Eurozone Blog

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 All payments had the appropriate taxes withdrawn and declared.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. 

The whole point of this article is to scare people – and it may well succeed. The indefatigable FAZ Eurosceptic Holger Steltzner writes that everybody who is saving up for retirement is penalised because Mario Draghi is debasing your money. He says savers only get returns of half a percentage point, which is more than eaten up by inflation. And despite the negative real return, savers still have to pay taxes on the tiny nominal returns they are earning. He argues that the combination of ultra-low interest rates and high taxes takes away all incentives for saving. After a rant about asset prices, and how low interest rates take away all incentives for reform, he conclude that the only positive thing has been the ECB’s recent publication of household asset wealth, which shows that the Germans are the poorest households in the whole of the eurozone. 

Philip Stephens writes that Britain’s Eurosceptic Conservatives are winning the debate. No matter how much David Cameron concedes to them, they come back and want more. The next demand will be that Mr Cameron set out his demands for the negotiation with the EU over a new deal for Britain, outlining which powers will be repatriated to Westminster, including a list of policy opt-outs. Stephens says that while Germany is horrified by the idea of a British departure, there are also red lines Berlin cannot step over, for it would otherwise threatening to unravel of the entire EU. Stephens concludes that there is, of course, the not completely unlikely possibility, that Cameron fails to win the elections, but Ed Milliband may not be strong enough to win without also making a referendum pledge. A Labour government would quite likely lose such a plebiscite.

“So there’s the final rub. Mr Cameron could lose the election and bequeath, as a deferred legacy, Britain’s flight from Europe.”

In his Spiegel Online column Wolfgang Munchau writes that his estimate for the total amount of bank re-capitalisation is between €500bn and €1000bn, but the banking union currently being set up is not going to deliver this restructuring. He said the banking union is a serious project, but it will take at least five years, if not more, until it can fulfil at least some of the fundamental economic functions of a banking union. It is thus a banking crisis for the next crisis. In the meantime, the only alternative is for governments to do this nationally, but citing the Spanish example, he says governments are reluctant to recognize the losses in their system as everybody fears a loss of competitiveness – even after an agreement on the new bail-in rules. His forecast is that Europe’s banks will remain under-capitalised for the rest of this decade, in a re-run of Japan’s experience.

An OECD report (press release) on Wednesday showed income inequality as measured by the Gini coefficient grew more in the first three years of the crisis to 2010 than in the previous 12 years. El Diario highlights that the largest increase in the Gini was registered in Spain, with an increase of 2.9%, followed by Slovakia, France and Sweden. Before taxes and social transfers, the largest increase In income inequality were registered in Ireland (10% increase in Gini) and again Spain (7%). The report also indicates that poverty rates for youth and children grew in 2007-10 from 12-13% to 14% while the poverty rate for the elderly dropped from 15% to 12%, confirming a previously identified trend for young people to replace the elderly at the group most at risk of poverty in the OECD. The largest increases in child poverty (above 2%) were in Turkey, Spain, Belgium, Slovenia and Hungary.

In a related story by El Pais, a report by the Economic Research Institute of the Valencian region shows not only rising poverty in Spain, but also a divergence in poverty rates among Spanish regions, with increases in the poverty rate as high as 21% in the Canary Islands, 18% in Valencia or 16% in Andalusia. Poverty rates decreases in the Basque Country (-2%), Rioja (-5%) and Navarra (-7%).

Spiegel writes that immigration from Spain to Germany grew from about 6000 to 9000 in the previous year of a pilot program by the Chamber of Crafts of Munich and Upper Bavaria aiming to "address the shortage of medium-skilled specialised workers" among German SMEs. Perhaps stereotypically, Spiegel's story opens with a young Spanish construction worker with no German, originally a welder in shipbuilding, one of 11 people involved in the pilot program. The Spiegel story points out the parallels with the 1960s 'guest worker' program, but also the differences. Officials are aware that Germany assumed that the Gastarbeiter would not stay long-term and would eventually return to their home countries, which didn't happen. Today's programs are more focused on integration, including language classes ad help navigating day-to-day bureaucratic hurdles in a new country.