Federico Fubini writes about concerns in Brussels about Renzi's plan to cut income tax by €10bn, as most of that would go into imports, and would thus not support Italian GDP;
- the latest Eurostat data show that Italy's exports are falling, including to the eurozone, while other periphery countries have rising exports;
- the Italian parliament yesterday ditched women quotas - one of the concessions Matteo Renzi had to secure Silvio Berlusconi's support for the electoral reform - a vote that led to convulsions with the PD;
- Massimo Franco says the deconstruction of all Renzi's policies is show that he has finally arrived in the reality of Italian politics;
Renzi's slow arrival in reality
Federico Fubini has an excellent insight article of how the European Commission (presumably, because he says Brussels) views the Renzi government's economic plans - with deep scepticism. This is not just about the 3% - although this is clearly part of it. Fubini writes that many of his interlocutors in Brussels say that Renzi has misdiagnosed the situation. The fear is that the €10bn in income tax cuts will be go mostly on imported goods so that its total GDP effect might be small and short-lived. The Eurostat data show that Italian exporters are steadily losing ground while those of Spain and Portugal are gaining. He quotes numbers (we assume they are nominal) that total overseas sales were €390bn in 2013, down €1.5bn, while Spanish exports were up 5.8%, Portuguese exports up 4.6% and global trade as a whole up 2.5%. The problem is not the strength of the euro, he writes, because sales to the rest of the eurozone were down by €4bn.
The big domestic political story was a defeat of amendments to secure women quotes in Italian politics, and this has triggered revulsions among Matteo Renzi's Democrats as the electoral programmes hits its final parliamentary stretch. Massimo Franco said in his front-page editorial in Corriere della Sera that the logic of Renzi's deal with Berlusconi on electoral reform now trumps everything else. He said Renzi's agreement to ditch quotas could backfire badly but at this stage it is hard to judge whether this was an own goal and a shrewd move. Franco seems sceptical. It certainly adds to the confusion, and is also revealing about Renzi's strategy. All of his big plans are now cut in two: parliamentary reform is split between electoral reform and the separate process to abolish the Senate. The same goes for the plans to cut the tax wedge. First he announces the tax cuts, while the counter-financing is left to the future. The Renzi government has arrived in the reality of Italian politics, Franco concludes.
The Labour Party rejects the candidature of Martin Schulz to become the next Commission president on the grounds that he is too European;
Labour to reject Schulz as too European
It has always been our contention that the UK - by not taking part in the monetary union - will ultimately drift away from the mainstream in the EU - whether that takes the form of a formal exit, a detached form of membership, or something else is almost irrelevant. Another example of the process of alienation is this story in The Guardian, which says that the Labour Party will reject Schulz as candidate for the next European Commission president on the grounds that he is too European. Instead, the article says Labour wants to push Helle Thorning-Schmidt, the prime minister of Denmark, who also happens to be married to the son of former Labour leader Lord Kinnock. The article says that Ed Milliband believes that Schulz was an arch-federalist and fiscally irresponsible.
The EPP Congress settled for Jean-Claude Juncker as its leader for the EP elections in May, in vote of 61% against Michel Barnier, who had mounted a strong challenge as smaller parties rebelled against CDU dominance;
- Nicolaus Blome welcomes the personalisation of the campaign, and says this is exactly what the EP needs to get out of the relative obscurity of the past decades;
- two German polls put the anti-euro party AfD at 5% and 7.5% respectively;
EPP settles for Juncker, in a surprisingly tight vote
The EPP Congress in Dublin voted Jean-Claude Juncker has EPP head for the upcoming European election campaign. The vote was 61% for Juncker, 39% for Barnier. Le Monde reports that the result was tight as some delegation were unhappy about the CDU's strong influence, as it pushed for Juncker.
Nikolaus Blome welcomes the fact, in a Spiegel Online commentary, that there is final a real political fight in Europe - Martin Schulz on the left against Jean-Claude Juncker on the right. And this will make this year's European elections special. There is no such thing as a European state or a European electorate, but there is such a thing as a European public, which is relevant when all of us face a joint threat - the euro crisis or Putin's aggression. The problem with previous European elections is that the parliament never received the attention it deserved. Blome appears to be supporting Schulz because he is more likely to put up a fight against the European Council.
A poll by Insa in Focus magazine puts the German anti-Euro party AfD at 7.5%, while an Emnid poll in Bild puts them at 5%. The FDP is at 3% in both polls, and will re-enter the EP after the decision by the constitutional court to get rid of the 3% threshold (on the grounds that the European Parliament is not a real parliament unlike the Bundestag, and thus it does matter whether it functions well or not). The Insa poll has the CDU/CSU at 38%, the SPD at 26%, the Greens at 9.5%, and the Left Party at 8.5%.
