Commission and France clash over policy co-ordination

 

In its strategy paper about the future of the euro area,  the European Commission will reject any notion of policy co-ordination that includes the European Central Bank, according to a report in Le Monde. The Commission will present its paper on May 7, and it will include a discussion of policy co-ordination post Lisbon Treaty. The Commission wants increased use of early warning, an area in which its powers are strengthened with the Lisbon Treaty. For example, it can issue warnings to member states not only over deficits, but also over inflation, pay increases, lack of reforms, etc. Le Monde reports that the government believes the Commission proposals to be too little, and it reserves the right to make more ambitious proposals. Le Monde also says that Silvio Berlusconi has even gone so far as to propose a formal change in the ECB’s mandate. FT Deutschland quotes a senior EU official as saying: “We don’t want this debate.” (Our own hunch is that the Commission will prevail as France has lost a much of its credibility on this issue, both through persistent ECB-bashing and its unwillingness to comply with the spirit of the revised stability pact).

 

 

A year on – Sarkozy’s first liberalisation package

With the draft law on the “modernization of the economy” the French finance ministry is expecting 0.3 pp additional growth for quasi zero costs to the government. Christine Lagarde will present the draft law today to the cabinet. The measures intend to ease the creation of small enterprises, and to ensure lower prices “Hypermarches” will be able to negotiate their prices with suppliers – who fix the price unilaterally since 1996 – and the access of hard discounters will be eased by restricting building permission from a local council to shops with surfaces of more than 1000sq – currently the limit is 300sq. It is not yet clear whether the text will make it through parliament. Especially the last is likely to become subject of hefty debates with parliamentarians next month. For more details see Le Figaro or Les Echos . In his column for Les Echos Dominique Seux argues that this is the first really liberal law from Sarkozy’s government, but that the government should extend its scope to services and protected professions. 

 

 

Slovakia to be euro member No. 16

Frankfurter Allgemeine has an in-depth report about Slovakia, which is likely to receive the green light from the European Commission next week about its membership of the euro in January. It would be the sixteenth member. The country’s business and banking elites are fully behind the move, but there are concerns in the population that the currency might suffer from high inflation after the change-over, as happened elsewhere. Slovakian prime minister Robert Fico apparently those concerns, not clear whether out of conviction, or whether he fears about his reelection chances in 2010. The former finance minister Ivan Miklos also said that prices might reasons, because the Slovakia price level is currently only 60% of the euro area average, Slovakia will no longer be able to benefit from the krona’s revaluation effect, which dampened inflation in the past, and thirdly, Slovakia is likely, like other new members, to opt for a competitive conversion rate. Central bank governor Ivan Sramko, however, does not believe in price increases.

 

 

 

 

Germany’s maximum wage

The SPD has made a proposal, according to Frankfurter Allgemeine, to limit wage bills as deductible corporate expenses only up until €1m per year. Any above this ceiling could only be tax deductible at 50%.  The idea is to give companies an incentive not to pay very high salaries. The article says that Peer Steinbruck, finance minister, favours the idea, while the proposals are too extreme for the CDU. (The point is that this is quite a popular measure, which the SPD could unashamedly use in the 2009 election campaign. So it is interesting to watch whether Germany will be the first industrial country to impose a maximum wage). There is also a question whether this is constitutional.

 

 

Mood in Germany changing

The chief executive of Bosch told the Financial Times that the a combination of next year’s elections, higher wage deals and a minimum wage would make 2009 a very critical year for Germany. Franz Fehrenbach said “this mixture, I fear, could lead us into the next crisis. And that at the same moment when we face all the other problems in the economy”. He was particularly dismayed by the Berlin government’s decision to raise pension payments. The FT quotes another chief executive as saying that “Germany is facing a perfect storm.”

 

 

Row over Germany’s next EU Commissioner

Frankfurter Allgemeine has a report that Kurt Beck, SPD chairman, wants to propose Martin Schulz, the socialists supremo in the European Parliament, for the succession of Gunter Verheugen as Germany’s man in the Commission. Angela Merkel makes the point that the CDU last had a commissioner some 20 years ago, and that there are a number of highly qualified candidates. While Merkel did not mention any names, the article mentions Peter Hintze, a parliamentary state secretary in the economics ministry, Roland Koch, prime minister of Hesse, or Elmar Brok, a well-known CDU MEP. This is part of a wider horse-trading exercise that includes other offices as well, including the renomination of Horst Kohler as president, which the CDU supports. The SPD wants to extract a price for its support.

