Is Spain in denial over its exposure to the property market?

 

Bank of Spain tries to calm fears about subprime spillovers

The Spaniards are worried sick that the troubles in the US subprime mortgage market might spill over into Spain. Yesterday, the Bank of Spain took the extraordinary step to intervene in the debate, according to El Pais (print edition), making the point that Spain had little to fear from the subprime fallout in the US, even though it admitted that property prices in Spain are still way too high. The Bank of Spain said that according to their calculation, there should be a gradual “normalisation”. Spanish property prices are estimated to be overpriced at between 24% and 32%. The Bank of Spain said the real estate market had already entered a period of slowdown, and there is a widespread optimism within Spain about how this slowdown works out. Analysts are also pointing to the fact that default rates in Spain are currently only 0.4%, as opposed to 4.6% in the US.

(For a discussion of this issue, see the latest edition of Eurointelligence ECB Watch).

Is Germany's Grand Coalition in Trouble?

Frankfurter Allgemeine Zeitung lead with an intriguing front page story this morning, which said that Angela Merkel and her inner circle of political advisers no longer exclude the possibility that the Grand Coalition may collapse before the end of the parliament term in 2009. There is much internal discontent within the SPD – Ms Merkel's coalition partner – about current government policy (foreign policy in Afghanistan, and the corporate tax reform), combined with the prospects of losses in upcoming state elections. (For a discussion of this story, see also Wolfgang Munchau's Blog)

French Election wrap

Is Sarkozy the only candidate to create jobs?

According to a new study by Coe-Rexecode, only Sarkozy’s programme has the potential to create new jobs, reports Le Figaro. The study finds that Sarkozy’s programme could have a clear effect on growth and employment, while Bayrou’s effect is expected to be slightly negative. Royal’s programme is a clear destructor of jobs. Her proposal to raise the minimum wage by 20% and to abolish the ‘first time employment’ contract (CPE) could cost up to 0.5 percentage points in economic growth, and a loss of 82 000 jobs. The calculations are based on the results of enterprise polls suggesting that 8% of the jobs would not have been created without the CPE. Coe-Rexecode estimates that Sarkozy’s exoneration of charges on extra working hours could reduce labour costs by 26%, raising output though not employment initially. Once the vicious cycle sets in, employment growth is to follow which could result in an increase of 120000 jobs.

Sarkozy’s “national identity” discourse finds approval

Sarkozy’s proposal to create a ministry for immigration and national identity – a shift to the right in response to the rise of Bayrou – is approved by 55% of the French according to the latest polls, reports Le Figaro (print edition). 82% of UMP, 59% of UDF and 88% of Front Nationale supporters are in favour. As expected, only Socialist supporters strongly disapprove Sarkozy’s idea (73%). 56% of the French consider immigration an important subject for the next government, one in four even consider it a priority. Bruno Jeanbart, director of the poll institute Opinionway, concludes that immigration remains an important subject in the election campaign.

Opportunities and risks of Sarkozy’s proposal are discussed by Alexis Brezet in Le Figaro (print edition). Sarkozy’s proposal has certainly helped to sharpen his image but weakened the coherency of his programme. After he opened up to the left his turn to the far right, his strategy is likely to strengthen the camp “tous sauf Sarkozy”. He was quick to react and played down his proposal in a TV show, saying that “national identity” is just an expression, without moving on the substance. Sarkozy's move sharpens the division between the left and the right, benefiting Royal, while confronting Bayrou to clarify his position. He tempts FN voters to support him especially in the second round. Brezet argues that the essential point is that Sarkozy re-appropriates the image of a radical moderniser when he dared to raise the controversial and emotional question of national identity. Sarkozy calculates that his radical stance appeals to the French at a time of hightened uncertainty and fear of gobalisation, delocalisation, immigration and Europe. His calculation is that the diffuse sense of insecurity is the source of Royal’s seductive popularity, and Bayrou’s rise. Sarkozy put his finger on this insecurity, which is the true cause of the exsasperation with the elite.

Socialist candidate on dangerous grounds

Philippe Marliere, lecturer at the London University, argues in Le Monde that the French Socialists suffer most from the exorbitant power that the Fifth Republic grants the French president. This power requires the president to represent, or even embody, the nation. It depoliticises a candidature and seduced the Socialists to maintain a discourse of the right on values instead of campaigning on its traditional strengths such as inequality and social justice.

Germany to cut its deficit further

The German government has revised downward its estimates for public-sector borrowing this year and next. In 2008, FT Deutschland (print edition) reports total public sector borrowing will fall to €18bn, about 1% of GDP. Other German forecasters are even more optimistic. The working group on taxes, an group of experts nominated by the finance ministry, is estimating a balanced budget by 2009, while the RWI economic institutions, already expects a near balanced budget in 2008.

Euro area core inflation now higher than headline inflation

Core inflation in the euro area, at 1.9% in February, now exceeds the headline figure, according to official figures on Thursday, the FT notes. This is the highest figure since December 2004. This is due to the effect of falling oil prices, which last year increased the gap between core and headline inflation. February’s headline rate was 1.8%. The FT says the upward trend in “core” inflation may strengthen the case for further increases in interest rates.

Irish inflation rate down to 4.8%

Irish inflation rate declined form 5.2% to 4.8% in February, reports the Irish Times. The Irish inflation rate - contrary to European inflation measure - includes mortgage costs. Mortgage repayments are the largest contributor (22%) to the inflation rise. Its rise reflects the increase in interest rates. Analysts predict that inflation has now peaked and that it will continue to fall. The European measure also confirms a slowdown in inflation from 2.9% to 2.4% in February.

