Paul Taylor http://blogs.reuters.com/paul-taylor Tue, 28 May 2013 16:17:25 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.5 Europe’s austerity-to-growth shift largely semantic http://blogs.reuters.com/paul-taylor/2013/05/28/europes-austerity-to-growth-shift-largely-semantic/ http://blogs.reuters.com/paul-taylor/2013/05/28/europes-austerity-to-growth-shift-largely-semantic/#comments Tue, 28 May 2013 16:17:25 +0000 http://blogs.reuters.com/paul-taylor/?p=609 To listen to some European leaders, especially in France, you would think the era of austerity was over and the euro zone was going full steam ahead to revive economic growth. In a striking change of tone, European Commission President Jose Manuel Barroso said last month that austerity – the policy of cutting public debt by reducing spending and raising taxes – had reached the limits of public acceptance.

In reality, the shift is more in words than deeds. The rhetoric has changed but there has been no policy U-turn.

To be sure, the European Commission is granting governments more time to reduce their budget deficits to EU limits, chiefly because recession had made those targets unattainable. Euro zone states have a breathing space because bond markets have ceased to panic since the European Central Bank said last year it would act decisively if necessary to preserve the euro.

The EU emphasis is now on reducing “structural deficits” – an elastic measure meant to take account of the economic cycle – and on reforming labour markets and pension systems, opening up more sectors to competition and easing business regulation to improve countries’ growth potential.

Small initiatives are in the works, amid great political fanfare, to combat the scourge of mass youth unemployment which threatens southern Europe with a lost and alienated generation.

The ECB is exploring ways to ease lending to smaller businesses in the hardest-hit peripheral countries of the euro zone. But while it is keeping the liquidity taps to banks open, it has no intention of following the U.S., British and Japanese central banks into massive money printing to try to spur growth.

“It is not that we are letting austerity policies go,” said Carsten Brzeski, European economist at ING in Brussels. “It’s only about the pace of adjustment and a shift towards structural reforms to avoid ending up in a downward spiral of austerity.”

While the ECB could perhaps do a bit more to increase the supply of credit to business in depressed southern Europe, the main inhibitor to investment there was the lack of demand, for which there was no easy solution, he said. EU policymakers and central bankers say highly indebted countries will have no alternative for several years to curbing public spending and shrinking the state, however politically unpalatable that may be.

“Growth is the key to getting out of the crisis, we all agree on that,” German Bundesbank chief Jens Weidmann, the ECB’s leading hawk, said in a speech to French businessmen last week. “But renouncing budget consolidation will not bring us closer to that objective.”

Barroso’s April 22 recognition of the political limits of austerity recalled his predecessor Romano Prodi’s 2002 comment that the EU’s budget rules were “stupid” because they were too rigid.  “While I think this policy is fundamentally right, I think it has reached its limits,” Barroso said. “A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.”

To some, that sounded a bit like the pope questioning the existence of God. It prompted gleeful “austerity is over” headlines in countries such as Ireland that have endured harsh cuts, and irritated several European governments. In Brussels, a senior official in regular contact with national leaders said Barroso had “miscommunicated” and there was no alternative to austerity, even if the word was avoided.

“The idea that there will now be deficit spending, that the age of austerity is finished, is misleading,” the official said, speaking on condition of anonymity because of the sensitivity of his position. “On the margins, we can postpone budget consolidation by a year, or by two years, but it’s not really the answer. The answer is growth, and that is only going to come through structural reform and improved productivity.”

German Chancellor Angela Merkel, who has used Berlin’s financial clout since the start of the crisis to press for fiscal discipline, made clear that austerity and growth were not opposites and that budget savings must continue. In a veiled criticism of close ally France, which has so far raised revenue rather than cut public spending to narrow its budget gap, Berlin says governments should avoid increasing the tax burden because that harms growth.

Two events in the economics profession have sapped the theoretical case for so-called front-loaded austerity – making drastic public spending cuts at the start of an economic adjustment programme. First IMF chief economist Olivier Blanchard acknowledged that cutting government spending may have had a bigger impact than previously calculated on reducing economic output. Then U.S. economists found flaws in data underpinning the influential theory of Harvard economists Kenneth Rogoff and Carmen Reinhardt that public debt above 90 percent of GDP stunts growth. That leaves the economics of austerity murkier today than when the euro zone debt crisis struck in 2010, while the politics just keep getting harder.

Governments in Greece, Ireland, Portugal, Spain and Italy that implemented austerity measures such as civil service pay and job cuts, pension freezes, raising the retirement age and easing hire-and-fire rules have been turfed out by voters. Their successors have faced mass protests, rising anti-austerity populist movements and a steep decline in public support for the European Union.

EU policymakers were chilled to watch former Italian Prime Minister Mario Monti, a liberal technocrat revered in Brussels, crash and burn in a general election in February in which anti-austerity populists made stunning gains. The lesson that leaders such as French President Francois Hollande and new Italian Prime Minister Enrico Letta seem to have drawn is that they must pursue fiscal discipline by stealth while constantly talking up growth.

The question is whether they will be willing to pursue bold economic reforms that loosen job protection, cut labour costs, break open closed professions and change the incentives to work. The political price of such measures may be high since they disturb vested interests, and the economic payoff in higher growth rates and more job-creation may take years to be felt.

PHOTO: European Commission President Jose Manuel Barroso addresses a news conference during a European Union leaders summit in Brussels May 22, 2013.  REUTERS/Laurent Dubrule

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Egypt under IMF spotlight as loan talks resume http://www.reuters.com/article/2013/04/03/egypt-imf-idUSL5N0CQ1V520130403?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/04/03/egypt-under-imf-spotlight-as-loan-talks-resume/#comments Wed, 03 Apr 2013 16:07:04 +0000 http://blogs.reuters.com/paul-taylor/?p=603 CAIRO, April 3 (Reuters) – An International Monetary Fund
(IMF) team resumed long delayed negotiations with Egypt on
Wednesday on a $4.8 billion loan to ease a deepening economic
crisis in the most populous Arab country.

After two years of political upheaval, foreign currency
reserves have fallen to critically low levels, limiting Egypt’s
ability to buy wheat, of which it is the world’s biggest
importer, and fuel.

President Mohamed Mursi’s government signed a preliminary
deal with the IMF in November but postponed ratification in
December due to unrest ignited by a political row over the
extent of Mursi’s powers.

The IMF mission began by meeting finance ministry and the
central bank officials and is expected to stay “a week or 10
days or more”, government spokesman Alaa El Hadidi told
reporters. Prime Minister Hisham Kandil will meet the team when
it has completed its work, he said.

Cairo must convince the global lender it is serious about
reforms aimed at boosting growth and curbing an unaffordable
budget deficit. That implies tax hikes and politically risky
cuts in state subsidies for fuel and food including bread.

An IMF deal has eluded Egypt for nearly two years, despite
on-off talks first with an army-led government and now with
Mursi’s Muslim Brotherhood-controlled administration.

Economists say the IMF appears to question whether Egypt has
the political consensus needed to enact reforms – doubts that
months of turmoil have done nothing to ease.

Parliamentary elections that were due to start this month
have been pushed back until October and a new legislature may
not be in place until December.

