August 15, 2014

In our last briefing before our summer break, our main focus is the disappointing eurozone recovery;
  • Eurostat confirmed that the economy stagnated during Q2; with Germany and Italy down 0.2% qoq, and France stagnating;
  • German 10-year yields dropped below 1% for the first time ever, as investors are now betting serious money against the ECB’s inflation target;
  • the main point of interest in the German press is not the next leg of the recession, but the French budgetary overshoot, which has given rise to an expression of outrage;
  • In Italy, Matteo Renzi was telling reporters: See, it’s not just us, it is a European problem;
  • Renzi also said that he expects “the lady” to soften her stance on deficits at the next European Council;
  • Simon Wren-Lewis explains the eurozone’s latest crisis in terms of household savings rates – they declined in 2012 to counteract the effects of fiscal tightening – which means the domestically-generated recovery has already happened;
  • Paul de Grauwe says policymakers are trying to fix a demand crisis with supply-side reforms, a policy that is now leading to a downward spiral;
  • Ambrose Evans-Pritchard argues that the policy is now too tight even for Germany – and is kept too tight for purely ideological reasons;

August 15, 2014

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The price we are paying for serial policy errors

This is our last briefing before our annual break. We will resume Monday, September 1.

Our overriding focusing today is, of course, the eurozone economy, which continues to disappoint. We were just able yesterday to give you the news of the German 0.2% fall in GDP during Q2. Eurostat followed up on this with the flash estimate for eurozone-wide GDP, which came in at zero. It is not hard to imagine the sheer volume of outraged editorials in the media: something, surely, must be done.

Just as the ECB re-iterated for the millionth time that inflation expectations remain firmly anchored, German 10-year yields defiantly dropped below 1% for the first time ever. We are not generally overawed by “records” – but this is the clearest sign yet that the markets are betting against the ECB’s inflation target. The message from the largest and most liquid fixed-interest rate market in Europe is telling us that Inflation expectations have firmly de-anchored despite of what the ECB says. The ECB is still clinging on the 5y-5y inflation swaps in defence of its views that, in the long run, inflation expectations are anchored, but we are not sure that this derivative instrument is all that meaningful. For us the question is no longer whether inflation expectations have come unstuck. They have. The question is: can they be re-anchored?

It is interesting that Frankfurter Allgemeine and other German newspapers hardly mention any of this – they cover the overshooting French deficit obsessively. The paper’s Paris correspondent has an outraged editorial, which fails to mention that the French economy outperformed the German economy in Q2 (and for the period since the beginning of the eurozone as well).

The Italian papers focus on Matteo Renzi’s comment: See, it’s not just us. The whole of the eurozone is in crisis. La Repubblica reports on Renzi’s comment that these data will soften Angela Merkel’s views on the fiscal overshoot. We at Eurointelligence are not sure that they will – also in view of the FAZ’ comment on France. The German consensus view is that one should never allow a recession to get in the way of a good deficit reduction.

Among the interpretations of what happened, we noted Simon Wren-Lewis’ observation on household savings. He found that in the UK the savings rate increased after the crisis, and the recovery started just as the savings rate began to fall. In the eurozone that decrease in the savings rate already occurred earlier in response to the austerity. Wren-Lewis says the eurozone already had its recovery, which came in the form a declining savings ratio helping mitigate the 2012 recession. The key question is now to which extent financial balance sheets of consumers are restored?

From the eccentric Ambrose Evans-Pritchard we learn of Paul de Grauwe’s interpretation of what happened. EU policy makers are treating a demand crisis as if it were a supply crisis by imposing reforms. De Grauwe:

“They are doing everything they can to stop recovery taking off, so they should not be surprised if there is in fact no take-off. It is balanced-budget fundamentalism, and it has become religious. We know from the 1930s that if everybody is trying to pay off debt and the government then deleverages at the same time, the result is a downward spiral. The rigidities in the European economy have been there for ages. They have absolutely nothing to do with the problem we face today.”

Pritchard himself makes the point that policy is even too tight for Germany. This is so “because otherwise Latins might get off too lightly”.

