Valls received Socialist opponents to his austerity plans yesterday, and signals compromise on pension freeze but not on the overall spending cut target;
Valls signals concessions to Socialists
France projects its public deficit to come in at 3.8% this year, instead of 3.6% envisaged earlier. In the stability programme Manuel Valls is expected to forecast that the deficit is expected to reach 3% in 2015 (instead of 2.8%). Valls spent his day yesterday talking with the representatives of 100 Socialists who openly called for a change in policies. While the €50bn in savings was apparently not up for negotiation (the group wanted to cut it down to €35bn), Valls seems open for concessions with respect to pensions, Les Echos reports. Discussions included a compensation for small pensions, a lower cap for the freeze and a review clause offered to public service employees, a payment freeze in accordance with economic growth. More salary revaluations Valls will receive the Greens and the Radical Left today. The plan is up for a vote in parliament on April 29.
The reaction among a small yet vocal group of Socialist lawmakers increases the risk that Hollande will have to water down his deficit-cutting plans, rely on opposition votes or -- more damaging yet -- face an election if a vote on the package fails, writes Bloomberg. Gerald Grunberg says the group is “unpredictable, malcontent and disoriented.” Though a no-confidence vote is unlikely, it cannot be excluded. The French Socialists never revised its ideology and the left wing feels lost intellectually and politically in today’s globalised world.
Stéphane Dupont argues that the sceptics offer no real alternative and that there is really not much choice either: Pressed to counter-finance every measure they object to, they cannot propose to raise taxes as the electorate is fed up with tax increase, and also given Hollande’s promise to reduce tax charges for households until 2017. Also the majority of the French support Valls savings plan, except for his pension cuts.
Pier Carlo Padoan has a long list of proposals to improve a monetary union between a Calvinist North and a Catholic South, including the construction of a genuine banking union;
Padoan’s ambitions for Italy’s EU presidency
We are not holding our breath for the Italian EU presidency and its stated ambitions to change the way the EU and the eurozone in particular are working. This would require a confrontation, for which the Italian political system never had the stomach. And we simply do not believe that the Italian government will put a fight at a time of a cyclical upturn and improved political fortunes for the PD.
Nevertheless, we were struck by the frankness with which Pier Carlo Padoan analysed the EU’s policy mistakes and some of the conclusions he drew. As he writes in La Repubblica, he is seeking a grand bargain between the Calvinist states of the north and the Catholic states of the south, to undo some of the mistakes that were made. He writes the US had focused on getting the balances of the private sector in order while Europe imposed austerity, which has produced a credit crunch and delayed the recovery. He makes the following proposals:
- A stronger banking union with adequate common resources;
- A fiscal strategy oriented towards growth and social stability;
- structural reforms to stimulate growth and innovations;
- a reallocation of EU funds towards growth and innovations;
- service liberalisation;
- completion of TTIP.
Finland’s economy minister Jan Vapaavuori declares candidacy to succeed Jyrki Katainen when he steps down in June;
Vapaavuori has good chances to become Finland’s prime minister
Finland's economy minister Jan Vapaavuori will seek to become leader of his party, he said on Monday, a move that would enable him to take over as prime minister from Jyrki Katainen who plans to step down in June. Members of Vapaavuori's conservative National Coalition party would back him as their leader, a recent poll by broadcaster MTV showed, making him the head of the five-party government until the next general election in April 2015. Vapaavuori is expected to guide his party further towards the political right if he takes over from Katainen, according to Reuters. Katainen surprised Finns earlier this month by announcing he was stepping down in June with a view to taking a senior European Union post. Other names mentioned as possible candidates to succeed Katainen were Petteri Orpo, the National Coalition party head in the parliament, and ministers Paula Risikko and Alexander Stubb. The party will vote on the issue on June 14.
Manuel Valls announces general freeze on pensions, benefits and public sector pay until October 2015;
- Socialists on the left of the party said they will oppose measure if it is not amended;
Left mobilises as Valls announced general pay freeze
Manuel Valls announced on television last night an 18 month freeze for pensions and benefits as well as the extension of a ban on cost-of-living increases for public sector workers. Pensions, benefits -including support for the young and long-term unemployed - as well as housing, family and invalidity allocations, will be frozen until October 2015. A pay freeze for France's five million public sector workers has been in place since 2010 and will also be extended.
Never before has a prime minister dared to impose such a broad based freeze, writes Les Echos. While quite unpopular with the left, it would bring in €2bn, of which €1.3bn is from the base pension alone. On top of this, the announced further cuts in family benefits, and expects social security services to cut their administration costs by €1.2bn, while complementary health and unemployment insurance, both run by trade unions and employers together, are to realise cost savings of €4bn.
