Juncker to remain as eurogroup chief

 

Perhaps the best sign that Europe’s leadership does not expect the Lisbon Treaty to come into force any time soon has been the decision by Jean-Claude Juncker to seek a third two-year mandate as head of the eurogroup. Before the Irish referendum, Juncker let it be known that he does not seek another mandate – since he was the leading candidate for the new position of president of the European Council. At that time, the Belgium finance minister Didier Reynders was widely talked about as a potential successor. That, however, would have required timely ratification of the Lisbon Treaty. The Irish No had a deep effect on Juncker’s career plans. He is now settling for second best, according to a report by Le Monde over the weekend.

 

The report went into some details about some possible trade offs. Juncker may only get support from Paris, current holders of the EU presidency, if he accepts Sarkozy’s demand for a permanent secretariat for the eurogroup, which according to the French is currently too dependent on the European Commission for its intelligence.

 

 

 

Commerzbank buys Dresdner

This is first and foremost a political, not a commercial deal. The merger of Germany’s second and third largest bank constitute the biggest in the country’s banking industry to date, and follows a number of attempts to seek a new partner for Dresdner, whose brand name will disappear after the merger. Frankfurter Allgemeine reports that the deal values Dresdner at $9.8bn, and is structured in such a way that Allianz will take a minority stake in the combined group. The merger will lead to about 9000 job losses.

 

FT Deutschland makes the point in a comment that the alternative deal with China Investment Corporation would have been better for everybody. There would have no job losses, and Allianz would have been able to get out of banking completely. But it was the wish by German politicians to produce a national champion that won the day. So much for a single European financial market!

 

Germany’s political shift to the left

This was a potentially important weekend for German politics, as the Left Party paved the way for a SPD minority government in Hesse. There, a Social Democrat opposition leader is currently pondering whether to form a coalition with the Greens – and supported by the Left party. Such an alliance would muster a small majority to unseat state premier Roland Koch. If this happens, and if this succeeds, this may well turn out to be a model on federal level a few years down the road – though not in time for the 2009 elections. This is why Oskar Lafontaine, one of the Left Party’s co-leaders, delivered a strong speech at the regional Hesse party’s local conference over the weekend. This is a political development to watch. See Frankfurter Allgemeine for more details.

 

The impact of the slowdown on Spanish municipalities

El Pais has a good account of the impact of the slowdown on the financing for Spanish municipalities, which have enjoyed an increase in revenues for much of the boom period. While this year transfers to the regions remain at a strong level, this is going to end abruptly in 2009, amid howls of protests from municipal leaders who are talking about the asphyxia of the city councils. To us, this is also an example about the pro-cyclicality of fiscal policy – and this in a country which has generally been better at this than others.

 

Heise on the German economy

Michael Heise, chief economist of Allianz and Dresdner Bank, writes in Frankfurter Allgemeine that Germany is experiencing a downturn, but not a recession. He said a more useful indicator than two consecutive falls in quarterly output is the capacity utilisation, which is falling in Germany, but remains well above the trend. While Germany would not be able to decouple from a global recession, there is much evidence that the world economy is going to remain robust in view of many growth regions, such as the oil producing countries, and large parts of Asia.

 

 

Hamilton on Obama

Slightly off topic for us, as we consciously avoid coverage of the US presidential elections in our press review, but this is one of the best analyses we have seen on Obama’s economic policies, by James Hamilton in his Econbrowser blog. Hamilton looks at Obama’s multiple promises, such as tax cuts for the poor, and for small companies, an ambitious health care plan, to be financed by an increase in corporate profit taxes (or the closure of loopholes, which is economically the same thing). Hamilton does the math. Nonfinancial corporate profits in 2007 were $1037bn, of which a third is taxed, $500bn are distributed as dividends, which are taxed again, and $240bn are reinvested. The only way to maintain investment at current levels, if taxes were to go up, would be through an increase in corporate borrowing, which would be both undesirable and unlikely. Hamilton said non-residential fixed investment is in his view the most important economic variable that will influence the country’s long-run prosperity.

 

 
Fressoz on the French Left

The French Socialists are meeting for their annual late-summer get together in La Rochelle this year amid continued confusion about their future strategy, and ledership. Writing in Le Monde, Francoise Fressoz makes the point that Sarkozy continues to unsettle the left, just as he did during the French election campaign, with policies such as supplementary capital taxes to fund social projects, which the Socialists have been demanding for a long time. She also makes the point that the Socialists are in a think-tank mode, with different groups around Strauss-Kahn and Segolene Royal, all struggling for a post-Marxist vision.

 

 

Munchau on why rates should not go down now

Writing in the FT, Wolfgang Munchau notes that there has never been such a discrepancy between the ECB and its observers, who are now habitually demanding rate cuts. He says the observers have the luxury of being able to ignore the inflation target, which the ECB is obliged to pursue. It is inconceivable that the last rate increase could lead to a situation in which the ECB risks is undercutting its target, while the risk of an overshoot in the other direction remains much more present. He predicts that European monetary policy will remain tighter than what is demanded by ECB observers for some time to come.

 

 

 

Dullien on why rate must go down now

Writing in Eurozone Watch, Sebastian Dullien makes the opposite argument – that the ECB was wrong to raise rates, because it underestimates the economic downswing, as a result of which inflationary pressure will ebb away. He says the ECB has done a decent job in its first years, but their expertise does not shield them from committing a serious policy error. He also bemoans the fact that there is too little critical scrutiny of the ECB, especially in Germany.

 

 

 

 

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