On the economic dynamics: we very much agree with the Wren-Lewis/De Grauwe viewpoint. This is a recession caused by policy failure. It was not a financial crisis that has damaged the eurozone as much as the policy response to it. Obsessive deficit cutting in a poisonous conjunction with obsessive central bankers (who obsess about everything, except meeting their own inflation target). On Italy: there is an economic reform we could propose that would cost nothing and is easy to implement: stop publishing your GDP figures before everybody else. If you tank then, there is a chance that the world might be focusing on others. On the continued obsession with deficit reduction. Watch out for the politics. When German and French debt to GDP ratios were roughly similar, a French overshoot did not matter all that much. But now that Germany has been focusing its national energy on repaying the debt - a strategy that will, over time, lead to a significant fall in the debt ratio - France and Germany will be diverging. Expect to see more German attempts to insulate themselves from any liability arising from fiscal deficits elsewhere. The politics of deficit reduction is an issue investors do not yet have on the radar screen. We will come back to that theme after the break.
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August 15, 2014

Just as Finland comes out of recession, it is threatened by the direct impact of Russian sanctions – with an estimated effect on growth of 0.5pp;

    August 15, 2014

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    Finland hit by sanctions just when it emerges from recession

    Latest data are showing that Finland pulled out of recession in the second quarter but growth was negligible and expectations are that Russian sanctions will hit the economy in the coming months, Reuters reports. The economy grew 0.1% in Q2 of 2014 from the previous three months, the statistics office said on Thursday, driven by growth in services. Technically, this marked the end of recession, if defined as a contraction of two successive quarters. The recovery, however, could be short-lived. A tenth of Finnish exports go to Russia and nearly half of Finnish companies are being hurt by sanctions the European Union and Russia have imposed on each other over the Ukraine crisis, a survey by the Chamber of Commerce showed on Thursday. Agriculture Minister Petteri Orpo said that sanctions could cut around 0.5pp from the country's GDP growth, which would mean the economy would contract this year. As Finland will be one of the EU states hardest hit by trade embargoes imposed by Moscow in retaliation for EU sanctions, Helsinki last week requested a bilateral meeting with Russia. Finland’s president Sauli Niinistö's is meeting with Russian President Vladimir Putin this afternoon, speculation about what this meeting can achieve dominates the Finnish press this morning, according to YLE broadcast.

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    August 11, 2014

    Finland considers to ask for compensation for unequal burden of sanctions against Russia;
    • Greek farmers also said to seek compensation, while Greek officials make a last minute attempt to negotiate with Russian counterparts the exclusion of Greek produce from the ban list;
    • The Spanish agricultural minister says Spain will request aid from the European Commission out of the Common Agricultural Policy reserve fund;

    August 11, 2014

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    Finland and others consider compensation for fallout from sanctions

    Finland is the Eurozone country hardest hit by Russian sanctions, smashing Finland’s hope for an economic recovery.  After backing the EU to expand sanctions against Russia, Finland is now considering to get compensation for the unequal burden, Bloomberg reports.  Finland sends 10% of its exports to Russia, and receives 18% from the country, while the euro area average trade with Russia is 3.4%.  Prime Minister Alexander Stubb last week underscored the need for “solidarity” in the EU, making clear he expects any measures to “treat EU members similarly. If the impact isn’t equal, we’ll consider what kind of solutions we will seek.” Finland is not the only EU country to seek compensation. Poland needs to apply “as soon as possible” for EU compensation to local growers hurt by Russia’s import ban on fruits and vegetables, Economy Minister Janusz Piechocinski said Aug. 5. The Commission says it will look into the possibilities for compensation under the EU agricultural policy in the longer term. The articles also mentions the EU globalisation funds with its €150m annual budget, which helped companies cope with job losses.

    Greek farmers also hope to be compensated by the EU, as peaches were sent back from Russia and tons of produce would have to be burned to avoid a price collapse. Greek diplomats continued their contacts with Russian counterparts over the weekend in a bid to secure an exemption for Greek products from the food ban, Kathimerini reports. Kremlin officials are expected to finalize the list of banned exports early this week. Greek exports were worth a total of €178m last year.

    Spain’s government will meet Spanish growers affected by Russia’s import ban on agricultural products, writes Europa Press. Agriculture minister Isabel García Tejerina suggested Spain will request aid from the European Commission out of the Common Agricultural Policy reserve fund. According to Tejerina Russia’s ban affects only 1.8% of Spanish exports of the affected products, some €337m annually, but admitted that the impact of the sanctions is substantial for those firms that do export to Russia. Spanish producers estimated the indirect export impact at some €800m. Of more concern is the warning by European producers, also carried by Expansión, that prices of some affected products in the European markets had dropped by up to 50% since the ban.