Portugal’s president says that the country will remain subject to foreign supervision until 2035 at least;
Portugal’s president says country under supervision until 2035
Portugal’s President Anibal Cavaco Silva called it "an illusion" to think that the demands of budgetary rigor will disappear after the completion of the adjustment programme and warns that Portugal will remain subject to supervision at least until 2035 when 75% of the loan is repaid, Jornal de Negocios reports. This Portuguese twist is different from the Irish narrative ahead of their exit from the bailout programme, hailed as the end of foreign control. The president’s comments were published by the weekly journal Expresso.
Joaquín Estefanía contrasts Bernanke’s regrets about not having been more aggressive in fighting the crisis with the ECB’s apparent satisfaction with a job well done;
Bernanke’s regrets, Europe’s nonchalance
Former El País editor Joaquín Estefanía compares Ben Bernanke’s regrets about not doing enough from the Fed to mitigate the effects of the financial crisis with the complacency of the ECB which contributes to making the Eurozone the global laggard in economic recovery. Estefanía refers to Bernanke’s first speech after leaving the Fed, given recently in Abu Dhabi, and recalling that Bernanke’s own academic work was on the Great Depression of 80 years ago, concludes the he learned from his study and applied what he learned to make the Fed more aggressive, whereas the ECB has been timid and late in its interventions. He also quotes another speech by Bernanke from his recent book about his years at the Fed, explaining the importance of Lender of Last Resort action for financial stability.
Fabrizio Saccomanni hits out at Matteo Renzi's suggestion that the budget he inherited is not what is seems;
- also criticises the European Commission's macroeconomic imbalance procedure as being based on a static analysis that fails to take into account some of the actions taken by the previous government;
Saccomanni strikes back
Fabrizio Saccomanni yesterday struck back, with a press release and a barrage of tweets, at Matteo Renzi's suggestion that the budget he inherited had holes in it, and the European Commission's decision to open up a macroeconomic imbalance procedure. He said the arguments by the Commission were incomprehensible and unjustified. He said the reforms that the previous government had taken would only come to be appreciated over time. He said he had been working towards getting growth back up to 1%, the threshold Italy needs to surpass to bring down debt/GDP and create new employment. And then, in a tweet to Renzi, he wrote that they enacted the spending review, but were denied the opportunity to reap the rewards.
Yesterday was also the first time Renzi met with the big leaders. Nothing of substance worth reporting, but some of the photos are quite hilarious.
Frances Coppola, meanwhile, writes that the euro is doomed no matter what the ECB does.
This must surely be the gloomiest article ever written on the euro
We have, by and large, ended reference to comments on whether the euro can survive or not - not because the issue is not relevant (it is in our view), but because virtually all arguments have already been made - though not yet by everybody. What struck is about Frances Coppola's comment in the Pieria blog is the sheer extremity of her views - that doom is a certainty and that policy cannot avert it. That goes quite beyond our view perspective according to which the future of the euro is state-dependent. So she argues that even if the ECB does QE, a monetary union between sovereign states is doomed, in principle, because macroeconomic convergence cannot conceivably occur in such an environment. Here is the core argument:
"Economic convergence is an impossible dream while there is no political or fiscal union. It cannot be achieved through wholesale economic destruction in weaker countries in the name of “structural reform” while stronger ones benefit in the form of lower borrowing costs, capital inflows and immigration of skilled workers. This creates economic divergence, not convergence. The fact is that weaker countries in the Eurozone are diverging from stronger ones. Unemployment is at 5% in Germany, 12.8% in Italy and 25% in Spain. And as for Greece – if this report in The Lancet is to be believed, health outcomes there are heading for third world standards. Even France is now on the downwards path, helped by a shockingly inept government. How can any of this be considered progress?"
Wolfgang Munchau says the lack of European agreement on a response to Russia's aggression should not come as a surprise - the EU is economically too divided;
On the failures of the EU's diplomacy
In his Spiegel column, Wolfgang Munchau says the total disaster of the European diplomacy vis-à-vis Vladimir Putin should not come as a surprise. He cites three causes why Putin is able to illicit diverging national responses from EU capitals. The first is that the EU has never been able to create a single energy market, with each country preferring its own gas deals with the Russians. An EU level energy market would not only be more efficient, the EU would also be in a much better position to preserve their independent from monopolitistic suppliers. The second reason is the eurozone's failure to resolve the debt crisis, which has weakened many countries irrevocably. The third is the lack of a banking union, which put countries in a vulnerable position with banks that large exposures to Russian and the Ukraine. He also has a go at Gerhard Schroder's pro-Putin course.
The IMF, meanwhile, says low rates of inflation over long periods makes it excessively hard for the periphery to adjust.
