Sarko’s diplomacy upsets the Irish

 

Nicolas Sarkozy prompted a storm of angry reactions in Ireland with his reported remark that Ireland will have to vote again on the Lisbon Treaty, reports the Irish Independent. Sarkozy made this comment in a private meeting with a member of his party. Foreign minister Micheal Martin said President Sarkozy would be in "listening mode" when he comes to Ireland next Monday, and would not be imposing any solutions. Amid the controversy which followed the president's comments, his officials last night insisted Mr Sarkozy would not arrive in Dublin on Monday with a "ready-made plan".

 

Concessions for a second Irish referendum

Le Monde, meanwhile, looks at what Sarkozy has to offer:  The treaty will be changed to assure that every EU country will keep the right for a commissioner in the European Commission (this is in fact what Jean Quatremer suggested earlier). As the no partisans indicated that this might not be enough, Sarkozy will also reassure Ireland rights already granted, namely that the EU will not impose on the Irish the right of abortion or gay marriage, its neutrality and that fiscal decisions will continue to be decided by unanimity. The proposals could be debated by the Council in October and adopted by September so that a second referendum could be hold at the latest on the day of the European Parliament elections. The big looser of this deal is the European Commission.

 

Jean Quatremer notes in his blog that Sarkozy has his intervention well prepared as he got the assurance from the Czechs and the Polish president, that their countries will be no obstacle in the ratification process. But Quatremer warns that amid the incipient recession in their home country the Irish might not as easily convinced to vote positively in the next referendum.

 

The Belgian odyssey

Belgium is in the middle of another government crisis after Prime minister Yves Leterme handed in his resignation on Monday evening, after failing to deliver constitutional reform, as requested by the Flemish and refused by the Walloons. But the Belgian king refused to accept the prime minister’s resignation; he is now receiving the representatives of the regions ahead of the party leaders for consultations. Le Soir speculates now about a rerun of Leterme but says that the other two options a new prime minister or new elections are also on the table.

 

 

Our gloomiest market day so far

If you thought we were gloomy, you should read this morning’s European newspapers. The euro is back to over $1.60, gold rose to its highest level in four months, and the German DAX index fell at one time to 6000 (it was at 8000 at the beginning of this year); and in America there is a fear about further bank collapses. The only two good piece of market news was a late rally on equity markets, neutralising some of the earlier losses, and a fall in oil prices to below $140.

 

The Financial Times writes from Washington that Ben Bernanke continues to see big risks ahead, but he qualified that his concern is not serial bankruptcies of US banks, but a credit squeeze. Mr Bernanke said inflation was also a problem and that it was necessary to prevent a rise in headline inflation to affect inflationary expectations. 

 

The International Herald Tribune says the crisis is now coming over to Europe in a big way, quoting one analyst as saying it would not be inconceivable that the US narrowly escapes a recession while Europe does not. Spain and Ireland are already in recession, Italy is stagnating, and Germany has suddenly faltered, as the country’s exporters are finally hit by the strong euro.

 

 

El Pais reports that Martinsa-Fadesa, one of the country’s largest house builders collapsed amid a pile of bad debts, as the property crisis is now in full swing. The collapse of the company affects some 12000 people, who are waiting to have their homes built, but the company said the construction continues for the time being.

 

Frankfurter Allgemeine seems to get scared by the credit crisis, according to an editorial, which felt it needed to make the point that personal savings in banks remain secure. But the rest of the editorial suggests that the world is close to a financial meltdown that is now spreading to Europe via Spain, where the bankruptcy of a construction group could be the beginning of a deep crisis in that country.

 

 

Writing in Lavoce, Francesco Giavazzi says the western economies are subject to two large, but still not that unusual shocks: a rise in commodity prices and a banking crisis. This will lead to a period of weak economic growth in the US. In the US, the political objectives to recapitalise the banks and their shareholders is likely to win the day. Another likely consequence of a strong recession is the rise in protectionism. He warns that European politicians are delusional when they think that they can protect themselves by searching for scapegoats.

 

 

Wolfgang Munchau, writing in FT Deutschland, says that neither Fanny nor Freddy can be accused of dabbling in dubious mortgages. This was the respectable end of the US mortgage market. But even a property bubble become so extreme, than the crash is going to kill a lot of otherwise sound banks and semi-state institutions such as Freddy and Fannie. Munchau predicts real price decline in the US, in Spain, and in Ireland of some 40-50%.

 

 

 

Has the euro boasted intra-EMU trade?

Volker Nitsch  and Mauro Pisu write in Vox that on aggregate, trade among member countries of EMU has moderately increased after the introduction of the euro. Their research suggests that this effect is mostly due to an increase in trade in long established trade relationships, not the number of traded varieties. The euro has increased the number of products that exporters ship to the euro-area. There is a trend towards low unit value per product, which suggests that smaller and less productive firms have entered the intra-EMU trade.

 

Second round watch: 3.8% inflation in UK and a local government strike

UK inflation hit the highest level since 1992 with annual rate of 3.8%. The British local government unions used this reported increased to press home their pay demands over which their members are now on strike. Trade union leaders say that they would not longer tolerated a loss of purchasing power among their members.

 

 

Buiter on central bank indepence

Willem Buiter makes the point in his latest blog entry that the large three western central banks have all not done sufficiently to fight inflation. Yet this is precisely why we created central bank independence in the first place – to fight inflation under adverse circumstances. So he concludes: If they flunk this one, there is no point in having operational independence in the first place.

 

 

 

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