Valls said that more than 40% of the €21bn in savings envisaged will come from cuts in social benefits and healthcare. Another €18bn is to be trimmed from government ministries and the remaining €11bn will come from a rationalisation of local government.
Christian Paul, a lawmaker on the left of the party, said he and fellow Socialist deputies had been "floored" by the announcement of the freeze, AFP reports. Paul said he and some other Socialist deputies would be unable to support the government if the package was not amended. Many Socialists were not briefed before the declaration on television, the JDD reports. Trade unions already talk about strike actions.
The measures are to be examined by the cabinet next week and presented to parliament on April 30.
The EU Commission will ask the Andalusian government whether any European Social Fund money was involved in the unemployed training programme which allegedly suffered massive misappropriation;
Commission to probe Andalusian government
The European Commission will ask the Andalusian regional government to investigate whether any of €1.1bn from the European Social Fund were affected by the alleged fraud in training for the unemployed which hit the news over the weekend, a spokeswoman for Audit and Anti-Fraud Commissioner Algirdas Šemeta said on Wednesday. According to El País, after contacting the region in January to inquire whether ESF money was being used for such courses as reports of irregularities has surfaced, the Commission had concluded the investigation needed only be of national scope. Vozpópuli, which broke the story last Friday, writes that the former Andalusian premier José Antonio Griñán had decided in April 2013 to strip his economy department of the responsibility for the courses in question, transferring them to the education department. In February, the Andalusian government’s economy department had issued a statement that the courses had been given without incident and with external controls, this in reaction to a report from the Andalusian court of audit relative to the years 2009 and 2010 claiming the subsidies had been given without a public tender. The police has filed a report with the anti-corruption prosecutor but the case is not yet in the hands of a judge. Público writes that the Andalusian regional government has accused the central government of leading an “inquisition” on the Andalusian government. Interior Ministry sources deny a leak of the police investigation, which has been running since last May under the auspices of the anti-corruption prosecutor in the province of Málaga.
Wolfgang Munchau, meanwhile, writes that the eurozone crisis is not fundamentally about spreads, but about deep-seated imbalances that are very unlikely to be resolved.
The euro crisis – a long game
We liked George Magnus’ (?@georgemagnus1) observation on Twitter about the future of the euro debate, who summed it up like this:
“… euro sceptics still waiting for euro to break. Euro philes still waiting for it to work. Long game."
In his Spiegel column, Wolfgang Munchau also takes stock of the debate, observing that the most dangerous moments of the crisis have been those when policy makers were becoming complacent, which is what is happening again now. The euro crisis was not primarily a crisis of sovereign spreads, but one of fundamental economic imbalances that are bound to arise in an imperfect monetary union. Austerity has suppressed the current account imbalances for now, but has not resolved them. As Magnus above, Munchau writes this is a long game, to be decided on the political battlefields. He wonders whether the Greeks and the Italians will continue to support moderate political parties of the centre in five years’ time unless there is a fundamental shift in their well-being. And he does not see that fundamental shift occurring in an environment of extremely low inflation rates, and continued budgetary consolidation.
Spain’s economic police is said to be investigating a €2bn fraud case involving subsidies for the training of the unemployed, implicating unions, firms, employers’ associations and those in charge of oversight at the Andalusian regional government;
Massive fraud uncovered in Andalusian unemployed training schemes
Spain’s police unit in charge of economic and fiscal crimes (UDEF) is investigating fraud in training courses for the unemployed worth €2bn, writes El Confidencial. Quoting “sources close to the investigation”, the paper says the Andalusian regional government channelled €3.7bn in subsidies for training schemes of which more than half may have been fraudulently used. The regional government advanced 75% of the cost of the courses to the unions, firms or employers’ associations organizing the courses and the remaining 25% was subject to an audit. The allegation is that either the audits were not carried out or, if irregularities were found the regional government didn’t usually demand the return of the subsidy, and thus the UDEF suspects that high ranking government officials must have been involved in the fraud. To avoid statute of limitations, the UDEF is investigating the period 2009-2011 although the fraud presumably extends further back. Also, to keep the size of the case manageable the investigation is focusing on only one of the 8 Andalusian provinces, Málaga. The case appears to have been initiated on a complaint by the Social Security.
a German program intended to subsidize unemployed youth coming to Germany’s sectors in need of workers has been mothballed after being overwhelmed by demand;
Germany suspends international youth employment program
Germany has suspended a youth employment programme initiated amid much fanfare less than a year ago and geared towards bringing foreign trainees into German sectors lacking manpower, writes The Local (Germany). Although the program was recently extended to run until 2018, it has run out of money and suspended new applications. The original budget was €48m for this year, but the programme has already used up the entire €400m earmarked for the duration of the program, though money to pay the subsidies already pledged will be forthcoming. A German labour ministry spokesperson said they could not cope with the demand, which had exceeded expectations as nearly 9,000 people had from across the EU had applied, particularly from Hungary and Spain with the latter leading with over 5,500 applicants.
