Eurozone Blog

After a short honeymoon, Italian politics has returned to its normal state of partisanship, with the PD proposing a constitutional change that would effectively ban Beppe Grillo’s party from standing for an election, and receiving official funding. Corriere della Sera reports that the law was brought in by PD Senate leader and constitutional affairs committee chairwoman, and has met with an outcry, not by Grillo, who warned of massive social unrest, but also by Matteo Renzi, the mayor of Florence. Italian papers are again full of articles about Renzi, who is repositioning himself as a potential successor to Enrico Letta. Renzi said that one has to beat one’s opponents, not disenfranchise them.

Separately, Silvio Berlusconi is hitting back at the PD for attempts to ban him for holding office. He is still supporting the government, but his tones of attack have become increasingly hostile.

Ireland’s corporate tax regime comes under international scrutiny after the US Senate said on Monday that Apple paid little or no tax on tens of billions of dollars in profits of its Irish subsidiaries and that it had negotiated a special corporate tax rate of less than 2%.  The report found that Apple's subsidiary, AAPL.O, was able to shelter billions of dollars of income from tax because it used an unusual loophole in the Irish tax code, Reuters reports. AOI, alongside Apple Sales International (ASI) and Apple Operations Europe, are all incorporated in Ireland but are not deemed to be tax resident there The Irish prime minister said that Ireland does not cut special tax deals with foreign companies and that the US Senate report is incorrect. An Irish opposition party, meanwhile, called for Irish-based multinationals to be questioned on corporate tax by a parliamentary committee as debate raged over how much tax the companies actually pay.

In the Irish Times Arthur Beesley comments that the revelations put Ireland on a defensive posture in times when it needs to build up is reputation on financial markets and continues to lobby Germany and other reluctant partners to help paying some of the costs for rescuing Bank of Ireland and Allied Irish Banks.   

Michael Pettis has a very good debate focusing on the distinction between household savings and national savings, accounting concepts that give rise to endless confusion in the debate, also among economists. He argues that household savings are the result of a whole number of factors, social safety net, demographics, and cultural attitudes. But national savings, defined as total GDP minus consumption, depends on policy choices. In China, household savings are normal, but national savings are enormous. He says that many economists are also confused about these accountant concepts. He gives an extensive analysis of the situation in China, and then turns to Germany:

“Notice that German savings rate did not rise because German households decided that they should prepare for a difficult future in the eurozone by saving more. German household preferences had almost nothing to do with it. The German savings rate rose because policies aimed at restraining wage growth and generating employment at home reduced household consumption as a share of GDP. As national saving soared, the German economy shifted from not having enough savings to cover domestic investment needs to having, after 2001, such high savings that not only could it finance all of its domestic investment needs but it had to invest abroad by exporting large and growing amounts of savings. As it did so its current account surplus soared, to 7.5 percent of GDP in 2007.” 

The Spanish labour minister Fátima Báñez and her German counterpart Ursula von der Leyen signed a Memorandum of Understanding whereby 5,000 Spanish youth a year will take part in German vocational training programmes, reports El Economista. The agreement also includes mechanisms for young Germans to go to work in Spain.

This appears to be in addition to the already existing MobiPro-EU programme, which according to ABC will allow 400 Spanish and Portuguese youth to train in Germany next academic year.

Harvard economist Jeffrey Frankel blogs that the recent focus on Reinhart and Rogoff on the one hand, and Niall Ferguson on the other, in the debate between austerity and stimulus is a distraction from Alberto Alesina, the originator of the concept of expansionary austerity. Frankel refers not only to the aptly timed 2010 paper with Silvia Ardagna, but to papers with Ardagna and Roberto Perotti in the late 1990s, and a further 2013 paper with Favero and Gavazzi, all pushing the argument that fiscal consolidation is not contractionary in a recession. Frankel reports on a recent paper by none other than Perotti, Alesina's original coauthor, criticizing the dating methodology used, and pointing out that some of the fiscal consolidations used by Alesina were announced by governments but never implemented. Thus Frankel quips that Alesina "has not been receiving his fair share of abuse”.

This debate is not really important in economic terms, but it has a sort revealing anal-retentive quality. Der Spiegel had the story over the weekend that Jens Weidmann opposes proposals by the European Commission to abolish the one cent and two cent coins. Anybody who lives in the eurozone knows that the wallets quickly fill up with these coins unless you make a very conscious effort to reduce them. Weidmann chose the Sunday edition of Bild to defend the cent on the grounds that this was also the majority view in Germany in general. The Commission made the point that the production of those coins exceeded their value – the accumulated deficit being €1.4bn.

In an editorial (!) on its business page, Frankfurter Allgemeine applauds Weidmann’s defence of the pennies, and notes that Weidmann and Wolfgang Schauble are united in this hugely important endeavour. 

