Merkel proposes fiscal union (well almost)

 

This is kind of of proposal you might be expected to read on the Eurointelligence website, but coming from Angela Merkel, this is quite something. She is proposing that the EU – or the eurozone – obtains direct responsibility over the fiscal policy of highly indebted countries such as Greece. She also said that it is necessary to discuss which competence the EU should get to support the community. Merkel was speaking at a meeting of the European People’s Party in Bonn. FT Deutschland says that Merkel’s proposals are a direct response to the problems in Greece. EU leaders were all over the place on the subject yesterday, with Reinfeldt saying that Greek’s problems were purely domestic , to Juncker, who categorically ruled out a default, but failed to mention how that could be achieved.

 

 

Papandreou’s policy of announcements

It is going to happen on Monday. George Papandreou said he will take the bull by the horn and announce Greek’s deficit cutting strategy, a month before what had been expected. (The FT writes that this is the stability programme Greece was due to present to the European Commission in January) Kathimerini has some details of Papandreous’ pre-announcement, focusing on “simple structural changes” within spending ministries, reduce the number of government layers, and fight against corruption. He also mentioned green energy and ecotourism. But this is not going to cut the deficit by much. What the EU is looking for is wage cuts in the public sector, a broader tax base, and pension reform, and he did not mention any of those. (Be prepared for several rounds of grand announcements that amount to nothing).

 

Don’t just blame Greece

Writing in FT Deutschland, Heiner Flassbeck and Friederike Spiecker argue that Germany is as much to blame as Greece, for Germany has also ignored the common good, for example through unilateral wage moderation to raise intra-euro area competitiveness, and through unilateral deficit-cutting laws. It is Germany’s wage policies that is some extent responsible for the detriorating position of the Greek economy.

 

Zapatero professes:  We are liquid

El Pais has the story about the aftermath of S&P’s decision to cut Spain’s outlook from AA+ neutral to AA+ negative, with Zapatero at pains to point out that Spain has no funding problems. Interestingly, S&P’s report on Spain was endorsed by Jose Manuel Gonzales Paramo, of the ECB. The paper reports that the effect of S&P’s warning were already felt at yesterday auction of 10-year bonds, where the interest rate was higher than at the previous auction.

 

France, to follow UK on bonus tax, but not US and Germany

After the imposition of a 50% bonus tax in the UK, France followed suit with a decision to tax bonuses in excess of €27000, according to the FT. Angela Merkel said the idea had its charms, but her government is unlikely to follow suit, while the Obama has no intention to change the existing policy, whereby only banks subject to the TARP bailout programme, see their salaries capped. Sarkozy had wanted to this before but feared that Paris might lose out to London. Now with the UK taking the lead, France is now in a position to follow suit. Bundesbank president Axel Weber is also opposed to a bonus tax, saying it would be more effectively to align bonus payments to long-term performance.

 

Samuel Brittan on economic cycles

An interesting column by Samuel Brittan on economic cycles, in which he gives a useful history lesson in the economic debate about the length of economic cycles. His conclusion is that they are essentially unpredictable, they are not subject to a regular pattern, both in shape and length. Keynes did believe in cycles – herd-like waves of optimism and pessimism – but attached more importance to other factors. Brittan’s advice is not to rely on the cycle to run large fiscal deficits.

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