    Ever insightful, Mariano Rajoy was "absolutely convinced" that the export ban “will spur Spanish producers to continue contributing to Spain’s economic recovery”.

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    August 07, 2014

    Ireland’s house prices are still undervalued between 12% and 27% according to an ESRI study;

      August 07, 2014

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      ESRI study says Ireland’s house prices still undervalued

      House prices in Ireland are still undervalued by up to 27% despite the recent recovery in market values, the Irish Times quotes from an ESRI research institute study. In its study of the housing market, the think tank calculated what it called the fundamental level of house prices using key economic variables, such as income levels, interest rates, unemployment and the quantity of housing stock. It then compared this with actual price data from the Central Statistics Office to see if current prices were undervalued or overvalued. Using four separate models for the period from 1981 to the end of 2013, it found actual prices were currently between 12% and 27% below their fundamental values, while they had been overvalued between 25% and 35% on the height of the property boom in 2006. The ESRI predicts real Irish house prices will grow by a further 8 per cent this year and by 9 per cent in 2015, before moderating to growth rates of 4.9 per cent and 3.9 per cent in 2016 and 2017.

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      August 06, 2014

      Credit Suisse weighs in on the debate on Scottish and Catalan independence with a report on the prosperity of small states;
      • the report estimates Scotland and Catalonia would be more prosperous (in HDI terms) after independence while rump Spain and UK would be less prosperous than at present;

      August 06, 2014

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      Catalonia and Scotland better off with independence

      Credit Suisse weighs in on the debate on Scottish and Catalan independence with a report on “The Success of Small States”. The report estimates that Catalonia and Scotland would have higher a higher Human Development Index than Spain and the UK, which have in turn a higher HDI than they would have after breakup. The report starts by noting that globalization has enabled a number of small states worldwide to become more prosperous but at the same time the impact of the financial crisis has been strongest in small states such as the Baltics, Iceland, Ireland, Portugal, Greece or Cyprus. The report considers trade openness, internal homogeneity, and age of states, and looks at the case studies of Czechoslovak partition, where Slovakia has lately caught up much of the ground lost in the short term after partition; and German unification, which “was and remains costly” and where the East remains stuck 70% of Western GDP per capita for the past 15 years. Among the findings of the report are:

       

      • A negative correlation between size and GDP per capita, especially for high-income countries
      • “Intangible infrastructure” allows small countries to do well on prosperity measures
      • Smaller countries tend to have lesser wealth inequality, tend to be demographically more homogeneous, and more open to international trade which allows them to benefit more from globalization but also makes their economic growth more volatile.
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      August 04, 2014

      Alejandro Inurrieta criticises Rajoy’s presentation as electoral propaganda and details the persisting weaknesses of the Spanish economy: precarious labour market, inequality, los consumption and investment, growing public and private debt overhangs, and banks still dependent on the ECB;

        August 04, 2014

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        Inurrieta on Spain’s bogus economic recovery

        Following Mariano Rajoy’s end-of-season press conference, in which he applauded himself about his economic management, Alejandro Inurrieta accuses Rajoy in a column in Cuarto Poder of being detached from reality and spouting electoral propaganda. In his column in Cuarto Poder, Inurrieta writes behind the headline GDP growth there is a reduction of hours worked, a replacement of full-time with part-time jobs, and growing inequality with a reduction of household disposable income which has a negative impact on domestic consumption. Inurrieta writes that banks’s nonperforming loan ratio is above 13% where it was just 2% before the crisis, and that banks are still on life support taking advantage of central bank carry trade on public debt. In addition, the current account balance had returned to negative territory, which does not bode well for reducing the public debt which has grown to just below 100% of GDP or the total debt public and private which stands at 430% of GDP. As a sign that the structure of the economy has not changed, he points to the lack of correlation between the improving trade balance and investment, which he takes as a sign that foreign capital inflows have gone to speculate in assets at fire-sale prices rather than improve the productive capital of the country.