Finance Minister Al-Mursi Al-Sayed Hegazy said on Monday the
government aimed to have a loan agreement completed by the IMF’s
spring meetings, held on April 16-21. But IMF officials have not
given a timeline and some private economists say a full deal
before the parliamentary polls seems unlikely.

“Our base case is that an IMF deal is unlikely before
parliamentary elections, but an emergency loan could possibly be
reached in the meantime,” Brahim Razgallah, an economist at JP
Morgan, said.

“…Since the constitutional crisis, things have become more
difficult and the political divide has widened… The IMF will
insist on having a political consensus behind the reform
programme.”

Just before the visit, the government announced an increase
in the price of subsidised cooking gas. But it has postponed
plans to ration subsidised fuel using smart cards until July 1
and some reports say that date may be pushed back further.

The Egyptian pound has lost a tenth of its value against the
dollar this year and is trading even lower on the black market,
driving up inflation. Shortages, meanwhile, threaten to
exacerbate tension in the street, where Mursi’s opponents have
been airing political grievances in protests that frequently
turn violent.

POUND TUMBLES

The United States and the European Union have urged Egypt to
build a broad political consensus in support of reforms required
by an IMF programme, but the main political parties have become
increasingly polarised.

U.S. Secretary of State John Kerry said on Tuesday that
Egypt was at a “tipping point”, telling reporters: “We share a
very real concern in the Obama Administration about the
direction that Egypt is apparently moving in.”

“We have been working very, very hard in the last weeks to
try to get the government of Egypt to reach out to the
opposition, to deal with the IMF, to come to an agreement which
will allow Egypt to begin to transform its economy and improve
the lives of its citizens.”

The leftist Popular Current party led by Hamdeen Sabahi, who
came third in last year’s presidential election, denounced the
proposed IMF loan in a statement on its Facebook page and joined
a small demonstration outside the Supreme Court on Wednesday
against the mission’s visit.

“This loan will lead to colonisation and the continued
dependency of the Egyptian economy,” Popular Current said,
adding it would have negative effects on the economy and on the
social and living conditions of Egyptians.

Seeking to protect the Egyptian pound, the central bank has
raised interest rates, increasing the cost of borrowing needed
to finance a state deficit expected to hit 12.3 percent of GDP
without reforms.

An economic plan submitted to the IMF envisages cutting the
deficit to 9.5 percent in the fiscal year beginning in July.

The financial crunch has forced the government to cut back
on fuel imports, leading to shortages that have caused transport
disruptions and power cuts. To ease shortages, Cairo has said it
aims to import oil from Iraq and neighbouring Libya while paying
off some of the money it owes to foreign energy firms.

Egypt has also cut back on wheat imports, running down grain
reserves in the hope that a bumper harvest will be enough to
feed its 84 million people.

A government statement on Wednesday said wheat reserves have
fallen to 2 million tonnes, enough to last 81 days. On March 27,
the government said it had a stock of 2.116 million tonnes.

Without a deal, Cairo could perhaps still limp along for
several more months with help from friendly Arab states such as
Qatar, but it would not be comfortable.

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Analysis: Germany sees itself as Europe’s grown-up, children sullen http://www.reuters.com/article/2013/04/01/us-eurozone-germany-idUSBRE93003P20130401?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/04/01/analysis-germany-sees-itself-as-europes-grown-up-children-sullen/#comments Mon, 01 Apr 2013 07:37:51 +0000 http://blogs.reuters.com/paul-taylor/?p=601 BERLIN (Reuters) – Buoyed by solid finances, roaring exports and low unemployment, Germany increasingly sees itself as the only grown-up in Europe, responsible for bringing wayward children into line to hold the family together.

The children are not enjoying it. Some, such as the Cypriots and Greeks and many Italians and Spaniards, are openly resentful of “Mutti” (mum), as Berlin officials privately call Chancellor Angela Merkel. Others, such as the French, are sulking.

The mood among German politicians and officials is one of economic self-confidence tinged with a sense of parental duty to provide the euro zone with stiff-backed leadership, even if that makes them unpopular in Europe.

“German policymakers have taken to their new found status with something close to gusto,” Simon Tilford, chief economist at the Centre for European Reform, said in the latest edition of the London-based think-tank’s bulletin.

“They routinely tell other euro zone countries how to run their economies, citing Germany as a model for the currency union as a whole.”

The view from Berlin, set out by a range of policymakers who spoke on condition of anonymity, is that Germany has a unique responsibility for the survival of the single currency area as its biggest and most dynamic economy.

The subtext is that since the Germans are the main bailout contributors and have most to lose in any collapse of monetary union, they must ensure that their partners cut their deficits, implement reforms and avoid mistakes that could sink the euro.

German confidence in the ability of the European Commission and the European Central Bank to hold to a firm course without yielding to political pressure is limited.

Hence Berlin’s insistence on involving the International Monetary Fund in all euro zone financial rescues and its own willingness to play bad cop, even if that means Merkel being burned in effigy or dressed in Nazi uniform by protesters.

Some European partners and many economists argue that her recipe of a synchronous fiscal contraction across Europe is deepening recession and raising unemployment and could turn the sovereign debt crisis into a social and political tsunami.

“Prolonging austerity today risks not achieving a reduction in deficits but the certainty of making governments unpopular so that populists will swallow them whole when the time comes,” French President Francois Hollande warned last week.

“I perfectly accept that European countries have to be rigorous, and France first of all. But not austerity, because sticking with austerity would condemn Europe not just to recession but to an explosion.”

In Berlin, such comments elicit a rolling of eyeballs. From Merkel on down, German leaders feel the French have not taken the measure of the crisis facing Europe and their own economy.

“There is a lack of will, a lack of awareness. What is needed is an emergency U-turn,” said a Francophile German lawmaker, adding: “There is still no clarity over their deficit reduction plans.”

SICK MAN

German leaders like to remind visitors that a decade ago their own country was depicted on the cover of The Economist weekly as the “sick man of Europe” for its rigid labor market, ineffective bureaucracy and low competitiveness.

“We are quite a good example of a success story,” says one senior politician who was in opposition in 2003 when Social Democratic Chancellor Gerhard Schroeder pushed through a tough overhaul of labor laws and reduction in unemployment benefits.

Last month’s bipartisan celebration of Schroeder’s “Agenda 2010″ program highlighted a broad consensus that the reforms had triggered an exemplary jobs miracle, even though many thousands in Germany now work for as little as 3 euros an hour.

Whatever the outcome of September’s general election, a “grand coalition” also exists de facto on many policy issues between Merkel’s conservatives and the Social Democrats.

When German officials are asked what joint liability they are willing to accept for borrowing or insuring euro zone bank deposits in return for stronger central control over national budgets and economic policies, the answer is to point a decade or more down the road without making a specific commitment.

“The problem is getting reforms in return for the present German solidarity in the crisis mechanisms,” one official said.

When she contemplates the future of this ageing continent, Merkel’s “reform or die” outlook is shaped by her experience of witnessing the collapse of her native East Germany.

At a mid-March EU summit on economic reforms, she drew the lessons of a slide-show by ECB President Mario Draghi, showing how wages had soared in southern states since the launch of the euro in 1999, far outstripping productivity gains.