Worry about present disinflation, not future deflation
As Paul Krugman notes, the IMF has become a blogger. In the latest blog, Reza Moghadam, Ranjit Teja and Pelin Berkmen take a close look at deflation risks. They start off by saying that the risk of ourright deflation - as a negative and persistent fall in HICP - is low. The problem is debt deflation - and that's happening already, as the country subject to deflationary adjustment are the ones with the biggest debt ratios. They also make the following interesting observation:
"…when inflation turns low everywhere in the euro area, each unit of deflation/low inflation endured by indebted countries delivers less price adjustment relative to the surplus countries. Or put another way, each point of relative price adjustment must be bought at the cost of greater debt deflation."
Their conclusion is that low inflation is thwarting efforts in the most fragile countries to reduce debt, regain competitiveness and tackle unemployment. Their recommendation is that the ECB should thus take more action to strengthen its balance sheet.
Matteo Renzi chose Tunisia as the destination of his first foreign trip - a deliberate anti-EU gesture according to Corriere della Sera;
- Silvio Berlusconi accepted the electoral law, calculating that a failure would destabilise Renzi, which is not what they want to happen right now;
Renzi goes to Africa before he goes to Europe
Enrico Letta's first foreign visit took him to Brussels and Berlin. Matteo Renzi has gone to Tunisia - an opportunity for a photo opp with Arab spring activists. Corriere della Sera remarks that this was a deliberately anti-European choice.
While in Tunisia, he clinched the final deal with Silvio Berlusconi on electoral reform. As La Repubblica writes, Berlusconi and his advisers concluded that they do not want Renzi to fail (now) as they see a Renzi administration benefitting them in the long run. Deputy PM Angelino Alfano, the leader of the New Centre Right, which split off from Berlusconi's Forza Italia last year, procrastinated on the bill because he does not want Renzi to call a snap election, which could annihilate the smaller parties. The compromise foresees that the reforms only pertain to the House - while the reduced powers of the Senate are to be negotiated separately - and as part of a longer process involving constitutional change. So if Renzi goes for a snap election under the new electoral law, he risks an inclusive majority in the Senate - where there is currently no voting premium. Renzi said he hoped the new law will be agreed on Friday.
Paul de Grauwe, meanwhile, argues that the ECJ should throw out the German OMT case because it entails deep misunderstandings of how central banks work.
De Grauwe on why the ECJ should reject the German case
Paul de Grauwe has an excellent comment on the LSE’s blog in which he argues the case for the ECJ to reject the ruling by the German constitutional court on OMT. He says the German argument was that OMT mixes monetary and fiscal policies, and that it was thus not covered by the ECB's mandate. The first thing he notes is that the separation is hard to make because money is central bank debt, redeemable by the issue of new money. He then goes to show that OMT, at no time, will involve taxpayer money of member countries. For as long as the bonds are serviced, a net gain accrues to the tax payers of the other countries. If a country defaults, those gains would stop, but there is no charge to the taxpayer. A recapitalisation of the ECB may seem inevitable, but since the ECB can redeem all its liabilities by the issue of new money, it can happily live with a lower equity ratio. And even a recapitalisation would not involve taxpayers' money. It would just be a bookkeeping operation whereby member states transfer bonds to the ECB in an amount to cover the losses. Member states would pay interest to the ECB, but this money would flow back to the member states at the end of the year. De Grauwe says the risks of OMT stem from inflation and moral hazard. But none of them have anything to do with the taxpayer. The inflation risks stems from the increase in the monetary base, but this risk is small at present. The moral hazard is more significant in theory, but taken care by conditionality. Here is his deadly conclusion:
"One can conclude that an important argument used by the judges of Karlsruhe to declare the OMT illegal testifies to an appalling lack of understanding of the basics of central banking. The OMT program does not create a risk that Eurozone citizens will have to pay taxes arising from losses of the ECB. It is quite terrifying that such an important judgment that could destroy the ECB’s necessary responsibility of lender of last resort is based on ignorance. One can only hope that the judges of Luxembourg will not show the same degree of ignorance."
The Renzi government is making good progress on electoral reform, with a broad political agreement now in sight;
- some contours of the jobs act have also emerged, with a funding scheme to help the young unemployed back into the labour market;
Renzi government makes some headway on reforms
What is clearly observable in Italian politics is the renewed level of energy with which the new government is pursuing reforms. Renzi’s electoral reforms, codenamed Italicum, is in its final stretch, according to Corriere della Sera - though it has not proceeded nearly as fast as Renzi originally set out. There seems to be a deal between Renzi and his more sceptical coalition partners that the reforms are decided now, but won't come into force until after 18 months, to give time to make the necessary constitutional changes for the abolition of the Senate. In getting this deal, Renzi had to manoeuvre between two effective partnerships - the first is the original deal with Berlusconi, the second is the new coalition, where the New Central Right of Angelino Alfano wants to ensure that this reform does not annihilate the smaller parties.
