Eurozone Blog

It was a mini-summit, not to deal with the central aspects of the eurozone-crisis, but the stuff that usually falls off the back of the agenda.

In Germany, Frankfurter Allgemeine led the paper with the news that the EU has not made progress in the fight against tax evasion. Specifically, there was no agreement to unlock the lingering dispute over the EU’s savings directive, as Luxembourg continues to delay. While there is a broad consensus that the fight against tax evasion should enjoy priority, Jean-Claude Juncker blocked a concrete agreement on the grounds that he would first require separate agreements with third countries, specifically, Switzerland and Liechtenstein. The paper noted that Austria is no longer blocking an agreement, in a significant shift of position. The summit, however, agreed a timetable to pass the directive by the end of the year, at which point third-country negotiations should be at an advanced stage. Angela Merkel said everybody knows that the complete and open exchange of information over all sorts of income will become the norm in the future.

On other summit issues, Il Corriere della Sera reports that Enrico Letta pushed for a Eurozone summit on youth unemployment. Herman Van Rompuy has agreed to Italy’ proposal given the gravity of the problem and the lack of a European response. The Eurozone must allow fiscal room for manoeuvre to enable member states to invest adequate resources into active labour policies, reducing taxes on labour and creating jobs for young people, Letta said.

The Greek government got what it wanted from the meeting – backing for its plans for gas and oil exploration in the Aegean, Kathimerini reports. The government believes it gets the green light to declare an exclusive economic zone in the Aegean and to search for oil and gas reserves.

Leaders also voted unanimously to continue with ‘one Commissioner per country' in the European Commission until 2019, European Voice reports. The Lisbon treaty stipulates that the number should be reduced to 19 starting in 2014, but a provision introduced after the Irish No-referendum gave the Council discretion to change the time frame if voted unanimously.

In an interview with TV station Antena 3, former Spanish Prime Minister José María Aznar suggested that he might return to active politics if the situation does not improve, writes El Diario, as he is concerned with the "lack of government action". Aznar criticised Rajoy's tax policy, advocating immediate tax cuts. In an Editorial, El Mundo suggested that PM Mariano Rajoy should heed Aznar's advice, or else the PP should hold an extraordinary party conference to "make a pronouncement on its leadership and programme". El Pais reports that the reaction to Aznar's TV appearance was almost uniformly cold, including from PP leaders, some of whom called him disloyal. Finance minister Cristóbal Montoro, who was part of Aznar's economic team, said that conditions are different now than they were during Aznar's Premiership and that "nostalgia is for another day". The VP defended the government against Aznar's suggestion that it is ineffectual and lacks a vision. The only positive reaction reported by El País was from the current Madrid regional Premier, Ignacio González.

Enrico Letta said that the life of his government depended on the reform of the current election law and specifically on a change of the present structure of the Senate. As La Stampa reports, Letta is looking for a deal between PD and PdL in order to introduce these new systems before the summer, in case a new vote is held soon. Otherwise the possibility is a return to the polls with a law that does not give citizens the right to choose and that will create a gridlocked parliament that is ungovernable, Guglielmo Epifani said. Letta agreed on this position, adding that he would propose to review the electoral systems by which bonus seats are granted in both the House and Senate. Under the current electoral law the party leaders have the power to name candidates on so-called 'blocked lists', which are then voted on. In addition, Letta wants to strip the Senate of law-making powers, with the aim of a rationalization of legislative process.

France must step up reforms to rein in its budget deficit, Bundesbank chief Jens Weidmann said in a magazine interview with Le Point (hat tip Reuters), urging the French government to avoid repeating "the mistakes of the past,” when both France and Germany, in 2003, "did themselves a disservice by weakening European budget rules." Weidmann said that “Additional measures will be needed, and that “It is the responsibility of each country to give credibility to European budget rules." Weidmann reiterated his opposition to bond-buying by the European Central Bank as well as to French proposals for joint euro bonds, added that Europeans "must aspire to a strong Europe with a strong euro."

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.