Slovenia without central bank governor

Slovenia has lost its central bank governor, and cannot find a new one. The FT reports that the triumph of euro membership at the beginning of this year is about to turn to embarrassment when the ECB's governing council meets next month, possibly without a Slovenian representative. This is due to a dispute between Slovenia’s president and parliament over naming a new central bank governor, after the term of Mitja Gaspari, the current governor, expires at the end of this month. The president has nominated Mr Gaspari for a second term, but the Slovenian parliament voted against Mr Gaspari. “Such a failure would be unprecedented in the eurozone, and could see lawyers hurriedly consulting legal texts to determine whether the country’s central bank could name a stand-in,” the FT says.

Global trade unions want regulation of private equity

The hostility towards private equity is not confined to Germany, but has now hit the global trade union movement. The FT reports that the trade union advisory committee to the OECD will call on the G8 to establish a joint task force to investigate dangers posed to the international financial system from the growth of highly leveraged private equity deals and hedge fund investments. The paper said that trade union leaders, include John Monks, general secretary of the European Trade Confederation, and Brendan Barber, general secretary of the Trades Union Congress of the UK, and others from the US, Canada and Japan, will say the world’s leading industrialised nations need a common tax and regulatory approach to private equity and hedge funds.

Franco-German co-operation

The FT's European Comment writes about the Paris-Frankfurt hi-speed train link, which was inaugurated yesterday, and will come into service in June, as a typical project highlighting the difficulties of Franco-German co-operation. While this link will cut travel time to Frankfurt to 3 hours and 45 minutes, the FT said one should remember how painful this particular co-operation has been. It has taken 15 years of negotiations to see the first German ICE high-speed train come to Paris, amid intense rival between Astom and Siemens, the producers of the TGV and ICE trains respectively. Even now competition remains skewed since only five German trains will initially come to Paris every day, compared with 14 TGVs across the Rhine.

Paul Fabra on financial and economic stability

Writing in his column in Les Echos, Paul Fabra argues that our economic expectations have become oblivious to the inherent risks posed by the financial markets. He noted that a taxi driver in Paris has told him about his concerns that Halliburton has relocated its head office to Dubai. If any proof of the world's flatness is needed, then this is it. While economic forecasters, with the exception of Alan Greenspan, remain as optimistic as ever, there are increasing number of signs that a dangerous bubble has built up. He gave the example of the award of a triple-A rating by Moody's to 43 banks, including some Islandic banks, which was defended on the grounds that no government would allow these banks to go bust. There is an increasing dichotomy between the reality of global risks, which are relatively high, for example, geostrategic risks, ageging, and the environment. Fabra quotes Denis Kessler, CEO of the French insurance group SCOR, as saying that the widely expected weakening of the dollar in the long run and the establishment of a multipolar global currency system, will make the world economy significantly less stable, leading to greater, not smaller risks.

Will a Golden Rule work in Germany?

Michael Huther, chief economist of Germany's IW economic institute gave a cautious analysis of the proposal by the Council of Economic Advisers for a new fiscal framework, based on a stricter cap on borrowing, and the introduction of a golden rule mechanism to balance the budget over the cycle. Huther argues in Handelblatt that the council was still living in the 1970s, when the economic cycles were strong. Referring to “the great moderation” he said the cycles have flattened, which renders this policy far more difficult. He said that the significance of automatic stabilisers is generally overestimated, and that the main criterion should be sustainability. This would imply that the current provision to limit borrowing to investment is theoretically sufficient. The problem in Germany is not a lack of good rules, but a lack of good implementation, and that depends entire on policy maker's readiness to apply those rules.

Employment growth in Europe

The story of France and Ireland

The construction sector is the major contributor to employment growth in France (Le Monde). French employment increased by 1.1% in 2006, nearly half of it realised in the construction sector. At the same time, French manufacturing employment decreased (-1.7%). Politicians from the left and the right warn that France lost 1.4m manufacturing jobs in the last 15 years, Germany 3.5m. Another weakness of France is its slow increase in service especially in the retail sector, where employment increased only by 0.7% despite buoyant consumption. France is lacking behind the European average, which recorded a 1.6% annual increase in the fourth quarter 2006, the highest rate since 2001. One of the highest performers is Ireland, whose performance is due to a thriving construction and service sector. Labour demand was so strong, that even migration from the EU27 could not fill all the jobs. There are now as many people employed in the construction sector as there are in the manufacturing sector – at the turn of the decade the ratio was 1:2, writes the Irish Times. The construction sector accounted for a third of new jobs. With the interest rate rise, the employment demand is expected to slow down according to the national employment agengy Fas. The manufacturing sector showed signs of recovery, with a 1.3% employment growth in the fourth quarter 2006.

How Italy can learn from Spain

In his column in Corriere della Sera (Print edition), the economist Francesco Giavazzi argues that Spain should serve as an example of job creation for Italy. He noted that Spain last year accounted for 40% of the employment growth in the euro area, and the extraordinary economic performance of the Spanish economy is predominantly a story of an increase in employment participation (male participation in Spain went up from 62% to 71%, while female participation rose by even more, from 46% to 59%). He acknowledged that Spain suffered from productivity problems, but that this was inevitable if low-qualified labour is entering the job market. What matters is that the growth in employment has more than compensated for the weakness in productivity in the last ten years. He said there are only two ways for a country to raise growth: to make the people in work more productive, and to get more people to work. The best is to do both, as happened in Ireland. He said too much of the discussion focused on investment in research and technology, culminating in demands for more government spending in these areas. He said the Spanish experience shows that the best solution can be simply to get more people into work. Therein lies a lesson for Italy, whose labour market participation rates today are similar to those of Spain ten years ago. To achieve this, he advocates more labour mobility, better education, and a realisation that the jobs of the future are not all full time jobs in manufacturing industries, but increasingly part-time jobs in services.

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