Berlin says Nein

 

The German government spokesman said only “Nein”, according to Frankfurter Allgemeine, no explanations, no discussion. Berlin rejects the Sarkozy 3-point plan, as reported yesterday, through which he wants the ECB to publish its minutes, the permanent secretariat for the eurogroup, and the strengthened dialogue between eurogroup and ECB. (This is not really surprising, the only question one asks is why the Elysee keeps on doing this. The kind of governance changes France wants require unanimity, and in some instances even a Treaty change. There is a zero percent chance of a success of an ECB-bashing treaty. Our own conclusion is that if Sarkozy were serious about economic policy co-oridination, he would try to co-opt Berlin. Since he is not doing that, this cannot be taken seriously.)

http://www.ft.com/cms/s/0/9128a0bc-574e-11dd-916c-000077b07658.html

The FT writes in an editorial that Sarkozy’s proposal amounts to a Trojan horse. It says the independence of the ECB, as well as its council members, enjoys priority over the need for transparency. The editorial is also sceptical about the proposal to have a greater dialogue between finance ministers and ECB. The FT calls this an apparatus for bullying the central bank.

 

 

Spain on course for a deficit already this year

El Pais has a story of the rapdily fast deterioration in Spain’s public finances. A country, which had a healthy fiscal surplus last year, is already in deficit territory, according to the latest numbers, which show that the total borrowing in the first six months amounts to some €5bn, about 0.4% of GDP. The article makes the point of some seasonal effects, but the projections are for a small deficit this year, as the economy slows down. Some economists believe that Spain may already have entered into recession. 

 

 

 

Edward Hugh on Spain

Edward Hugh, this time writing in A Fistful of Euros, says in a discussion of Wolfgang Munchau’s latest column, that a sum of E300-500bn needs to be injected into the Spanish banking system, either directly, through the purchase of some mortgage, or indirectly through “restructuring programme”, as part of which the Spanish government would nationalise parts of the construction industry. He also favours the proposals of a quid-pro-quo type assistence from the eurozone, where the eurozone could bail out a country in exchange for a partial loss of policy independence. “... this possibility was already implicit in the creation of the eurozone in the first place, so I suppose you could say that one day or another this situation had to arise. And now it has. So let’s get on with things and take some decisions.”

 

 

The Irish situation

 

Nicolas Sarkozy yesterday significantly backed off from his demand for a second Irish referendum on the Lisbon Treaty, the Irish Independent reports. Sarkozy defended his trip to Ireland and his recent comments about the need to hold a second Irish referendum on Lisbon, which infuriated the Irish earlier. Careful to appear like a listener, he asked the Irish whether they prefer an EU president who is indifferent or who comes to Ireland to meddle. With respect to the second referendum he said that there is no magic solution that can be imposed by the way of a magic wand. He sternly denied he had said there must be a second referendum. The Irish government was happy again.

 

Jean Quatremer discusses Sarkozy’s two-tongue strategy, when he denied that he put any pressure on them to hold a second referendum. (Ireland will vote again, but it’s a secret) Quatremer also has more on the Lisbon Treaty ratification process. In one entry, the Czech prime minister Mirek Topolanek has now indicated his country will ratify after the Constitutional Court will lift its embargo.

 

 

French constitutional reform accepted

The constitutional reform was adopted by the French parliament by just one more vote than needed, reports Le Figaro. Sarkozy succeeded to convince several UMP members to change their mind and voted in line with their party. But the crucial contribution comes from socialist Jack Lang who finally helped to let pass the reform, something his fellow Socialists did not appreciate. In the end this constitutional reform was essentially about politics, not a bipartisan ambition to strengthen the power of the French parliament. A failure of this reform would have been extremely damaging for Sarkozy.

 

 

 

 

Germany’s second quarter 

The German government now admits that the second quarter this year registered a significantly negative growth rate, according to Frankfurter Allgemeine, after a very strong growth performance in Q1. German quarterly data are volatile. The finance ministry, which publish the data, said the figures are consistent with a slowdown in growth, but not an abrupt end of the economic expansion.

 

 

Euro reaches all-time high against yen

The euro hit Y169.90 yesterday, the highest level since the introduction of the euro in 1999. The reason, according to Frankfurter Allgemeine, has been the expectation of a further economic slowdown in Japan, and with it the prospects of interest rate cuts, and the persistently high interest rates in the euro area.

 

 

ECB policy and time horizon

David Milleker, writing in RGE Europe Economonitor, discusses the importance of the length of the medium-term time horizon in the ECB’s policy making. If one took 2009 as meaning “medium term” (it would be an 18 months period), then further rate rise could be justified on the ground of an inflation forecast. But if one took a longer perspective, say another year, the ECB could rest easy, or may even be inclined to cut rates.

 

 

 

CPI and democracy

Menzie Chinn in Econbrowswer has a very thoughtful debate about the weightings in the CPI index. The question is whether one should use expenditure weights of all householdds aggregate, of whether one should use the weight of the typical household. In other words, should we aggregate of all spending, and then attach weights, or we should go on the basis of one household, one vote. He says a more democratic weight would produce a somewhat higher CPI reading – the gap is also known as the plutocratic gap.

 

 

Austria’s anti-Europeans

Austrian’s right wing Freedom Party enjoys a rating of 20% in the polls, according to the FT, and together with another right wing party, this adds up to 27%, by parties which define themselves primarily through their hostility towards the EU. Following the collapse of the Austrian Grand Coalition, the next elections might bring a vast increase by the far right in the Austrian Parliament. There would still be a Grand Coalition, this time under a different leadership, but the extremes are strengthening.

 

 

 

Regulating the interbank market

Writing in Lavoce, Rony Hamaui says it is time to rethink the regulation of the interbank markets, which were previously considered to be one of the cases where self-regulation was best. But now that the difference between interbank rates and policy rates are on the verge of becoming structural, we are risking a situation where central bank rates only working in the shortest of times, and lose their influence as a monetary policy instrument. The solution to this crisis has to be a combination of stronger rules, stronger regulation, and common sense.

 

 

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