Party leaders, who were mentioned in the former party treasurer's alleged shadow accounting scam, have begun appearing before the investigative judge, reports El País. On Monday, MP Eugenio Nasarre admitted receiving €70,000 in 2000-2004 in the form of anonymous cash donations to a non-profit organisation he was a trustee of. Nasarre explained that additional payments to party leaders were common when they also held public office incompatible with private wages. All payments had the appropriate taxes withdrawn and declared. Also on Monday, the speaker of the Senate, Pío García Escudero, admitted receiving a €24,000 loan and an additional payment of €4,200 a month between 1999 and 2003, though he denied the authenticity of the annotations referring to him in the so-called Bárcenas papers.

Italy won’t be headed for an election in the next six months, Mario Monti said. As CNCB reports, Monti said Italy needed political reform as a pre-condition for elections. But the new electoral law won’t be ready in the next six months at the earliest.

Matteo Renzi said the PD was in a state of shock after the change of party leadership from Pier Luigi Bersani to Guglielmo Epifani, according to La Repubblica. He said the party needed to determine whether it was capable of making new proposals or where it is just grinding along. Renzi said he has confidence Enrico Letta’s government, but added that the efforts needed to stabilize Italy could be huge. In addition to austerity Italy needs of public spending cuts and new measures for competitiveness, Renzi said. He also described Letta’s concessions on IMU property tax as a political compromise the PD must shoulder to keep the current government coalition together. According to Renzi, acting on the IMU is the price paid for the alliance with Silvio Berlusconi.

La Stampa reports that Epifani rebutted Renzi’s comments, saying it was no gift to anyone but common sense in order to tackle the current situation. According to Epifani the IMU is quite unfair and needs to be more progressive. Epifani also said that reforming IMU was a part of the PD campaign programme. 

Keep Talking Greece  picked up the story that suicide rate in Greece climbed by 26.5% in 2011, the second year of the economic crisis and the bailout, rising from 377 to 477. In the region of Attica alone, including Athens, 172 took their lives. According to ELSTAT, 477 suicides were reported in 2011, out of which 393 concerned men and 84 women. It is estimated that more than 3000 people have committed suicide since 2010. The number includes also those who were rescued.

A contentious anti-racism bill caused another rift in the Greek coalition government on Monday, as the two junior partners, PASOK and Democratic Left, pushed for its submission to Parliament without delay, conservative New Democracy insisted on key changes, while Justice Minister Antonis Roupakiotis appeared set to resign if his bill is watered down, Kathimerini reports. The bill imposes tougher penalties on individuals or groups inciting racial hatred, in essence an attempt by the government to curb the growing influence of the ultra-right Golden Dawn.

In his FT column, Wolfgang Munchau makes the point that it is impossible to defend EU membership on purely utilitarian/economic grounds, as is happening in the UK because the EU aspires to an irreversible political union while utilitarian arguments are prone to change over time. This is exactly what happened in the UK, where membership of the EU seemed more rational from an economic perspective in the 1980s and less so today. Munchau says that if you need a utilitarian reason, it is better to stick to politics than to economics. But ultimately, the main arguments for or against the EU or not utilitarian at all, but emotional.

There will be no newsbriefing today, the Pentecost Monday holiday in large parts of Europe. The regular briefings resume tomorrow.

Francois Hollande called for greater pooling of political and financial ressources in Europe. He suggested a Eurozone government with monthly meetings, a budget and the right to issue debt. None of the ideas is new, writes Les Echos and the last two –budget rights and Eurobond- have no chance to find Angela Merkel’s support while monthly meetings might, so Les Echos.  At his press conference Hollande put forward also two other ideas: to use the EU budget 214-2020 framework to finance youth employment initiatives with about €6bn; and an energy union among EU  member states, called for many times in the past ending nowhere.

Hollande took pains to say that the dispute with Merkel was political, not personal. "We have to find a balance between budgetary rigor and support for growth," Hollande said, adding that the debate with Germany "is a respectful dialogue." "We don't have the same convictions but we have the same responsibilities," he said.

Angela Merkel, meanwhile, said that governments must first work on getting their finances in order and making their economies more competitive through reforms. "What we need above all is a common understanding in Europe — and there unfortunately isn't one yet — of what actually makes us strong and where growth comes from," Merkel said at a European policy forum in Berlin according to AP.

As RAI reports, Giorgio Napolitano said Italy needs institutional reforms to make the country easier to govern. He said Italy could not afford to spend more time of political deadlock. That’s why the needed reforms should include a new electoral law to avoid a major constitutional crisis. Italy needed an electoral based on a majority voting, or a purely proportional system, the latter being considered the most likely outcome. Only then will Italy be in a position to have enough stability to pass structural reforms. According to Giovanni Sartori, a well known political scientist, a first-past-the-post type system as in the UK, works only in countries with an established two or three party system. The opposite is the case in Italy.

Giorgio Napolitano also defends his choice to appoint Enrico Letta as PM, despite the continuous fights between PdL and PD. In an interview with Il Messaggero, Napolitano said Letta was the only figure able to lead the country. The frictions between the parties over justice, after Silvio Berlusconi’s rally in which he attacked the magistrates, can be solved easily, Napolitano said. The president also attacks the parties on current priorities, saying some people don’t realise that the country lives on a razor’s edge.