Merkel said the crash course in macroeconomics highlighted how the gap had widened within the euro zone between countries with current account surpluses and those with deficits, and was an eye-opener for many leaders.

“It shows that high deficits are bad for growth,” she said.

There are three risks with her strategy: that the economic policy that worked for frugal Germany may not work for Europe, that a country unable to cope with tough bailout programs may default, and that southern Europeans may rebel against mainstream parties and vote in anti-austerity governments.

Despite green shoots of improvement in Spanish exports or Greek productivity, the economic outlook for southern Europe is still darkening and the horizon for any recovery continues to recede while unemployment keeps on rising.

No program country has defaulted so far but Greece has repeatedly fallen behind on its adjustment, and its debt has ballooned despite a second bailout last year. Germany made clear it would have left Cyprus to default and leave the euro if Nicosia had rejected its bailout terms.

An electoral backlash is already under way. Anti-austerity populists narrowly failed to win two Greek general elections last year and have now caused political deadlock in Italy.

There is a strong prospect that a backlash against German-driven austerity policies will fill the European Parliament next year with a bumper crop of Eurosceptics and political radicals.

Faced with ever more unruly children, “Mutti” may eventually face a hard choice between the breakup of the family and more financial support for the poorer relatives.

(Writing by Paul Taylor; Editing by Peter Graff)

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Q&A-What next after Cyprus bailout? http://www.reuters.com/article/2013/03/26/eurozone-cyprus-future-idUSL5N0CI3PP20130326?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/03/26/qa-what-next-after-cyprus-bailout/#comments Tue, 26 Mar 2013 17:12:54 +0000 http://blogs.reuters.com/paul-taylor/?p=599 BRUSSELS, March 26 (Reuters) – In bailing out Cyprus and
taking funds from savers instead of taxpayers, the euro zone has
crossed a Rubicon with implications for future banking rescues
in other countries despite assertions that the crisis in the
island nation is unique.

CYPRUS: ONE-OFF OR TEMPLATE?

Eurogroup Chairman Jeroen Dijsselbloem caused uproar in
financial markets by saying in an interview with Reuters and the
Financial Times that the Cyprus solution gave a flavour of how
Europe would handle future bank crises, by making banks solve
their own problems rather than using European taxpayers’ money.

Finnish Prime Minister Jyrki Katainen supported him, saying
that “bail-in” thinking should guide a planned European banking
union, but clarified that he did not necessarily mean depositors
should be hit in future.

ECB policymakers sought to calm the ensuing storm and
reassure savers throughout Europe by pointing out that Cyprus
was unique in that its banks were largely funded by deposits
rather than by issuing bonds and shares.

The European Commission said it might be possible for large
uninsured depositors to be “bailed-in” as part of the future
resolution of a bank under a new draft EU law, but savers with
less than 100,000 euros ($128,600) would not be hit.

Under existing rules, shareholders and bondholders are the
first to take losses. The exception so far has been senior
bondholders. The European Central Bank blocked any “haircut”, or
debt write-down, for them in Ireland’s bailout programme but has
since dropped its opposition in future cases.

Dijsselbloem’s comments made clear that the idea of using
the euro zone’s European Stability Mechanism (ESM) rescue fund
to recapitalise banks directly, agreed by EU leaders last June,
is increasingly remote and may never come to pass.

His thinking gave some insight into how policymakers may be
looking at new ways to deal with banking crises in the future.

WHAT NEXT IN CYPRUS?

Banks are due to reopen in Cyprus on Thursday after a
closure of nearly two weeks, but withdrawals will be limited
“for a matter of weeks”, its finance minister has said. The
government has yet to spell out restrictions on capital
movements and there are fears of a bank run.

The British security firm G4S that transports cash
for Cypriot banks is working round the clock, sending teams out
with police protection to stock bank machines and readying
guards for when banks reopen.

Cyprus Popular Bank will be among banks to reopen
for limited business even though it is due to be wound down
under the terms of the bailout deal, with insured deposits under
100,000 euros to be transferred to Bank of Cyprus.

The Cypriot parliament holds its weekly session on Thursday,
the first since the bitterly resented bailout deal, which may
inflict losses of some 40 percent on deposit accounts of more
than 100,000 euros in the two banks, many of them held by
Russians and savers from outside Cyprus.

Parliament does not need to ratify the bailout deal because
it already adopted bank resolution legislation last week.
However, its will have to approve privatisation laws for state
assets due to be sold under the EU/IMF programme.

The banks face big layoffs that may cause labour unrest.

Parliament, which rejected an earlier plan to impose a levy
on smaller bank deposits, may also seek to legislate to shield
pension funds, such as those of Cyprus Popular Bank workers,
from losses.

Critics have accused Cyprus Central Bank Governor Panicos
Demetriades, a fierce critic of austerity in his former role as
an economics professor at Leicester University in Britain, of
mismanaging the crisis and questioned whether he is capable of
implementing the bank resolution that covers the bailout.

WHAT NEXT IN THE EURO ZONE?

The European Central Bank has vowed to do “whatever it
takes” within its mandate to save the euro, notably by buying
the bonds of troubled euro zone countries that accept an EU/IMF
assistance programme, but that pledge has yet to be tested.

Euro zone finance ministers say there is no other country
which needs a bailout after Cyprus joined Greece, Ireland,
Portugal and Spain in receiving emergency loans from the
currency area’s rescue fund.

Ministers hope both Ireland and Portugal will manage to exit
their adjustment programmes and return to market funding this
year. Ireland has already issued its first 10-year bond since
2010. Portugal is some way behind but has also made its first
bond issue in January since the mid-2011 bailout.

EU governments and lawmakers agreed last week on the key
rules for a single banking supervisor for the euro zone, based
at the European Central Bank. The new supervisory body is due to
enter into force gradually by mid-2014.

The European Commission says it will propose laws this
summer for a single resolution mechanism for banks covered by
the supervisor.

The EU executive has also promised proposals at a later
stage to connect national deposit guarantee schemes, although EU
paymaster Germany and its northern allies have opposed any joint
liability for deposit insurance. One possible model could be to
make national guarantee schemes take out reinsurance contracts
with the euro zone rescue fund.

NEXT SHOE TO DROP?

Slovenia’s central bank chief Marko Kranjec said last week
he was sure his small euro zone country would not need a bailout
in the footsteps of Cyprus. Banks in Slovenia are nursing some 7
billion euros in bad loans, equal to about 20 percent of GDP,
but the banking sector’s assets represent just 135 percent of
Slovenian GDP, compared to 800 percent in Cyprus.

Slovenia has experienced political instability, with a new
centre-left government taking office last week after the
previous conservative administration lost its majority in
parliament in January over a corruption scandal.

Dijsselbloem said on Tuesday there has been no sign of
higher-than-normal withdrawals of bank deposits in the euro zone
or of abnormal shifts in deposits from peripheral to core
countries following the Cyprus deal.

Analysts say European savers and companies may diversify
their holdings to keep accounts under 100,000 euros.

Both Luxembourg and Malta have higher ratios of banking
sector balance sheets to GDP than Cyprus, but neither is seen as
carrying the same risks.