Some contours also emerged on the jobs act, a series of emergency measures to help the labour market. The data out yesterday suggest that these much trumpeted measures are very small - macroeconomically irrelevant - because most of their funding will be diverted from other expenditure items, such as regional aid. The sum total for the schemes is about €1.5bn over two years, with an emphasis on getting the under-25 trained or re-trained. Of the funds, a third comes from national resources, a third from the EU, and the last third from a diversion of spending out of the European social fund.
Istat, meanwhile, published the GDP data for last year, showing nominal GDP declining by 0.4% to €1560bn. The chain-linked volume measure of real GDP was down 1.9% after 2.4% in 2012. The fall in GDP was due to a sharp contraction in Gross fixed capital formation (-4.7%) and in Final consumption expenditure (-2.2%). Imports decreased by 2.8%. General government borrowing was exactly 3% of GDP, and debt was 132.6%.
Paul Taylor writes that the Glienicke and Eiffel proposals are important because each one of them address the national taboos of their own country;
- Charles Grant, meanwhile, is more sceptical that these will see the light of day even though he agrees with parts of the analysis of the two groups;
The debate on Glienicke and Eiffel
Paul Taylor's Reuters column offers an optimistic outlook on the Glienicke and Eiffel groups’ vision of an enhanced political co-ordination within the eurozone. He said their visionary proposals contrast sharply with the bland proposals by all the established political parties. He compares the current debate with Schauble/Lamers in the 1990s, which got nowhere because France did not support it. What both groups managed to do is to address, and break, national taboos -transfers for the Germans, and national sovereignty for the French. Taylor believes that these proposal stand a better chance to be heard than previous ones. Politicians realise that the crisis is far from over, and some politicians, like Frank-Walter Steinmeier, want to gain more influence in the debate.
Charles Grant is more sceptical. He is sympathetic to some of the arguments used by the Eiffel group, but does not believe they are realistic, especially in terms of the implications for the non-eurozone countries. Here is his conclusion:
"In private, one of the authors has explained to me that the manifesto’s key point is that the current set-up does not work and is economically and politically unsustainable; he believes that both elites and citizens can be convinced of that point, and that they will therefore see the need for a tighter euro union. He may be right that the eurozone cannot flourish without significant reform. But politicians will find it very hard to persuade voters that a lot of powers now held by member-states should be transferred to new or existing Brussels institutions."
Jens Weidmann argues that the zero-weighting of sovereign bonds constitutes a potential financial stability risk for the eurozone, and also says that central bank should not make it their job to prick bubbles;
Two points on which we agree with Jens Weidmann
Frankfurter Allgemeine has a short entry quoting Jens Weidmann making two points in a speech with which we agree. The first is that the zero-weighting of sovereign bonds produces undesirable clusters of risks as a result of which a sovereign default could produce financial instability. He supports limits on the exposure of banks to a single counterparty. He said the Greek crisis had demonstrated the sovereign bonds are inherently risky - and this would not justify a zero weighting. Weidmann also made the point that central banks should not prick bubbles. Financial stability should not be put on an equal footing than price stability. The tools of central banks are a like sledgehammer. He said he prefers to use a scalpel.
Kevin O'Rourke, meanwhile, says the demise of the euro would be a major crisis, which we should not wish for, but if we see it coming, we might as well get it over with quickly.
Whither the Euro?
Kevin O’Rourke offers an excellent comment on the future of the euro. He acknowledges that the solutions he and other economists and economic historians have advocated in the years of the crisis are simply not attainable. They remain strong arguments, but there is no chance that the EU is about to embrace a meaningful banking union, let alone a fiscal union or a eurozone bond. He concludes that a break-up of the eurozone while not desirable, may be inevitable, thus it would be right to prepare for it:
"Europe is now defined by the constraints it imposes on governments, not by the possibilities it affords them to improve the lives of their people. This is politically unsustainable. There are two solutions: jump forward to a federal political Europe, on whose stage left and right can compete on equal terms, or return to a European Union without a single currency and let individual countries decide for themselves. The latter option will require capital controls, default in several countries, measures to deal with the ensuing financial crisis, and agreement about how to deal with legacy debt and legacy contracts.
The demise of the euro would be a major crisis, no doubt about it. We shouldn’t wish for it. But if a crisis is inevitable then it is best to get on with it, while centrists and Europhiles are still in charge. Whichever way we jump, we have to do so democratically, and there is no sense in waiting forever. If the euro is eventually abandoned, my prediction is that historians 50 years from now will wonder how it ever came to be introduced in the first place."