 

 

 

The pain of Spain – how fast house prices are falling

El Pais on Sunday had an interesting article showing how fast property prices are falling. Taking the example of a new apartment building in the central Madrid, a flat of about 100 sqm was originally offered for sale at €550,000. It is now being offered by €460,000, down 16%, and the vending agency even said the new price was negotiable. There were several other examples. In other words, the centre of Madrid is already subject to a falling prices in the order of 10-20% - and this is just the beginning of the downturn.

 

 

The pain of Spain - a view from the bottom

The FT has an excellent article from Madrid where the correspondent writes what it is like to be poor in Spain’s crashing economy. One of the big social issues are remittances – money sent by immigrant workers back home. The author quotes a concrete example of a Bolivian family, who work in Madrid and send money back home to support their two daughters, who live in Bolivia. As the crisis would hit the poor in Spain particularly hard, there would be huge knock-on effects in Latin America.

 

 

Euro area lending is falling finally

The euro area economy is cooling off, as mortgage lending is now growing at the slowest rate since the start of the euro, the FT reports. Lending for house purchases rose at an annual rate of 6.1% in March, after 6.6% in February. The article argues that the future outlook would depend crucially on France, where house price inflation peaked in 2005 with an annual rise of 16%, but is now stagnating, or even falling. The article quotes predicts that French house prices could fall by 3% this year, though the economic impact is believe to be smaller than elsewhere.



 

Why central banks must care about housing

There is now an increasing interesting among researchers about the impact of the monetary policy on housing. One example is the IMF, which said in its latest WEO that central banks should take explicit take account of housing. Writing in Vox, the economists, Roberto Cardarelli, Tommaso Monacelli, Alessandro Rebucci  and Luca Sala argue that the extent to which monetary policy should react to changes in the housing sector depend on the level of development of mortgage markets – the more developed, the more aggressive the optimal response. In the same vein, they should also respond more aggressively on the way down. That would explain why the Fed is cutting interest rates more aggressively than the ECB. In economies with a more sophisticated housing market, economic stabilisation would be improved by a monetary policy that responds to house price developments. They also make the point that a house price function should be applied symmetrically during upturns and downturns (unlike in the US where the central bank does not care about asset prices on the way, but cares greatly when they fall).

 

 

Pessimism about oil

Over the weekend there are two pessimistic bloggers about oil. One is the Wall Street Journal economics blog which quotes research showing that from a US perspective this oil crisis is worse in impact that all the preceding, including in the 1970s. Paul Krugman makes the point that if China consumer as much oil per head of population as Mexico (which is not an intrinsically unreasonable proposition), it would gobble up 30% of world oil supplies (with no hope of a rise in supply). He quotes one commentator who predicted that oil shortages will cause World War III.

 

 

How Nobel Laureates disagree on the economy

The Big Picture economics blog has three videos of a CNBC interview of three Nobel laurates – Joe Stiglitz, Robert Engle, and Ed Phelps. Stiglitz says the US has entered the worst recession since the Great Depression. Engle says the weak dollar will pull the economy up, while Phelps says that judging by the labour market this is not a recession, but a mild downturn.

 

Munchau on when the crisis will end

Wolfgang Munchau argues in his FT column that this crisis is far from over, contrary to what some optimists now believe after central banks bailed out Bear Stearns, and other banks holding huge amounts of MBS. Munchau says there is only one crisis, which is global economic adjustment crisis, which is not going to be over in a very long time. The financial part of the crisis will depend critically on how the economic adjustment occurs. The most painful scenario is one where it happens with rising in inflation, as this would cause serious problems in the US bond markets. He also makes the point that the important question is not whether the US is presently in recession or not, but how long the US will grow at rates below potential. This downturn is not as bad as the Great Depression, but it might last longer.

 

Larry Summers on why the US needs to make a new case for free trade

Larry Summers shows sympathy with those who say that free trade makes them worse off. He says that the policy elites cannot continue to take that arrogant position for the very simple reason that it is not true, and that current politics moves in the opposite direction. He says that the big political task is to realign the interest of working people and the middle classes with globalisation. He does not say how this can be done, but promises to write another column on the subject – so we wait in suspense.

 

 

 

 

Eurointelligence wishes to thank the Collegio Carlo Alberto for their support to help us maintain eurointelligence.com a free public service.

---