Before the Cyprus bailout drama, market attention was
focused on political uncertainty in Italy, where centre-left
leader Pier Luigi Bersani is struggling to form a minority
government after a general election that gave the radical
anti-system 5-Star movement the balance of power in the Senate.

However, after an initial spike following last month’s vote,
Italian borrowing costs have fallen again and markets seem
unfazed by the prospect, if Bersani fails, of another
short-lived technocratic government and an early return to the
polls.

The main threat to euro zone stability is now seen as the
absence of economic growth in southern Europe and the risk of
rising social unrest and political radicalisation over record
unemployment. Popular anger could topple Greece’s fragile
governing coalition, analysts say.

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Analysis: “Lex Cyprus” will set precedents for closer EU union http://www.reuters.com/article/2013/03/23/us-eurozone-cyprus-precedent-idUSBRE92M09N20130323?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/03/23/analysis-lex-cyprus-will-set-precedents-for-closer-eu-union/#comments Sat, 23 Mar 2013 17:37:26 +0000 http://blogs.reuters.com/paul-taylor/?p=597 BRUSSELS (Reuters) – Lawyers have a saying that hard cases make bad law.

Whatever happens this weekend on a bailout for Cyprus will set precedents for the euro zone’s future banking union, investor confidence in the single currency area and political relations among European states.

Europe’s political leaders, and their finance ministers, are having to decide in practice at breakneck speed on issues on which they have not yet agreed in theory.

Among those issues is whether euro membership is really irreversible for all member states, or only for countries deemed systemic, and what the true meaning is of the European Union’s agreed guarantee of 100,000 euros in bank deposits.

“Lex Cyprus” will likely be a template for future bailouts, bank resolution and the protection – or not – of creditors and depositors, even if euro zone leaders swear on the bones of saints, as they did for Greece, that this is a unique case.

Some precedents have already been set in a chaotic week of stumbling crisis management.

For the first time, European leaders made clear they were willing to cut loose a member of the 17-nation currency area, leaving it to default and abandon the euro if it did not meet the conditions set for a financial rescue.

The European Central Bank said it would pull the plug on Cypriot banks kept afloat by emergency lending assistance unless Cyprus had a bailout in place by next Monday night.

Even though the ECB does not yet have supervisory authority over European banks, or powers to resolve failed institutions, it effectively acted as a resolution authority since withholding liquidity would have the same effect as withdrawing a banking license.

A senior European Union official warned that in that case, the biggest banks would have to be wound down, and Nicosia would have to fend for itself and revert to issuing national money.

“If the financial sector collapses, then they simply have to face a very significant devaluation, and faced with that situation, they would have no other way but to start having their own currency,” the official told Reuters on Thursday.

COMBINED ULTIMATUMS

The combined ultimatums from Frankfurt and Brussels may have been intended primarily to jolt Cypriots into accepting a levy on large bank deposits that lawmakers had rejected, but it sent a message that recalcitrant small countries can be expelled.

That is the opposite of what EU leaders sought to signal when they went the extra mile last year to grant Greece more time and money to keep it in the euro zone.

“Why did we say this for Cyprus when we didn’t say it for Greece?” a euro zone central banker said. “Cyprus is 0.2 percent of the euro zone economy and Greece is 2 percent. Size matters.”

Like other European policymakers quoted in this report, he spoke on condition of anonymity because of the acute sensitivity of the negotiations.

EU paymaster Germany, with a general election in September, was keen to show it could say “no” and stick with it after domestic critics complained that Berlin had been stampeded into previous bailouts by anxious euro zone partners.

Last week’s EU-mandated attempt to impose a one-off levy on all bank deposits in Cyprus, rejected by the Cypriot parliament and subsequently disowned by euro zone finance ministers, set another precedent that caused an outcry among investors and many ordinary Europeans.

Stunned by the backlash, the ministers changed their minds within three days, blaming the Cypriot government for the plan to hit smaller savers, and said deposits below the 100,000 euro threshold should not after all be raided.

“I understand that electorates in Germany and northern Europe demand some sacrifice. However, when you accept a solution that basically expropriates 10 percent of deposits, you set a dangerous precedent,” Vladimir Dlouhy, a former Czech economy minister and now international advisor at Goldman Sachs, told Reuters. “If we get into deeper trouble, God help us, they may try to take 50 percent.”

The latest word from Cyprus suggests the levy on holdings of over 100,000 euros at Bank of Cyprus could go as high as 25 percent. Many of the accounts are held by Russians and other foreigners.

DAMAGE

The psychological damage may have been done.

There has been no bank run in Spain, Italy or Ireland, but depositors now know, if they did not suspect it before, that in extreme circumstances their savings in euro zone banks may not be as safe as they had imagined.

Tellingly, the International Monetary Fund urged the EU a week ago to press ahead with a common deposit guarantee, a red line for Germany which fears it will end up footing the bill.

The European Commission sought to distinguish between protecting deposits if a bank collapsed, in which case accounts of up to 100,000 euros were guaranteed by EU law, and “fiscal measures”, from which there was no such protection.

Cypriots were not alone in seeing the levy as an attempted “bank robbery” rather than a tax, since it touched capital rather than income.

In reality, even the EU guarantee in case of a bank failure is less certain than it sounds, since there is no procedure so far for other euro zone countries to help a country that does not have the money to compensate depositors.

In the case of Cyprus, not only would accounts with more than 100,000 euros be potentially wiped out in a bank failure, but European officials say there is little chance the Cypriot state would be able to reimburse all “guaranteed” deposits.

Berlin, in particular, opposes the idea of metalizing national deposit insurance schemes and the European Commission has yet to put forward a proposal for a financial backstop for the planned European banking union.

One idea that may get around the German objection would be to require national resolution funds to take out reinsurance contracts with the euro zone’s rescue fund, perhaps paying differentiated risk premiums.

If, as now seems likely, only accounts larger than 100,000 euros are hit in Cyprus, euro zone policymakers may be obliged by the public outcry to give stronger force to the deposit guarantee than they had originally intended.

In that case, the Cyprus outcome also risks upending the traditional hierarchy of claims in case of a bank failure, since big depositors will suffer a “haircut” but senior bondholders, of whom there are few in Cypriot banks, will not.

The Cyprus case does confirm another EU precedent in the treatment of small member states, which could have serious consequences for public support for European integration.

As with Ireland’s repeat referendums on the EU’s Nice and Lisbon treaties and Greece’s two general elections last year, the bloc has a habit of pushing small states to vote again until they produce the desired answer.

When France voted against a European constitutional treaty in 2005, no one suggested the French be made to return to the polls.

(Writing by Paul Taylor, editing by Mike Peacock)

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“Lex Cyprus” will set precedents for closer EU union http://uk.reuters.com/article/2013/03/23/eurozone-cyprus-precedent-idUKL6N0CEFS920130323?feedType=RSS&feedName=everything&virtualBrandChannel=11708 http://blogs.reuters.com/paul-taylor/2013/03/23/lex-cyprus-will-set-precedents-for-closer-eu-union/#comments Sat, 23 Mar 2013 17:30:37 +0000 http://blogs.reuters.com/paul-taylor/?p=595 BRUSSELS, March 23 (Reuters) – Lawyers have a saying that
hard cases make bad law.

