked at least in part by some sub-par U.S. data and it’s hard to argue that prospects for the world’s largest economy have suddenly taken a turn for the worse.

French figures under microscope

French Finance Minister Sapin adjusts his tie while seated at the start of debate on France's 2015 budget at the National Assembly in Paris

France will submit its 2015 budget to the European Commission today and, after a respectable period of consideration, it is likely to be thrown right back.

Paris has confirmed it will yet again miss the EU’s debt limits, failing to achieve a budget deficit of three percent of GDP until 2017 four years after it should have done.

EU officials have warned they could use their powers to reject the budget outright – a political humiliation for Paris. French Finance Minister Michel Sapin ruled out substantive changes on Tuesday though he expressed hope that a rift could be avoided.

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.”

A first for British politics

Nigel Farage, the leader of UKIP drinks a pint of beer in the Gardeners Arms pub in Heywood near Manchester

By this time tomorrow, the anti-EU United Kingdom Independence Party is likely to be celebrating its first member of the Westminster parliament. Polls have just opened in the deprived seaside town of Clacton where the sitting Conservative lawmaker switched to UKIP and called a vote.

A second member of the ruling Conservative party has now defected to UKIP and will force another by-election before long leaving the party on tenterhooks over who might be next. Many fear they will lose their seats at the May 2015 general election as UKIP splits their vote.

Could that be enough for them to turn on David Cameron? Maybe not but if they did go for a new leader they would inevitably want someone who was more anti-European with all the implications that would have for a planned referendum on EU membership in 2017.

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.