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        August 04, 2014

        the German economics ministry stops an already agreed €100bn export of a large training installation to Russia, a decision that goes beyond the agreed EU sanctions;

          August 04, 2014

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          Germany extends sanctions to Russia beyond what has been agreed

          This is quite an important decision by the German government, which has just banned a €100m defence deal. This deal could easily have passed under the EU agreement not to apply sanctions retroactively as it was already agreed beforehand. But as Suddeutsche Zeitung reports, the economics ministry decided to apply sanctions to the provision of a military training installation by Germany’s Rheinmetall. The installation was supposed to be in place this year, and would have allowed 30,000 Russian soldiers to train at military simulation instruments each year. The article also said the government had tried to negotiate with Rheinmetall, but that these negotiations had come to nothing. It is now possible that the company sues the government for compensation.

          We also noted an article by Aasim M. Husain, Anna Ilyina and Li Zeng on IMF Direct blog, which tries to dissect the various trade and financial flows between Russia and the rest of Europe. It is not possible to summarise, but the following chart gives a broad overview (Red means strongest ties, followed by orange, yellow, light green and grey.)

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          August 04, 2014

          Wolfgang Munchau, meanwhile, debunks the idea that the Bundesbank could influence German wage negotiations – the labour markets reforms have produced structural wage moderation.

            August 04, 2014

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            The limits of bully-pulpit economics

            Wolfgang Munchau has a go at the Bundesbank’s recent exhortations on German wages. He says there are a number of reasons to think why the 3% wage rise target will not stick. The first is that the number itself (based on 2% inflation plus 1% productivity), is not credible. Why should employers believe in a target that the ECB is obviously not willing to defend? Inflation will not return to within the expected duration of a wage contract. With Germany at full employment, the unions’ negotiating positions has strengthened. That is now the main driver towards higher wages, and the unions never needed a reminder of their negotiating powers. The problem is that the labour market reforms have made unions and their members very risk-averse. Wage moderation is a feature of the reforms, not a bug. It is hard to turn the clock back. And finally, the degree of unionisation in Germany has fallen, and many union-agreed deals have been watered down, or superseded by plant-level agreements. This is also why headline numbers differ from survey data, which look at all components of remuneration. According to the latter, German real wages fell in 2013.

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            August 01, 2014

            Matteo Renzi officially nominates Federica Mogherini, but Jean Claude Juncker needs more female candidates to ensure approval by the European Parliament;

              August 01, 2014

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              Renzi nominates Mogherini, but Juncker struggles to fill his female quota

              The letter by Matteo Renzi to Jean-Claude Juncker was short, and to the point. “Dear Mr President, I would like to inform you that the Italian government has decided to nominate Federica Migherini, the current foreign minister, as candidate for the role of High Representative, and as a vice-president of the European Commission.” Renzi’s calculation is that the EU can hardly reject a female candidate, given the dearth of female candidates for the European Commission.

              Jean Claude Juncker plans to present the composition of his Commission on August 30, but he faces a major problem as there are not enough female candidates, writes Les Echos. Martin Schulz already signalled that an essentially masculine Commission will be rejected by the European Parliament. At this moment, there are only two countries proposing female candidates to represent them in the 28 head strong Commission, the Czech Republic and Sweden (and yesterday Italy). Others could emerge from the list of those countries who propose several candidates (Slovenia, Denmark, Portugal, Bulgaria, and possibly the Netherlands). But he needs at least 10 female candidates, which would be still less than half of the 28 members. Juncker could threaten to postpone the announcement to put pressure on the member states, argues the article. But the gender question will certainly complicate the distribution of portfolios and could have knock-on effects on the nomination of the Council president and the High Representative of the Union.

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              July 30, 2014

              the Italian opposition unites in an effort to bring down Matteo Renzi’s flagship reform to turn the Senate into a revising chamber;
              • Francesco Giavazzi, meanwhile, writes that the spending review by Carlo Cottarelli is not going too well either.

              July 30, 2014

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              Italy’s reforms not going so well

              The Italian papers are full of the latest twist, turns, intrigues and walk-out threats in the battled to abolish the Senate in its current role, and to reduce it to a revising chamber. We will keep an eye on this evolving situation, which still has the potential to derail Matteo Renzi’s agenda. The opposition parties of the Left and the Right yesterday stepped up their protests against the government’s attempt to bulldoze the first reading of the legislation through by August 8 – bypassing virtually all of nearly 8000 amendment proposals.