Whatever happens this weekend on a bailout for Cyprus will
set precedents for the euro zone’s future banking union,
investor confidence in the single currency area and political
relations among European states.

Europe’s political leaders, and their finance ministers, are
having to decide in practice at breakneck speed on issues on
which they have not yet agreed in theory.

Among those issues is whether euro membership is really
irreversible for all member states, or only for countries deemed
systemic, and what the true meaning is of the European Union’s
agreed guarantee of 100,000 euros in bank deposits.

“Lex Cyprus” will likely be a template for future bailouts,
bank resolution and the protection – or not – of creditors and
depositors, even if euro zone leaders swear on the bones of
saints, as they did for Greece, that this is a unique case.

Some precedents have already been set in a chaotic week of
stumbling crisis management.

For the first time, European leaders made clear they were
willing to cut loose a member of the 17-nation currency area,
leaving it to default and abandon the euro if it did not meet
the conditions set for a financial rescue.

The European Central Bank said it would pull the plug on
Cypriot banks kept afloat by emergency lending assistance unless
Cyprus had a bailout in place by next Monday night.

Even though the ECB does not yet have supervisory authority
over European banks, or powers to resolve failed institutions,
it effectively acted as a resolution authority since withholding
liquidity would have the same effect as withdrawing a banking
licence.

A senior European Union official warned that in that case,
the biggest banks would have to be wound down, and Nicosia would
have to fend for itself and revert to issuing national money.

“If the financial sector collapses, then they simply have to
face a very significant devaluation, and faced with that
situation, they would have no other way but to start having
their own currency,” the official told Reuters on Thursday.

COMBINED ULTIMATUMS

The combined ultimatums from Frankfurt and Brussels may have
been intended primarily to jolt Cypriots into accepting a levy
on large bank deposits that lawmakers had rejected, but it sent
a message that recalcitrant small countries can be expelled.

That is the opposite of what EU leaders sought to signal
when they went the extra mile last year to grant Greece more
time and money to keep it in the euro zone.

“Why did we say this for Cyprus when we didn’t say it for
Greece?” a euro zone central banker said. “Cyprus is 0.2 percent
of the euro zone economy and Greece is 2 percent. Size matters.”

Like other European policymakers quoted in this report, he
spoke on condition of anonymity because of the acute sensitivity
of the negotiations.

EU paymaster Germany, with a general election in September,
was keen to show it could say “no” and stick with it after
domestic critics complained that Berlin had been stampeded into
previous bailouts by anxious euro zone partners.

Last week’s EU-mandated attempt to impose a one-off levy on
all bank deposits in Cyprus, rejected by the Cypriot parliament
and subsequently disowned by euro zone finance ministers, set
another precedent that caused an outcry among investors and many
ordinary Europeans.

Stunned by the backlash, the ministers changed their minds
within three days, blaming the Cypriot government for the plan
to hit smaller savers, and said deposits below the 100,000 euro
threshold should not after all be raided.

“I understand that electorates in Germany and northern
Europe demand some sacrifice. However, when you accept a
solution that basically expropriates 10 percent of deposits, you
set a dangerous precedent,” Vladimir Dlouhy, a former Czech
economy minister and now international advisor at Goldman Sachs,
told Reuters. “If we get into deeper trouble, God help us, they
may try to take 50 percent.”

The latest word from Cyprus suggests the levy on holdings of
over 100,000 euros at Bank of Cyprus could go as high as 25
percent. Many of the accounts are held by Russians and other
foreigners.

DAMAGE

The psychological damage may have been done.

There has been no bank run in Spain, Italy or Ireland, but
depositors now know, if they did not suspect it before, that in
extreme circumstances their savings in euro zone banks may not
be as safe as they had imagined.

Tellingly, the International Monetary Fund urged the EU a
week ago to press ahead with a common deposit guarantee, a red
line for Germany which fears it will end up footing the bill.

The European Commission sought to distinguish between
protecting deposits if a bank collapsed, in which case accounts
of up to 100,000 euros were guaranteed by EU law, and “fiscal
measures”, from which there was no such protection.

Cypriots were not alone in seeing the levy as an attempted
“bank robbery” rather than a tax, since it touched capital
rather than income.

In reality, even the EU guarantee in case of a bank failure
is less certain than it sounds, since there is no procedure so
far for other euro zone countries to help a country that does
not have the money to compensate depositors.

In the case of Cyprus, not only would accounts with more
than 100,000 euros be potentially wiped out in a bank failure,
but European officials say there is little chance the Cypriot
state would be able to reimburse all “guaranteed” deposits.

Berlin, in particular, opposes the idea of mutualising
national deposit insurance schemes and the European Commission
has yet to put forward a proposal for a financial backstop for
the planned European banking union.

One idea that may get around the German objection would be
to require national resolution funds to take out reinsurance
contracts with the euro zone’s rescue fund, perhaps paying
differentiated risk premiums.

If, as now seems likely, only accounts larger than 100,000
euros are hit in Cyprus, euro zone policymakers may be obliged
by the public outcry to give stronger force to the deposit
guarantee than they had originally intended.

In that case, the Cyprus outcome also risks upending the
traditional hierarchy of claims in case of a bank failure, since
big depositors will suffer a “haircut” but senior bondholders,
of whom there are few in Cypriot banks, will not.

The Cyprus case does confirm another EU precedent in the
treatment of small member states, which could have serious
consequences for public support for European integration.

As with Ireland’s repeat referendums on the EU’s Nice and
Lisbon treaties and Greece’s two general elections last year,
the bloc has a habit of pushing small states to vote again until
they produce the desired answer.

When France voted against a European constitutional treaty
in 2005, no one suggested the French be made to return to the
polls.

(Writing by Paul Taylor, editing by Mike Peacock)

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Europe’s social shock-absorbers show crisis strain http://in.reuters.com/article/2013/03/18/eu-stabilisers-idINDEE92H0FL20130318?feedType=RSS&feedName=everything&virtualBrandChannel=11709 http://blogs.reuters.com/paul-taylor/2013/03/18/europes-social-shock-absorbers-show-crisis-strain/#comments Mon, 18 Mar 2013 20:39:26 +0000 http://blogs.reuters.com/paul-taylor/?p=593 PARIS (Reuters) – Grigoris Lemonis, a 73-year-old Athens pensioner, uses his 580 euro monthly state pension to support his wife and the family of his son, an unemployed cook with two small children and a wife who works occasionally as a cleaner.

Three-generation families surviving on a single income are increasingly common across southern Europe as mass unemployment tears at the fabric of closely knit societies.

The continent’s social shock-absorbers are creaking under the strain of a prolonged economic crisis that began in 2008 and engulfed the euro zone in a sovereign debt crisis from 2010.

The welfare state that Europeans built after World War Two, and which many view as a defining achievement of their civilisation, is one reason why the Great Recession has not triggered a revolution or severe social unrest so far.

“Daily life has become pure misery,” said Lemonis, a former painter in the construction industry who owns his own house.

“We are up to here with bills and once all that is paid there’s nothing left to live a decent life,” he said, adding that the family can only afford meat once or twice a month.