Silvio Berlusconi receives a surprisingly mild sentence of social services, but the chances of an eventual return to Italian frontline politics, and the outlook for his party, remain bleak;
The future of Silvio Berlusconi and Italian politics
The Italian papers are naturally full of the reports of Silvio Berlusconi’s sentence of four hours of community work per week in a nearby old peoples’ home for ten month. The interesting political question is how do the various scenarios affect Italian politics? La Repubblica has an article looking at various scenarios for Berlusconi. In the best case scenario, he would be a free man March 1, 2015, when he will be 78 years old. This would allow him, health permitting, a full political comeback ahead of the next elections, which would have to be held before February 2018. His political ban would have expired by then. The article then discusses how the various other legal cases could impinge on that scenario, most importantly the case involving sex with an underage prostitute, for which he was already found guilty and received a seven-year sentence in a first ruling. That, in turn, could also impinge on the current sentence itself. The maximum sentence he could expect is four-years of house arrest (which would take him beyond the election and out of politics altogether). Even a lower period of house arrest would freeze him politically, as he would no longer be able to have external contacts.
Eurozone Blog: Sweden is now in full-fledged deflation. Good comment by Lars Svensson.
- Lars Svensson says Sweden was now in full-fledged deflation due to policy errors by the Riksbank;
Sweden is now in full-fledged deflation
Definitely off our reservation, but highly relevant nevertheless, is the Swedish experience, which may be a pointer to where the eurozone is headed. Lars Svensson, the economists who was also a former deputy governor at the Riksbank, writes that Swedish inflation was hovering around zero since November 2012 and turned negative in January 2014. He blames the failed policy of the Riksbank, which started to raise rates in the summer of 2010, then at 0.25%, to 2% in 2011. The real rate went up by 3.5pp, which constitutes a huge shock. He says Sweden is in serious danger of getting trapped in a deflationary spiral, and urges the Riksbank to take rates back to low or even negative levels, and if necessary adopt QE.
On Macropolis Nick Malkoutzis writes that the momentum of Syriza seems gone, missed opportunities and only slight lead in the polls suggest they no longer are a credible alternative to Samaras;
Nick Malkoutzis concludes Syriza's momentum over
Nick Malkoutzis on Macropolis concludes that the Syriza moment has gone. The problem is that Alexis Tsipras tried to do both, open up to a wider audience by refining its message or it could remain faithful to its radical roots. Almost 24 months on since the last election, SYRIZA’s grand idea is still unclear about its position to the bailout programme and has yet to find allies in the EU in favour of a larger haircut. Their political handling remains immature and they missed out two golden opportunities they could have put the government under pressure with - after cabinet secretary Takis Baltakos was forced to resign over his secret contacts with Golden Dawn, and the new bond issue. A recent Public Issue poll put SYRIZA 3 percentage points ahead of New Democracy for the May 25 European Parliament elections but most other surveys indicate the gap is much smaller. It does not look like they will win by a landslide, and with only a small lead they will loose their momentum as a credible alternative to Samaras and it will lack the political legitimacy to push for national elections.
Klaus Kastner says that Greece faces a real choice between staying the course and default, while he himself has lost confidence in the success of the current policy;
- Keep Talking Greece says there is not enough political support for default, let alone euro exit, in Greece right now;
- Vanis Varoufakis says default not the best option – Greece has better means available to force a debt conference, for example by holding the EU ransom over banking union;
Should Greece default?
Wolfgang Munchau’s FT commentary on Greece has provoked some reactions. The argument of the column was not that Greece should default. It said the conditions for a default strategy to work well would be onerous, and would require much more in terms of real economic reform. But a primary surplus and a current account surplus both make a strategy of default a feasible option, leaving Greece with a genuine choice (when there was no choice before). A decision should be based primarily on which option yields the greatest likelihood of an increase in real investment and a return to full employment.
Klaus Kastner, who runs the Observing Greece blog, strongly agrees with the final conclusion of the comment, which is that there is now a choice available to Greece. He says the EU, and not a financial journalist, should be the one that tells the Greeks that they have a choice.