              Meanwhile, we noted an excellent editorial in Corriere della Sera by Francesco Giavazzi this morning, in which he favourably compares the the new anti-corruption tsar Raffaele Cantone to the spending reform tsar Carlo Cottarelli. While Cantone has already initiated a number of high profile cases, Cottarelli operates quietly in the background, watching as his proposals are being watered down in the political process. One of the examples Giavazzi gives is a mobility clause in the public sector, for which the trade union negotiators managed to get exemptions for families with young children, which is not the case in the private sector. There is also not much happening in spending areas under the full control of the government. Giavazzi says Cottarelli should be more confrontational in his approach. 

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              July 28, 2014

              Herman van Rompuy sends a letter to EU ambassadors, urging them to agree a list of sanctions by tomorrow, on the basis of a number of principles:
              • They are a balance across sectors, and member states; no retro-activity; sensitive technologies only to affect oil sector; and dual use limited only to end users;
              • said he asked the Commission to produce a constant assessment of economic impact;
              • EU newspaper editors join forces to sign an open letter to EU leaders with the plea to stop Vladimir Putin;

              July 28, 2014

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              Tomorrow’s sanctions against Russia

              The FT has the letter Herman van Rompuy has sent to EU ambassadors, urging them to agree the next stage of sanctions by tomorrow. The sanctions will include restrictions on capital market access, on dual use goods and sensitive technologies. What we thought particularly interesting are the principles according to which the decision should be made. It is clear from those principles that the first of the Mistral orders will be delivered as the rules do not apply retroactively. Here is van Rompuy’s list:

              The overall balance will be maintained across sectors and across Member States;

              The principle of non-retroactivity will apply across all targeted sectors, notably in the field of arms trade and restrictions on access to capital markets;

              The measures in the field of sensitive technologies will only affect the oil sector in view of the need to preserve EU energy security;

              The prohibition of dual-use technology exports will be limited at this stage to military end-users.

              As far as the other concerns expressed by Member States, notably on the impact on our economies, I have asked the Commission to keep these under constant review and to keep Member States closely involved.”

              In the meantime, pressure on the EU to act increased further with the publication of a joint letter calling on EU leaders to stop Putin. The letter is written by European newspaper editors and published across various newspapers in Europe, including Die Welt, Le Monde, El Pais, La Stampa and de Volkskrant. It was initiated by Adam Michnik, the editor of Gazeta Wyborcza. Here is an excerpt:

              “Experience has taught us that it's useless to talk to him, unless the dialogue is supported by unity and firmness. Putin doesn't care about weak and spineless opponents. He seems to view EU in that light: they talk and talk while Kreml continues to cross more and more "red lines". Putin sends all the time weapons and lego-soldiers to East-Ukraine. He groups his troops from outside the border.” 

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              July 25, 2014

              EU ambassadors met yesterday to decide a new round of sanctions against Russian citizens and institutions, and are preparing a list of financial sanctions that would go further than those imposed by the US;
              • the Commission’s proposals focus on Russian state-owned banks and companies, and seeks to restrict access to financial instruments of a maturity of more than 90 days;
              • Norway’s Government Pension Fund Global said it will reconsider its investments in Russia;
              • Reuters has an interview with a pro-Russian military commander in the Ukraine, who said the rebels may well have used the BUK, but that the Ukrainian government provoked this attack through an air strike at exactly the same time when the machine flew overhead;

              July 25, 2014

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              Towards financial sanctions

              EU ambassadors met yesterday, and inched towards an eventual agreement on financial sanctions against Russia. The actual decisions taken yesterday were minor. The list of people and institutionss was increased by another 15 and 18 respectively, but the really important development – as Frankfurter Allgemeine reports – is that the list of sanctions to be agreed next week will be similar to those imposed by the US by focusing on financial transactions. This will affect in particular state-owned Russian companies and banks. As the paper writes, one of the reasons for the delay is the need for unanimity. It is not clear whether the ambassadors could simply take the decision themselves, or whether there is a need for a foreign affairs council, or a European Council.

              In a separate article the paper writes that the discussions are to be continued next Tuesday. The Commission’s proposal focuses mostly on banks in which the Russian state as a share of more than 50%. The sanctions could make it illegal for EU citizens to buy shares or bonds in such banks. As in the case of the US sanctions, the EU sanctions, too, would kick in for maturities of 90 days or over. There are no plans to extend the ban to Russian sovereign debt. The article points out that Russia could withstand financial sanctions for a while, given is $470bn in foreign reserves. Another important development is the announcement by Norway’s Government Pension Fund Global, one of the world’s largest sovereign wealth funds, that it will reconsider its investments in Russia. Spiegel Online remarks that if there was an agreement next week, it would be more far reaching than what the US has done so far. 