With more than 26 million unemployed in the 27-nation European Union, including nearly 6 million young people, the system is struggling, and in some places failing, to cope. Many of the jobless have exhausted their benefit entitlements.

“In many countries, the poor are getting poorer,” says Laszlo Andor, the EU’s Commissioner for Employment and Social Affairs, pointing to a growing North-South divergence. “Europe’s social fabric is clearly under pressure and a stronger response at EU and national level is needed.”

Social spending rose across the continent in the first phase of the crisis but states like Greece, Portugal, Ireland, Spain and Italy that were hardest hit have now had to cut outlays on pensions, healthcare, education and unemployment benefits.

Countries that target social spending towards providing services such as childcare, vocational training, job-search assistance and accessible healthcare have better results than those that spend most in cash payments to pensioners and the unemployed, Andor told Reuters in an interview.

While Austria and Spain both spent about 15 percent of GDP on social welfare other than pensions, Austria achieved a 55 percent poverty reduction while Spain managed only 28 percent.

Countries like Italy and Poland that spend a higher share of their social budget on pensions tend to be less effective in alleviating poverty because the working-age population most severely hit by the crisis is less well covered, Andor said.

But welfare systems breed their own interest groups and are fiendishly hard to transform.

AFFORDABILITY

Political leaders are fretting about the affordability of the European social model in an era of high public debt, low growth and ageing populations.

“If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” German Chancellor Angela Merkel said in an interview with the Financial Times last December.

Social spending as a proportion of output is now at least 6 percent higher than in 2007 on average in the 34 countries of the Organisation for Economic Cooperation and Development, a club of industrialised democracies of which 21 are EU members.

Moreover, ageing populations are set to drive up the costs of pensions and healthcare in coming years, the OECD said.

The majority of EU governments have used the crisis as a reason to raise the retirement age, bringing it more into line with increasing life expectancy, said Willem Adema, an OECD expert on employment, labour and social affairs.

Social scientists distinguish three broad welfare models: Nordic, continental European and Anglo-Saxon.

Nordic countries offer a high level of “cradle to grave” welfare with an emphasis on pre-school childcare and education, designed to keep women and older people in the labour market.

The continental European model features contributory social insurance systems that offer strong protection to “insiders” with protected jobs, while continuing to regulate employment and the labour market.

The Anglo-Saxon model tends to make welfare payments smaller and more selective and encourages private provision of healthcare, education and pensions for the better-off.

The Nordic model seems to have proven the most effective at reducing poverty without discouraging people from work, although it comes with the highest taxes.

Britain and Ireland pay cash allowances to stay-at-home single mothers, contrary to the OECD and EU view that such money is better spent on providing public childcare. In Germany, Merkel’s government plans to introduce such a benefit this year.

“It makes more sense to get people into work than to focus on paying benefit to stay home,” the OECD’s Adema said. “Yet amazingly, some countries are cutting pre-school childcare.”

European governments have found it easier to trim welfare systems at the edges than to reform them radically.

In particular, spending more on young children and school-leavers to promote employment and skills and less on the elderly is politically difficult. Older people vote more than the young.

“In many countries, it is the middle class who are the direct beneficiaries of social security entitlements,” policy analysts Patrick Diamond and Guy Lodge wrote in a paper for the Policy Network think-tank. “This makes pensions and welfare payments to older cohorts practically untouchable.”

The Netherlands, where retirees enjoy the highest purchasing power in Europe, provides an example. Its recently created 50PLUS party that campaigns on behalf of pensioners won two seats in the 150-member parliament for the first time last year.

Since the new coalition of centre-right Liberals and the centre-left Labour party agreed to raise the retirement age to 67 from 2021, support for the grey movement has soared. A poll this month showed 50PLUS would win 18 seats if the election were held now, making it the third biggest party.

Older voters may fight their political corner, but they also should grasp the need to leave resources for social spending for the young. Just ask Lemonis – the Athens pensioner supporting two younger generations on his dwindling monthly allowance.

“At least we pensioners are old and we’ve lived our lives,” he said. “I’m worried about our children. What will they do when we can no longer help them?”

(Additional reporting by Karolina Tagaris in Athens and Sara Webb in Amsterdam; Writing by Paul Taylor; Editing by Peter Graff)

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Analysis: Europe’s social shock-absorbers show crisis strain http://www.reuters.com/article/2013/03/18/us-eu-stabilisers-idUSBRE92H04S20130318?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/03/18/analysis-europes-social-shock-absorbers-show-crisis-strain/#comments Mon, 18 Mar 2013 06:59:15 +0000 http://blogs.reuters.com/paul-taylor/?p=591 PARIS (Reuters) – Grigoris Lemonis, a 73-year-old Athens pensioner, uses his 580 euro ($760) monthly state pension to support his wife and the family of his son, an unemployed cook with two small children and a wife who works occasionally as a cleaner.

Three-generation families surviving on a single income are increasingly common across southern Europe as mass unemployment tears at the fabric of closely knit societies.

The continent’s social shock-absorbers are creaking under the strain of a prolonged economic crisis that began in 2008 and engulfed the euro zone in a sovereign debt crisis from 2010.

The welfare state that Europeans built after World War Two, and which many view as a defining achievement of their civilization, is one reason why the Great Recession has not triggered a revolution or severe social unrest so far.

“Daily life has become pure misery,” said Lemonis, a former painter in the construction industry who owns his own house.

“We are up to here with bills and once all that is paid there’s nothing left to live a decent life,” he said, adding that the family can only afford meat once or twice a month.

With more than 26 million unemployed in the 27-nation European Union, including nearly 6 million young people, the system is struggling, and in some places failing, to cope. Many of the jobless have exhausted their benefit entitlements.

“In many countries, the poor are getting poorer,” says Laszlo Andor, the EU’s Commissioner for Employment and Social Affairs, pointing to a growing North-South divergence. “Europe’s social fabric is clearly under pressure and a stronger response at EU and national level is needed.”

Social spending rose across the continent in the first phase of the crisis but states like Greece, Portugal, Ireland, Spain and Italy that were hardest hit have now had to cut outlays on pensions, healthcare, education and unemployment benefits.

Countries that target social spending towards providing services such as childcare, vocational training, job-search assistance and accessible healthcare have better results than those that spend most in cash payments to pensioners and the unemployed, Andor told Reuters in an interview.

While Austria and Spain both spent about 15 percent of GDP on social welfare other than pensions, Austria achieved a 55 percent poverty reduction while Spain managed only 28 percent.

Countries like Italy and Poland that spend a higher share of their social budget on pensions tend to be less effective in alleviating poverty because the working-age population most severely hit by the crisis is less well covered, Andor said.

But welfare systems breed their own interest groups and are fiendishly hard to transform.

AFFORDABILITY

Political leaders are fretting about the affordability of the European social model in an era of high public debt, low growth and ageing populations.

“If Europe today accounts for just over 7 per cent of the world’s population, produces around 25 per cent of global GDP and has to finance 50 per cent of global social spending, then it’s obvious that it will have to work very hard to maintain its prosperity and way of life,” German Chancellor Angela Merkel said in an interview with the Financial Times last December.

Social spending as a proportion of output is now at least 6 percent higher than in 2007 on average in the 34 countries of the Organisation for Economic Cooperation and Development, a club of industrialized democracies of which 21 are EU members.