“When I started this blog 3 years ago and for the first couple of years, I was an adamant supporter that Greece could and should make it with the Euro. Nearly 28% unemployment and nearly 60% youth unemployment after 4 years of adjustment prove me wrong. Yes, Greece is now financially stable with both domestic and external accounts in balance (or rather: in surplus). But how long will Greece remain politically and socially stable with these kinds of unemployment ratios?
I cannot judge how quickly Greece's employment situation would improve if the country switched to a default/exit course but I am certain about the following: with the Euro, the Greek employment situation will not return to more or less satisfactory levels for a very long time.”
The Greek blog Keep Talking Greece suspects that there is a big plot behind this column, another German attempt to influence Greek voters. It said the option was politically unrealistic, as even Syriza would not advocate such a strategy.
Yanis Varoufakis agrees with the analysis, but not with the conclusion. He says default and exit were nuclear options that may not be needed. Instead Greece should adopt a strategy consisting of three prongs: first, refuse to ratify the SRM agreement; second, refuse to issue new bills or bonds until there debt relief is agreed; refuse a change of further elongation of official debt (with the goal to make debt relief the only option).
a report by Catalan government advisors argues that EU and international law is silent on the scenario of a region seceding from a member state while intending to remain in the EU, but it also considers scenarios where Catalonia stays outside the EU but joins for instance the EEA;
- leading opposition party PSOE is planning to propose a constitutional reform after the may European elections, which is being negotiated behind the scenes;
Catalan government says it may remain in the EU after independence
On Monday the Catalan regional government released an advisory report arguing that international and European law does not explicitly regulate the case of “regions which until the actual moment of applying for entry form part of a member state” and that German reunification and Greenlandic exit are not precedents though they are evidence of the EU’s flexibility and pragmatism. Therefore the report expects Catalonia to be allowed to remain in the EU after independence. The report includes 4 scenarios (permanence, ad hoc accession, ordinary accession and exclusion from the EU) as well as the possibilities of concluding bilateral agreements with the EU, accession to EFTA, the EEA and Schengen, as well as the possibility of concluding free trade agreements with individual states.
Meanwhile, in an interview with Catalunya Radio, opposition leader Alfredo Pérez Rubalcaba explained his party’s proposal for a federalist constitutional reform to be introduced after the European elections. At the centre of the debate is the 2006 reform of the Catalan autonomy statute which was partly struck down by the Constitutional court in 2010. According to Expansión Rubalcaba believes the leader of the Catalan group in the Spanish parliament Josep Antoni Duran Lleida agrees with the substance of the proposal. Duran Lleida is the leader of Unió, the sister party of Convergència, the party of Catalan premier Artur Mas.
Vozpópuli writes that the federalist constitutional reform is being negotiated behind the scene at the highest levels, including the King, former socialist PM Felipe González, and Miquel Roca, a Catalan participant in the drafting of the current Constitution. Nevertheless, PM Mariano Rajoy is said to be wary of opening a constitutional reform because of the absence of a clear consensus, especially among the regional leaders of his own PP party.
The UMP is to decide on its position on Europe this week, amid rising euroscepticism inside the party;
The resurgence of euroscepticism inside the UMP
The Journal du Dimanche and Cecile Cornudet in Les Echos find a rise of eurosceptic voices in the UMP ahead of its meeting this week to adopts its position on Europe and it is not yet clear how it will play out. Two former ministers under Nicolas Sarkozy now came out in clear language against the current EU setup. Both are self-declared pro-Europeans, who now want Europe to change. Laurent Wauquiez in his new book evokes a core Europe with six countries and harmonised tax policy. Xavier Bertrand speaks clearly against the Franco-German couple in his interview with the JDD saying it prevents another ECB policy, one that is clearly favourable towards growth and employment. He considers Europe at the source of France’s problem. Francois Fillon and Allain Juppe and AlainLamassoure come out in favour for the Franco-German special relationship. Fillon is expected to give a speech in the following days favouring social and economic ‘rupture’ at home rather than blaming the EU. UMP leader Jean-François Copé remains silent for now, caving the image of a ‘rassembleur.’
The Front National continues to lead in the polls (24% against 22,5% for the UMP) for the European elections.
Former European Commissioner Frits Bolkestein spoke at an anti-euro conference in Italy, saying that monetary union was a failed project;
Bolkestein says euro has failed
There was, apparently, a conference going on in Italy over the weekend “Un’Europa senza euro”. Frits Bolkestein attended it, and is quoted by the blog l’Antidiplomatico as saying that the monetary union had failed. He said eurobonds would not work. They would dilute responsibility, and would create a permanent dysfunctional transfer mechanism similar to that of Italy. His prediction was that the deficit countries will not be able to sort out their problems on their own.