              The other interesting piece of news was a remarkable interview by Reuters of Alexander Khodakovsky, commander of the Vostok Battalion, who acknowledged that the rebels did possess a BUK missile system. Khodakovsky said Kiev had launched air strikes in the area fully aware that the missiles were in place. He said that the only situation in which he would use a BUK was as a direct response to an air strike. 

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              July 24, 2014

              with requests for almost 1000 secret votes on 8000 amendment, Matteo Renzi’s Senate reforms are in real trouble – the deadline is likely to be postponed from mid-August until late-September;
              • Senators are also wary of Renzi’s threats to call new elections if the reforms fail – one Senator calls it a threat with a water pistol;

              July 24, 2014

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              Renzi’s reforms face delays

              We have seen the glitzy campaigns and the tax cuts, but the hard work has yet to happen. Matteo Renzi’s political reforms are in trouble. There are now nearly 8000 amendments on the table – three amendments each two hours – and almost 1000 requests for secret votes. By comparison, the Senate only voted on three amendments yesterday. The amendments and secret votes are obviously a filibuster operation, designed to scupper the legislation. La Repubblica writes that government sources were no longer treating a postponement of the reforms as a taboo as they did until recently. The problem for Renzi is not only the opposition Five Star Movement, but also Senators from his own party who oppose the reforms, and are seeking to slow them down. It is also possible for the Senate leadership to guillotine the process, but this is more likely to happen after the summer break, with a first reading to be completed by end-September (instead of mid-August, as under the current plan).

              In another article, La Republicca quotes a senator as saying that Renzi’s threat to call new elections was hollow. Even a child recognises a water pistol. 

              The reason the treat is hollow is because in the absence of electoral reforms, any elections would have to be held under a system of pure proportional representation in line with a recent Constitutional Court ruling. There is no way that Renzi could repeat his performance of over 40% share of the vote in such an election, given that an election would only arise if the unity of his own party crumbled. For that reason, we are certain Renzi will accept a slowdown of the reforms, and compromises. And that will also be the case for any subsequent economic reforms.
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              July 22, 2014

              There were reports that EU ambassadors met in an emergency session yesterday to discuss the scope for the next round of sanctions – EU foreign ministers meet today;
              • the German economics minister, Sigmar Gabriel, also supports sanctions, and says that Germany’s economic interests were not the most important issue;
              • various leading CDU figures expressed concern that the EU has been too slow in reacting to Vladimir Putin, and expressed outrage at a recent French sale of Mistral helicopters to Russia;
              • Frankfurter Allgemeine notes that Russians fear sanctions more than we think that they are likely to happen;
              • Wolfgang Munchau says Gerhard Schroder should resign from his plum job, and says Germany should reorient its strategic thrust in industrial policy away from Russia;
              • Clifford G. Gaddy and Barry W. Ickes say sanction will hurt the Russians economically, but will not alter Putin’s policies;

              July 22, 2014

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              Towards sanctions

              There have been several reports yesterday that the EU was preparing the next round of sanctions against Russia. Peter Spiegel (@SpiegelPeter) tweeted that EU ambassadors had been summoned to an emergency meeting on Ukraine yesterday afternoon. EU foreign ministers are due to meet in Brussels this morning.

              Frankfurter Allgemeine reports that German support for economic sanctions against Russia was increasing quoting German economics minister Sigmar Gabriel as saying that the economic concern – important as they may be – should not be decisive. He said another round of sanctions against Russia would now be likely. But the paper says the EU would still not agree to target entire sectors. But it is possible that Gazprom might be targeted in the next round. The paper quotes the chairman of the Bundestag’s foreign affairs committee, Norbert Rottgen, CDU, as saying that the EU was late in its response and had allowed a vacuum to arise. The purpose of sanctions is to be forward looking, not to be punitive. Handelsblatt reports that another senior CDU MP expressed outrage at a recent defence deal by France to sell Mistral helicopters to Russia.

              In another article Frankfurter Allgemeine notes a disconnect between the Russian fear of sanctions, which is high, and the Western expectation that sanctions will actually happen. The Russian equity market has not collapsed but has been trending steadily downwards, having lost 6% over the last week. The article quotes a former Putin adviser as saying that if the EU passed financial sanctions against Russia, the economy would collapse within six weeks.

