Euro area inflation at 3.6%
The rise in the oil price led to a return of inflation back to the previous record of 3.6% in May. German inflation was 3% - and the ECB sends out increasingly the signal that there won’t be a rate cut this year. The FT notes that Axel Weber, the Bundesbank president, once again hinted at the possibility of a rate rise. The article dismisses this probability as posturing by a well-known hawk (we actually disagree: if and when inflation hits 4% - the present interest rate will no longer be defensible. We believe that the chances of a rate rise this year are about 50-50, but rising next year, when it becomes clear that inflation is not falling back to the target of 2%).
Commission issues formal warning to France
The European Commission yesterday issued a formal warning to France, in which the French government is being advised to take steps to cut the deficit. French prime minister Francois Fillon responded in a manner only well-versed politicians capable of: He welcomed the Commission’s statement, arguing that his government was in total agreement with the Commission’s support of the French economic reform process, Frankfurter Allgemeine reports. The only slight disagreement he has with the Commission is over the almost trivial matter of the deficit itself. He explicitly rejects deep budgetary cuts, but points that the reforms will improve the structural deficit over time (this is precisely what the Commission does not believe in, and rightly so in our view. Whatever the French economic reform programme may do, it will hardly affect the country’s economic growth potential, nor its deficit.)
Some new evidence on the Spanish housing meltdown
The FT has the latest data on the Spanish housing market, and they are ugly. Spain’s National Statistic Institute said the number of house sales in March dropped more than 38% year-on-year. The number of home mortgages awarded in March fell by 40%. These day show that Spain’s residential housing sector is in the middle of a hard landing. Insolvency proceedings against real estate or construction groups more than doubled year-on-year in the first quarter of 2008.
El Mundo has a report on yesterday year-high of the 3-M Euribor, the benchmark money market rate on which Spanish variable rate mortgages are best. This rate is now at 5.05%, which means that the average mortgage is now €636 dearer than a year ago.
In a separate report, El Mundo writes about the Bank of Spain’s latest statistical bulletin, which says the economy is decelerating fact, not just the construction sector. Private consumption and consumer confidence are hitting new 15-year lows, and consumer credit is falling rapidly. The only sector that is doing well is tourism.
Solbes hints at further slowdown of Spanish economy
He did not say it, but he said it. In an interview with Nouvel Observerateur, hat tip El Mundo’s economic pages which provided a useful summary, Solbes said that the deceleration of growth had been harder than anticipated. He also that Spain had enormous room for manoeuvre, in case growth falls and unemployment rise. He said, for example, that the budget surplus of 1.1% in 2007 could disappear this year, and turn into a deficit next year – without making a prediction that this would happen. But the point he made is that Spain is well equipped to handle even a severe economic downturn.
The French government provokes trade unions over overtime regulation
The French government is to present today its draft law on working time, that goes much further than trade unions and the employer organization MEDEF had previously agreed upon. Le Monde summarises the main measures. The 35 hours week shall remain the legal working time, but the government now suggests that the effective working hours – i.e. the overtime contingent - shall be negotiated at company’s level. It is a casus belli for the trade unions CGT and CFDT, who warned the government not to go any further than trade unions had agreed to. Their agreement with MEDEF is to allow increases in overtime only by majority agreements and on an experimental basis. Laurence Parisot, president of the Employers federation, takes side with the trade unions, calling on the government to respect their common agreement. UMP members wonder meanwhile why Sarkozy did not simply abolish the costly 35 hours week right at the beginning of his presidency. Instead the new law will even increase the costs if it is to pass parliament and provokes the outrage of trade unions in times when other important reforms on pension and unemployment insurance are on the table.
Greek government blames high profit margins for rising consumer prices
Greece is to counteract rising consumer prices by reinforcing stricter transparency requirements for retailers and their suppliers, reports Kathemerini. The reform package is a ten measures catalogue. Companies with high or deemed “excessive” profits will be listed in public. It will also oblige multinationals to reveal their wholesale and retail prices in other countries. There had been reports that companies move products from country to country with bogus sales between subsidiaries and sell those more expensively in Greece.
The Italian reform program – in full
Il Sole 24 ore has a very use summary of the new governments economic policy agenda. We have reported on some of it here, such as the agreement with the banking association to facilitate the transfer of variable rate mortgage, or measures to improve profit-related pay, which are of a wider labour productivity agenda. One important measure is the reduction of taxes on overtime. The whole thing is excruciatingly complicated, and we spare you the details. Another measure is the abolition of property taxes on the first house.
Three different approaches to fiscal policy
Andrea Brasili, writing in RGE Economonitor, takes a closer look at the approaches by the three largest euro area countries to fiscal policy. This is how he summerizes the approach:
Germany: stick to the target whatever happens
Italy: stick to the path towards the target whatever happens
France: stick to the path towards the target provided that …
Naturally there are different outcomes. The authors looks at different scenario, including an economic shock of growth of 1% below forecasts. This would have almost no effect on Germany, while the budget deficit of France and Italy would hit 3% (more in France).
Mishkin resigns from Fed, Blanchard goes to IMF
Frederik Mishkin, one of the architects of the Fed’s low interest rates, has resigned ahead of schedule to return to academia. See this article from Bloomberg. The article does not say why he left – his term was not due to expire until 2014. (We like to think that he does not want to be around when the dreadful consequences of his policies become apparently, but obviously we don’t either what drove to resign his post so prematurely). The article also points that there are already three vacancies on the board, which the Senate refuses to fill.
Another notable appointment this week is that of Olivier Blanchard as chief economist of the IMF. A story by Thomson Financial says Blanchard is relatively optimistic about the outlook for the world economy, applauding the Fed’s rate cut and liquidity injections.
Where are all the economists this weekend?
Not all, but a large number of them will be at Trento, in Northern Italy, at the economics festival, a unique event that tries to bring economics to the people. The speaker list is who is who in European and global economics. For more details about what’s on the agenda, and who is there, see this article in il sole 24 ore.
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