Hang on in there, Gordon – We really need you until January

 

Gordon Brown survived the dismal European elections, but the FT reports that Labour Party rebels still hope to oust Mr Brown by the autumn, which would jeopardise the Lisbon Treaty. The Independent newspaper has a poll to suggest that Alan Johnson, the popular home secretary and a potential Labour successor to Mr Brown, would be able to deny the Conservatives an overall majority, while Mr Brown might destroy the Labour party if he continue to cling to power.

 

FT Deutschland has an article saying that EU politicians are genuinely concerned about the situation in Britain, and quotes the SPD’s European spokesman as saying that the decision to call a referendum on the Lisbon Treaty would invariably lead to that country’s exit.

 

Philip Stephens says there is a possibility that Cameron might get in this year, in which he will hold a referendum on the Lisbon Treaty, which the UK electorate is almost certain to reject. This would produce a huge crisis in the EU, and might even trigger the beginning of the end of the UK’s membership. In his column he concludes that even Cameron might not want to go that far, and might prefer to be elected after the Lisbon Treaty takes effect.

 

 

Sarkozy’s remaining challenge

Nicolas Sarkozy takes the EP election results as support for himself and his government and announces the next series of reforms. In response to the election victory of the Greens the government is quick to put judicial reforms and climate change on top of the agenda. With the defeat of the Socialists and Francois Bayrou he is confortable at home. Arnaud Leparmentier argues that Sarkozy’s main challenges are at the European level. Angela Merkel if reelected, is likely to continue her strategy of deficit reduction, hardly compatible with Sarkozy’s vision. A crisis cannot be excluded.

 

 

Turkey concerned about its EU future

The Turkish newspaper Hürriyet reports this morning that Turkey will face a mighty challenge after the drift to the centre-right in the European elections. The paper analysts as pointing that the election result is not a response to future Turkish membership but a response to the crisis, but nevertheless the paper’s correspondent concludes that Turkey’s path towards is going to be harder than it would have otherwise.

FT Deutschland also has a story on this, quoting Elmar Brok from the EPP as saying that EU enlargement should stop with Croatia.

 

S&P cuts rating for Ireland

Standard & Poor's cut its rating for Irish long-term debt to ‘AA’, its lowest level in 14 years, blaming massive losses at Anglo Irish Bank and the likely cost of rescuing the nation's other banks, reports the Irish Independent. S&P expects that the economy won’t return to last year’s level of growth for another five years at least and that debt, meanwhile, could balloon from 45% last year to more than 100% of GDP. The news raised the yield spread against German bunds by 3bp and pushed the euro to a two week low against the dollar.

 

Green shoots interrupted

As Brad Setser points out, Korea is the first country to report trade data, which makes a useful but imperfect guide for world trade, as Korea is among the world’s largest exporters. After a recovery in April, exports fell again in May, though not much, though the year-on-year decline is 28%. Taiwan did not as well as in April, and a slight improvement in May, but yoy it’s still down 31%. These data suggest is that the speed of the decline has slowed down, but these data are disappointing.

 

Does the rise in yields slow down the recovery?

As the 10-year US Treasury yield heads towards 4%, the FT is wondering whether this complicate the economic recovery. Some commentators quoted in the article say that there is a danger of a negative feedback loop between higher yield and a slower recovery, while others point out that the scenario of a sharp recession followed by a shallow recover is not consistent with high inflation.

 

Protest votes in the Baltics

Le Monde has an article on the Baltic states and their desperate battles to counteract rumours of devaluations against the euro despite their economies contracting with double digit rates. In good times, the prospect of EU adhesion had set off an extraordinary growth in credits denominated in euros. As the economic crisis is unfolding, Baltic states took drastic cost cutting measures to defend their peg. Estonia is now in the middle of a political crisis because it refuses to cut further, in Latvia the government only survives with the help of the international community. In last Sunday’s European elections, protest votes propelled extremists from the region into the European Parliament.

See also Simon Johnson on disturbing parallels between Latvia and Iceland.

 

How to save Latvia – and sink Sweden

The FT is quoting from a rather devious research paper which points towards a way out Latvia’s crisis. Convert the consumer debt – in euros – into Lats, and then devalue the currency by 40%. The damage would be born entirely by the Swedish banks, which have lent them the money. The articles goes on to say that the Swedish banks will lose one way or the other, but at least this way, Latvia is going to survive.

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