Moreover, ageing populations are set to drive up the costs of pensions and healthcare in coming years, the OECD said.

The majority of EU governments have used the crisis as a reason to raise the retirement age, bringing it more into line with increasing life expectancy, said Willem Adema, an OECD expert on employment, labor and social affairs.

Social scientists distinguish three broad welfare models: Nordic, continental European and Anglo-Saxon.

Nordic countries offer a high level of “cradle to grave” welfare with an emphasis on pre-school childcare and education, designed to keep women and older people in the labor market.

The continental European model features contributory social insurance systems that offer strong protection to “insiders” with protected jobs, while continuing to regulate employment and the labor market.

The Anglo-Saxon model tends to make welfare payments smaller and more selective and encourages private provision of healthcare, education and pensions for the better-off.

The Nordic model seems to have proven the most effective at reducing poverty without discouraging people from work, although it comes with the highest taxes.

Britain and Ireland pay cash allowances to stay-at-home single mothers, contrary to the OECD and EU view that such money is better spent on providing public childcare. In Germany, Merkel’s government plans to introduce such a benefit this year.

“It makes more sense to get people into work than to focus on paying benefit to stay home,” the OECD’s Adema said. “Yet amazingly, some countries are cutting pre-school childcare.”

European governments have found it easier to trim welfare systems at the edges than to reform them radically.

In particular, spending more on young children and school-leavers to promote employment and skills and less on the elderly is politically difficult. Older people vote more than the young.

“In many countries, it is the middle class who are the direct beneficiaries of social security entitlements,” policy analysts Patrick Diamond and Guy Lodge wrote in a paper for the Policy Network think-tank. “This makes pensions and welfare payments to older cohorts practically untouchable.”

The Netherlands, where retirees enjoy the highest purchasing power in Europe, provides an example. Its recently created 50PLUS party that campaigns on behalf of pensioners won two seats in the 150-member parliament for the first time last year.

Since the new coalition of centre-right Liberals and the centre-left Labor party agreed to raise the retirement age to 67 from 2021, support for the grey movement has soared. A poll this month showed 50PLUS would win 18 seats if the election were held now, making it the third biggest party.

Older voters may fight their political corner, but they also should grasp the need to leave resources for social spending for the young. Just ask Lemonis – the Athens pensioner supporting two younger generations on his dwindling monthly allowance.

“At least we pensioners are old and we’ve lived our lives,” he said. “I’m worried about our children. What will they do when we can no longer help them?”

($1 = 0.7680 euros)

(Additional reporting by Karolina Tagaris in Athens and Sara Webb in Amsterdam; Writing by Paul Taylor; Editing by Peter Graff)

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Analysis: Italy’s Grillo blazes trail for Europe’s populists http://www.reuters.com/article/2013/03/08/us-europe-populists-idUSBRE9270KH20130308?feedType=RSS&feedName=everything&virtualBrandChannel=11563 http://blogs.reuters.com/paul-taylor/2013/03/08/analysis-italys-grillo-blazes-trail-for-europes-populists/#comments Fri, 08 Mar 2013 13:09:15 +0000 http://blogs.reuters.com/paul-taylor/?p=589 PARIS (Reuters) – Italian comic-turned-activist Beppe Grillo has blazed a trail for populist political movements around Europe by taking his Five Star Movement (M5S) from obscurity to become Italy’s largest party in its first general election campaign.

Grillo’s stunning success in turning a fringe protest group into a national force while refusing to be interviewed on television or debate with mainstream politicians may be studied by political scientists and campaign operatives for years.

Populists hostile to the euro or to immigration have ridden a wave of anger over austerity, recession and unemployment to make inroads from the Netherlands to France, Finland and Greece since the financial crisis began in 2008.

But none has upended national politics as suddenly as the 64-year-old Grillo, a self-made millionaire satirist.

His spectacular rise highlights the threat to center-right and center-left parties of government around Europe that are involved in implementing unpopular austerity policies and structural economic reforms.

Grillo’s unique combination of grassroots organization, personal charisma, rock-star-style road tour, Internet savvy and use of social media confounded pundits and stunned an elderly political class when M5S grabbed 26 percent of the vote.

His central theme is to denounce the Italy’s political and business elite as corrupt and over-privileged.

The new-age movement of political novices, which advocates sweeping electoral reform, clean government and environmental causes, seized the balance of power in the Senate, making it hard for any party to form a stable government.

“By standing on an anti-establishment platform and using modern communications, (Grillo) has combined medium and message to create a genuinely novel type of movement,” Britain’s Demos think-tank said in a report.

“Grillo’s remarkable success shows the effectiveness of communicating and organizing through the Internet – and the potential that has to speak directly to millions of people, especially those who are disenchanted with existing political structures,” said the study of his Facebook followers commissioned by the Open Society Institute.

ARAB SPRING TECHNIQUES

Historically, revolutionaries have often exploited new technology to propagate their message and outwit flat-footed authorities. Martin Luther used the printing press to challenge the Roman Catholic church’s monopoly on the scriptures.

In 1978, Ayatollah Ruhollah Khomeini’s anti-Shah sermons calling for an Islamic Revolution, dictated by telephone from exile in Iraq and France, were smuggled around Iran on mass-replicated audio cassettes.

The fax machine played a key role in the 1987 Palestinian uprising, relaying instructions from underground leaders around towns, refugee camps and villages in the occupied West Bank and Gaza Strip cut off by Israeli military blockades.

Radio and television broadcasts from the West helped bring about the fall of the Berlin Wall and communist rule in eastern Europe and the Soviet Union in 1989-91.

Grillo’s social media campaign mirrors tactics used by Arab democracy activists in 2011 to mount protest movements that swept veteran autocrats from power in Tunisia and Egypt.

M5S’s policy statements are issued via Grillo’s blog, the most widely read in Italy according to ‘BlogItalia’ rankings.

His Facebook page has nearly 1.3 million fans, more than twice the number of center-right former Prime Minister Silvio Berlusconi and roughly 10 times the following of center-left leader Pier Luigi Bersani and outgoing technocrat Prime Minister Mario Monti. He also has a million followers on Twitter.

Grillo shunned the traditional media by choice, accusing them of being in thrall to corrupt politicians and big business.

Instead, he criss-crossed Italy in a camper van on a “Tsunami Tour” of 77 public rallies in 38 days, drawing hundreds of thousands to town squares, while countless thousands more watched live webcasts of his hoarse-voiced harangues.

His success in galvanizing alienated voters, especially the young, wrongfooted pollsters who had credited M5S with just 16 percent in the last published surveys two weeks before the election.

GREEK EPICENTRE

While austerity has driven voters towards the radical fringe across much of Europe, in most countries, protest parties have little prospect of winning national power.

In Greece, however, the radical leftist SYRIZA party, which opposed an EU-IMF bailout, almost beat the center-right New Democracy party of Prime Minister Antonis Samaras before voters stepped back from the brink in a second election last June.

The ultra-nationalist Golden Dawn, branded neo-Nazi by critics for its black-uniformed activists and muscular anti-immigrant crusading, won 7 percent in that election and now polls more than 10 percent, putting it in third place.

