Sarkozy wants to freeze VAT on petrol
Nicolas Sarkozy started a European debate on how to react best to rising oil prices, when he suggested to freeze VAT on petrol once its price exceeds a certain level. In a radio interview with RTL yesterday morning he said that all countries are affected by rising oil prices and that protesting fishermen are a European phenomenon. Interestingly the proposal was more commented in other member countries while French newspapers like Le Monde focused their reports on the news that Sarkozy wants to use the extra VAT income to transfer some extra money to the most precarious families. The Frankfurter Allgemeine has the best summary about what Sarkozy said.
Immediate reactions from member states and the European Commission suggests that this is a big subject for the Europeans. The European Commission rejected a tax suspension as a wrong answer and suspects that the proposal is more an exit strategy for Sarkozy in the confrontation with French fishermen (El Mundo). The finance minister of Portugal Teixeira Dos Santos said that Portugal has no room to forego tax income but economics minister Manuel Pine asked the European Commission for an extraordinary meeting to find alternative responses (Diario Economico). The Finnish finance minister Jyrki Katainen considered a petrol tax reduction as too difficult to implement (Newsroom Finland).
Inflation hits the bond market
The financial markets now expect that the next move in European interest rates will be increase (as have we have done on Eurointelligence for quite some time, see our ECB Watch of 22 April). The interest rate future market now price in an ECB policy rate of 4.25% for early 2009, as a result of the persistent rise in inflation, which has flared up again recently due to the higher oil prices. Higher inflation has also pushed by bond yields, Frankfurter Allgemeine reports. The yield on the two year Bund went up from 2.94% mid-March to 4.2% most recently, all of which suggests that dreams of interest rate cuts have now completely evaporated. The article quoted analysts as saying that the market now has made this correction in full, adding that there will be no further upwards moves in yields for the time being.
German savings rate rise again as consumer climate worsens
Germany’s relatively short economic recovery 2005-2008 has ended before even the consumers have noticed. It took a while for the message to sink in, then came the 3-point VAT increase, which depressed consumption, and this year, when consumption was supposed to take off, came the fear of the next recession. Frankfurter Allgemeine reports that the German savings rate has grown again, to 14.8% of disposable income, the highest level since the deep recession of 1993, and this despite a pick-up in wage settlements.
Financial Times Deutschland reports that the GfK consumer climate index had fallen from 5.6% in April to 4.9% in May, another signs that the German economy is not benefiting from the much expected upswing. The GfK institute says the reasons are price increases, and fear of a global recession. The paper’s financial column Das Kapital notes that the combination of a weak domestic economy, a very like fall in exports, as the global economy slows, and rapidly declining confidence in the government means that the economy is weakening.
Italy to make mortgages portable
After the Prodi government introduced legislation to allow early redemption for Italian mortgages, the new economy minister Giulio Tremonti is now outlining plans to allow mortgages to become more fully portable. The plan also forsees a reduction in transaction costs, especially the costs of notaries, which are very high in Italy. See il sole 24 ore for more on this story. In a short comment in Lavoce Luigi Guiso makes the point that in practice nothing is gained by this initiative. All of what is offered is already available on the market, or been facilitated through existing legislation.
Dutch central bank to controls bank bonus payments
NRC Handelsblad reports that the Nout Wellink, president of the Dutch central bank, said the DNB will in future monitor bank bonus payments, to ensure that bank employees are not rewarded for taking excessive risks. Mr Wellink said the current bonus structure has not changed despite the crisis. Wellink is not principally opposed to bonuses, but believes that they have to be structured in such a way that they are no longer produce bad behaviour.
Solbes’ economic programme for Spain
The website 5spaniards.com has a very useful analysis and summary of the Pedro Solbes economic programme, written by Sergio Perez-Saiz. Solbes said the Spanish government is clearly not opposed to preventing adjustment in the housing market, but will instead focus on helping the poorest cope with the shock. There six specific measures. 1. a €400 tax rebate per worker; 2. removal of capital gains tax; 3. as unemployment rises, part of the rise will be reduced through special programmes; 4. guarantees for securitised state credits to SMEs; 5. VAT refunds to come monthly, instead of quarterly; 6. targeted measures to help the property marketed, including help for families with difficulty paying their mortgages.
US real house prices now down 21% peak-to-trough
The best coverage of the US property market is from Calculated Risk. Rather than reporting only the nominal annual fall in house price, as most newspapers do, they focus on the better measure of peak-to-trough in real terms. According to this measures, US house prices have fallen by 21% since their peak in 2006. If you look at the long term graph of the real Case Shiller House Price you can see how much further US house prices have to fall until they get back to long-term average. More than 30% is now very likely.
Inequality and EMU
Giuseppe Bertola, writing in Europe Economonitor, presents evidence that since the adoption of the euro inequality has risen. While it has also risen in the EU as a whole, it rose even more in the euro area – which suggests that the monetary regime may have contributed to inequality. He writes that “EMU does appear to improve economic performance (both in terms of per capita income and in terms of unemployment) and the intensity of international transactions (especially as regards foreign direct investment flows). But it also appears to be associated with higher inequality, and with lower social spending.”
JP Morgan Chase: US inflation to hit 5% in August
The Wall Street Journal Economics blog picked up a note sent by JP Morgan to its clients forecasting annual US CPI to hit 5.1% in August, on the assumption of further oil price rise, and some further increases in food prices. This would be the highest rate of inflation since 1991.
Martin Wolf on 10 years euro
Martin Wolf writes in his FT column about the first decade of the euro, and concludes that it was a success as a monetary union, but less so as an economic union. Future success will depend not so much on technical matters, but on the right policies. He makes the point that adjustment will be very difficult to achieve, and he doubts the ability of other countries to adopt the policies that Germany adopted in the early part of this decade.
A peoples’ front to succeed Merkel
Wolfgang Munchau, writing in FT Deutschland, says German will sooner or later be governed by a coalition made up for SPD, Greens, and Post-Communists – a People’s Front as he calls such a construction. There has been a hefty discussion in Germany in recent days about the SPD’s strategic choices. (yesterday former party chairman Franz Muntefering demanded a categorical decision by the party’s congress, never to form a coalition with the far-left, which was rejected by current SPD chief Kurt Beck). Munchau argues the SPD has no strategic options other than to form a coalition with the Left in the long run. The SPD is now structurally weaker than the CDU and its Bavarian sister party. In a Grand Coalition it will always the junior partner. The other coalition options are not realistic either, as the SPD’s shift to left has alienated the liberal FDP – and as a three party coalition of SPD, FDP and Greens may not have an absolute majority. Another four years of Grand Coalition would strengthen the Left even further, so Munchau concludes that the most likely outcome of next year’s election is another, this time time-limited, Grand Coalition, which will be replaced by a Peoples’ Front government either in 2010 or 2011.
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