Oil production is shrinking, despite Saudi Arabia’s increase
The FT has a story that the Saudi’s planned increase in oil production, at 200,000 bpd, is less than had been expected in financial markets last week, and that this is more than wiped out by short-falls of production in Nigeria, which is producing 1m bpd due to attacks on installations. The Saudis are planning to raise production by another 2.5m bpd after a long investment programme, but the main effect will be to stabilise reserves, which have been falling. At the oil conference in Jeddah, attended by oil producers and consumers, it became clear that global demand for oil will outstrip global supply at current prices.
Rajoy wins power battle
Mariano Rajoy, the leader of Spain’s conservative Popular Party won a challenge to oust him, but his victory is unconvincing and unlikely to overcome a growing split in the party, according to El Pais. The challenger was the ultra-conservative Esperanza Aguirre, who during the party’s conference failed to secure enough votes for a challenge, but at the same time it is clear that Aguirre is, and will remain, a future challenger. During the conference former prime minister Jose Maria Aznar also only gave a lukewarm endorsement to Rajoy, a politician he had once chosen personally to succeed him. The article also makes the point that Rajoy has become more conciliatory in tone than in the past.
Spain’s financial crisis
Edward Hugh has an excellent in-depth of the Spanish economy, which is facing a huge economic crisis brought on by a property crunch. But behind this property crunch is massive financial crisis in the Spanish banking sector, as Spanish banks can no longer provide sufficient finance to maintain the boom. At fault is not the rise in ECB interest rates, but the credit market crash. Add to this a large and rising current account deficit, made worse the oil crisis, and the adjustment looks very brutal indeed.
Second-round inflation watch: Italian labour unions fear inflation tax
Italian labour leaders have accused Giulio Tremonti, the Italian finance minister, of trying to impoverish Italian workers by introducing a “1.7% inflation tax” in his three-year budget plan, noting that a €25,000 salary will lose €1,500 in purchasing power over three years on that assumption. Tremonti said his inclusion of inflation assumptions in his budget plans derives directly from the ECB’s inflation target. (What interests us in this somewhat absurd debate is the sheer fact that the Italian trade unions, and we suspect other trade unions as well, are getting nervous about inflation)
Who is Giulio Tremonti
The FT takes an in-depth look at Mr Tremonti, who has been instrumental at steering his party away from orthodox economic libertarianism towards a more protectionist slant – similar to what Nicolas Sarkozy did in France. Tremonti’s book The Fear and the Hope, which laid out the message of a more inclusive Italy, was a best-seller before the election, as it focused on the role of globalisation in Italy’s economic difficulties. Tremonti wants the EU to be a genuine fortress, he says so himself, to protect citizens from an ever assertive China.
How serious is Sarkozy’s and Merkel’s threat to boycott enlargement
FT Deutschland and other papers report intensively on Nicolas Sarkozy’s and Angela Merkel’s threat to boycott EU enlargement from now onwards, which means they would be excluding Croatia, which hoped to enter the EU next year. The Croatians take this debate with calm, as they believe this is only a ploy to get the others to ratify. But FT Deutschland wonders whether this strategy is sustainable in the long-run, for example if Lisbon fails? The answer is probably not, but then the EU would have to find some other to accommodate the integrationist ambitions of France and Germany.
Munchau on the Irish economy
Wolfgang Munchau writes in his FT column that the Irish No vote could have huge long-run implications for the Irish economy if the country ended up outside the EU or some inner core – which would be a very likely consequence of a failure to ratify. Ireland has benefited enormously from the EU. The subsidies may be overrated, but Ireland benefited hugely from the macroeconomic stability brought by the EMS and the euro, and from the internal market. All this could be put at risk in various degrees if Ireland failed to ratify the treaty.
O'Connor on Cowen's power battle after Lisbon
Brendan O'Connor in the Irish Independent has a sharp comment were he warns that after the Irish referendum PM Brian Cowen could be challenged within his own party. O'Connor’s notes that Micheal Martin, the current foreign affairs minister, managed to be seen as the only one that emerged with dignity as he managed to secure a blessing from Brussels that the government was not to blame for the “No” vote. Amid the 'No' vote it is surprising that the Lisbon Treaty even might have boosted any long-term ambitions Martin might hold for the Fianna Fail leadership. O'Connor goes on and critises Cowen for his passivity, arguing that if under the current difficult economic conditions Cowen is not getting more active he can no longer rely on his party’s loyalty.
Why Lisbon is not going to work
Alberto Alesina and Romain Wacziarg argue in Vox that the Lisbon Treaty is a Trojan horse where better rules of government (a good thing) are associated with fears of their misuse (excessive centralization). No wonder voters won’t open the gates. EU leaders need to dispense with schemes designed to bypass the will of the people and focus instead on fundamentally rethinking the goals and processes of political integration. Until this is clarified, European electorates will be confused, fear the “Eurocrats” and vote no.
Cavlo on inflation
Guillermo Calvo argues in Vox against the widely-held view that we going through another self-fulfilling bubble. Today’s explosion of commodity prices is the result of a very real global financial storm associated with large excess liquidity in several non-G7 countries and nourished by the low interest rates set by G7 central banks. This price explosion could be a leading indicator of future inflation driven by fundamentals.
See also a riposte by Paul Krugman, who says that Calvo is wrong. Krugman says he does not believe the excess liquidity story – or, as he put it, in the use of hydraulic metaphors in monetary economics.
Stephen Cecchetti on the future of finance
Writing in the FT, Stephen Cecchetti warns not to throw out the baby with the bathwater when it comes to fixing the financial mess. He said many of the innovations of previous years have had hugely beneficially economic effects. In particular, they made what was subsequently known as the Great Moderation possible. It would be big mistake to regulate the financial innovations out of the system.
Schmieding on the ECB
Holger Schmieding writes a critical article in Frankfurter Allgemeine Zeitung about the ECB, arguing that ECB monetary policy already acts restrictive. While inflation is higher, there is no comparison with the 1970s, where wage-price spirals led to hyperinflation, while today there is no evidence of irresponsible wage of even fiscal policies. He says the ECB should not go overboard, and continue to raise its interest rates beyond July.
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