              There has naturally been a lot of commentary on this story. Wolfgang Munchau writes in his Spiegel column that the first thing the German should do is to ask Gerhard Schroder to resign from the Nord Stream pipeline project in response to the atrocities that have resulted from Vladimir Putin’s policies. He writes that eastward orientation of the German economy has gone too far, and that it was now in the country’s strategic interest to correct that imbalance quickly. He says Germany should support further sanctions against Russia, notably in the area of energy and finance.

              Clifford G. Gaddy and Barry W. Ickes from the Brookings Institute doubt that sanctions will be effective in influencing the action of Putin and the Russian elites in general.

              “It is a fallacy to assume that Russia will respond to sanctions the same way that we would. We cannot simply project our own preferences onto Russians. (After all, if Russians had our preference structure, they would not have annexed Crimea in the first place.) Whether it is the idea that Vladimir Putin cares more about his personal wealth than Russia’s national security, or that ordinary Russians who see their living standards decline as a result of sanctions will mechanistically direct their anger against Putin rather than the West — many of the assumptions underlying the West’s sanctions policy are flawed, to say the least.”

              The authors say that sanctions will damage the Russian economy. But our assumption is that the economic costs would lead to a change in political preference by Russian voters is mistaken.

              “…if the motivation is defense of vital national interests and survival, Russia — like any state — will resort to import substitution and even more radical sorts of interventions to defend itself, no matter what the cost.”

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              July 18, 2014

              Miquel Roig of Expansión goes through the scenarios through which Spain’s Luis de Guindos might achieve his goal of chairing the Eurogroup, but Jeroen Dijsselbloem stands in the way;

                July 18, 2014

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                De Guindos’ Dijsselbloem problem

                In his Expansión column, Miquel Roig writes that the only obstacle to de Guindos’ ambitions to chair the Eurogroup is the current holder Jeroen Dijsselbloem, whose term expires in June next year. The difficulty at Wednesday’s European Council was that, with the deadlock in the appointments of the Council President and the High Representative, there was no chance to “find an informal solution” for the Dutch economy minister. The Dutch government is not going to “accept a switcheroo” and demands a position of responsibility for Dijsselbloem. With the top jobs undecided, that is off the table. One option is the post of Economic affairs Commissioner, which Juncker has conceded should go to a Socialist, but the problem here is that Dijsselbloem called Juncker an “inveterate drinker” on prime TV during the recent European Parliament campaign. Will Juncker hold a grudge? Will the Netherlands nominate Dijsselbloem to the Commission? Will Juncker’s female Commissioner quota get in the way?

                A second option, writes Roig, is to appoint Dijsselbloem to head the Single Resolution Mechanism, and Guindos might land that job as a plan B. But if the Netherlands wants a weighty Commissioner in addition, that would mean overrepresentation in the top jobs. The third and final option is for Dijsselbloem to serve his term, but the Eurogroup chairman has to be a finance minister and Spain is holding general elections at the latest in November next year. If Guindos did not keep his minister portfolio after the election, he would only serve at the Eurogroup for a few months. This would not be a problem if the Eurogroup chair were made a full-time position, but Wolfgang Schäuble has recently indicated Germany doesn’t want that.

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                The price we are paying for serial policy errors

                • In our last briefing before our summer break, our main focus is the disappointing eurozone recovery;
                • Eurostat confirmed that the economy stagnated during Q2; with Germany and Italy down 0.2% qoq, and France stagnating;
                • German 10-year yields dropped below 1% for the first time ever, as investors are now betting serious money against the ECB’s inflation target;
                • the main point of interest in the German press is not the next leg of the recession, but the French budgetary overshoot, which has given rise to an expression of outrage;
                • In Italy, Matteo Renzi was telling reporters: See, it’s not just us, it is a European problem;
                • Renzi also said that he expects “the lady” to soften her stance on deficits at the next European Council;
                • Simon Wren-Lewis explains the eurozone’s latest crisis in terms of household savings rates – they declined in 2012 to counteract the effects of fiscal tightening – which means the domestically-generated recovery has already happened;
                • Paul de Grauwe says policymakers are trying to fix a demand crisis with supply-side reforms, a policy that is now leading to a downward spiral;
                • Ambrose Evans-Pritchard argues that the policy is now too tight even for Germany – and is kept too tight for purely ideological reasons;

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