Although another election is not due until 2016, Brussels policymakers’ nightmare is that Samaras’ fragile coalition falls apart over austerity measures, forcing an early poll that could open the door to radical forces.

In Spain, corruption scandals, a long recession and high unemployment have soured the public mood and voters are turning increasingly toward smaller parties to express their disgust with the center-right People’s Party and the Socialists.

Yet politicians and pollsters do not see an extreme fragmentation that would break down the country’s dominant two-party system and lead to Italian-style uncertainty.

The latest Metroscopia poll shows that if elections were held now, Prime Minister Mariano Rajoy’s center-right Popular Party would take 24.3 percent, far from its absolute majority in 2011, and the opposition Socialists would get 23 percent.

The ex-Communist United Left has risen to 15.4 percent, more than twice its 2011 result and the centrist Union for Progress and Democracy has doubled its score to 10.0 percent.

In wealthier northern Europe, where the economic crisis has not bitten so hard but resentment of bailouts for south European countries is strong, populists may have peaked for now.

The two mainstream pro-European parties won a surprisingly clear general election victory in the Netherlands in September, while anti-euro radicals on the right and far-left fell back after riding high in the polls early in the campaign.

Voters punished Geert Wilders’ anti-Islam Freedom Party, which had held the balance of power before the vote and imposed some of its anti-immigration agenda, for bringing the government down and opposing European Union membership.

In Germany, the Pirates Party, which campaigns for Internet freedom, looks to be running out of steam after a string of regional gains. It is polling well below the 5 percent threshold for entering parliament in September’s general election.

The anti-bailout Finns Party scored less well in local elections last year after its general election surge in 2011.

While Europe’s populists are moving away from the limelight on some national stages, they may move towards it in next year’s European Parliament elections, where an expected low turnout will give protest votes greater impact.

(Writing by Paul Taylor; editing by Philippa Fletcher)

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EU needs ‘who lost Italy’ debate on austerity http://uk.reuters.com/article/2013/03/04/uk-eu-austerity-idUKLNE92301F20130304?feedType=RSS&feedName=everything&virtualBrandChannel=11708 http://blogs.reuters.com/paul-taylor/2013/03/04/eu-needs-who-lost-italy-debate-on-austerity/#comments Mon, 04 Mar 2013 10:16:54 +0000 http://blogs.reuters.com/paul-taylor/?p=586 BRUSSELS (Reuters) – European policymakers should be asking themselves “who lost Italy” after a grassroots revolt against austerity, unemployment and the political elite caused an electoral earthquake in the euro zone’s number three economy.

Instead, most are insisting that their policy mix to fight the currency area’s debt crisis is right, even though the latest EU forecasts have pushed any prospect of meaningful economic recovery in southern Europe back into the middle distance.

A surge in support for anti-euro populist Beppe Grillo and the surprise resurrection of former Prime Minister Silvio Berlusconi on an anti-austerity platform in last week’s election have plunged Rome into political deadlock.

Italy, which had been governed by respected technocrat Mario Monti for 15 months since Berlusconi’s last government fell, is far from the worst affected by the three-year-old debt crisis.

Unemployment there stands at 11.7 percent, less than half the rate of Greece and Spain, where one of every two young people is without a job.

If a milder recession and less severe spending cuts and tax rises can cause such a social and electoral revolt in Italy, the risks of an explosion in Greece and Spain ought to be greater.

Yet the official reaction from Brussels and Frankfurt is to act as if nothing, or almost nothing, had happened.

“The crisis is not yet over and efforts must not be relaxed,” European Commission President Jose Manuel Barroso said in a joint statement with Monti two days after the election.

At a Reuters Summit on the future of the euro zone, Barroso appealed to European leaders to stay the course and “not give in to populism”. Despite the bleak growth forecasts, structural reforms were starting to bear fruit, he said.

Barroso reeled off figures showing current account deficits in Portugal, Spain, Italy and Greece were shrinking and Ireland was back in surplus. Exports from Spain and Portugal were rising and the labour competitiveness gap between northern and southern Europe was narrowing.

Those numbers have a flipside. Payments imbalances are down mostly because those countries’ imports have shrunk due to sinking demand. The labour cost gap has declined largely due to mass layoffs in southern states rather than productivity gains.

Exports account for less than 20 percent of the Iberian countries’ output, less than half Germany’s ratio and too little to offer a fast track to recovery.

SOCIAL CRISIS

While the European Central Bank removed the danger of a financial meltdown of the euro zone with its bond-buying plan, there is now a growing risk of a social crisis that could lead to one or more southern countries leaving the currency area.

“I absolutely think it can get a lot worse,” said Clemens Fuest, the incoming chief of Germany’s respected ZEW economic research institute.

“There is really the current plausible scenario for a break-up of the currency union. It may very well be that in these countries at some point the population will say ‘we don’t believe things will get better’,” he told the Reuters Summit.

The degree of despair would have to be high to risk leaving the euro area, “but if things continue, if unemployment goes up to 30 percent… in Spain, there certainly is a danger that might happen”.

Zsolt Darvas of the Bruegel think-tank in Brussels said southern European countries were trapped in a downward spiral of economic contraction and rising debt for an unknown duration but had no alternative to fiscal consolidation.

The only way out was to alter Europe’s fiscal policy mix by stimulating demand in northern Europe, notably with tax cuts in Germany, and giving the European Investment Bank a huge capital increase to lend to companies in southern Europe, he said.

Using the EIB to inject the equivalent of 2-3 percent of gross domestic product a year into south European economies for a limited number of years would be the most effective and politically feasible way to revive growth, Darvas said.

No such plans are under consideration in the European Union, and German, Dutch and Finnish voters remain deeply hostile to any fiscal transfers to southern Europe.

With Germany facing its own general election in September, followed by the usual period of coalition negotiations, it is hard to imagine any major policy shift this year.

EU growth initiatives so far have been on a far more modest scale, including a small boost to EIB capital last year and a recently created 6 billion euro youth employment fund due to take effect next January to support job training and mobility.

Monti warned repeatedly last year that anti-European populists would gain ground in the south unless the euro zone did more to support his efforts and those of Spanish Prime Minister Mariano Rajoy by bringing down borrowing costs.

Those costs did fall significantly after the ECB announced its bond-buying initiative in September, but Monti’s appeal for more financial solidarity from Germany fell on deaf ears.

Whether his election debacle, after European leaders encouraged him to enter the race, will sway minds in the EU remains to be seen.

For the moment, their key priority is to help Ireland and Portugal return to capital markets later this year to demonstrate success for their bailout and adjustment programmes.

French Finance Minister Pierre Moscovici, also speaking at the Reuters Summit, was one of the rare voices to say the Italian voter backlash showed that austerity had gone far enough and it was time to strengthen growth.

His German counterpart, Wolfgang Schaeuble, a leading advocate of austerity during the crisis, drew no such lesson, saying European policies were not to blame for greater inequality and economic divergence between north and south.

“We need to continue on this path, but we will have setbacks,” Schaeuble said.

It may take another, bigger jolt than Italy’s election to spur euro zone leaders to change course, if they ever do.

(Writing by Paul Taylor; Editing by Jeremy Gaunt)

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