July 03, 2014

we review the PSOE leadership contest between Pedro Sánchez, Eduardo Madina and José Antonio Pérez Tapias, in advance of a primary for the general election which hasn’t been called off;
  • there are few substantive policy disagreements among the candidates, and the PSOE in general rejects austerity and would be on board with Renzi in Europe.

July 03, 2014

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The PSOE leadership contest

Spain’s PSOE is having a leadership contest to replace its current Secretary General Alfredo Pérez Rubalcaba after the debacle in the European Elections, which will be resolved with a vote of party members on June 13 followed by a party conference on June 26/27. Three candidates have cleared the hurdle of receiving the endorsement of 5% of party members: Pedro Sánchez, Eduardo Madina, and José Antonio Pérez Tapias, reports EFE. A fourth candidate, Alberto Sotillos, did not get the requisite endorsements.

Sánchez is an MP and economics professor from Madrid and sometimes said to represent the economic right wing of the party; Madina is an MP from the Basque country who’s also the whip of the PSOE parliamentary group in the Spanish parliament; and Pérez Tapias is a professor of philosophy in Granada and a former MP until the previous parliamentary term ending in 2011. Tapias, the older of the three, represents the left of the party as the candidate of minority faction Izquierda Socialista and is noted for being one of few Socialist MPs to have voted against introducing a debt brake in the Spanish constitution, one of the last acts of Zapatero’s government in September 2011. Sánchez could be considered a stalking horse candidate as he leads the other two in endorsements but had not been mentioned as a Secretary General hopeful before the current contest, unlike Madina who had been talked about for years alongside others who finally did not enter this contest. Both Sánchez and Madina take pains to deny they are the candidate of the party apparatus, reflecting general discontent among the party base. Tapias has stated that should he become Secretary General he would not run in a subsequent party primary to be the party’s candidate for Prime Minister in next year’s general election, but the others have made no such commitment. Before Rubalcaba’s announcement to step down, the PSOE had scheduled an open primary for its candidate for PM to be held in November. The primary process for the 2015 general election is one of the main issues to be decided by the upcoming party conference, and the PSOE is not used to having a candidate separate from the party secretary general, be it at the national or regional levels).

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July 01, 2014

Slovak PM promises a €250m package for poor households, with cuts in payroll charges, raising pensions and cutting gas prices by at least 10% over the next two years;

    July 01, 2014

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    Slovakia's fiscal boost for small income households

    The Slovak Prime Minister Robert Fico Slovakia's said his government will raise the minimum wage and cut household gas prices as part of a €250m package for poorer households (This is about 0.3% of GDP), Reuters reports. As part of the package, the government said people with lower wages - about 800,000 in the nation of 5.5m - would pay lower payroll charges, a quasi-tax including health and social insurance. Fico said he would raise pensions and subsidise train tickets for students, pensioners and commuters. The government will also cut natural gas prices by at least 10% in the coming two years.

    Slovakia has overcome the euro zone debt crisis with fewer bruises than many other countries in the currency bloc. After years of austerity, the economy has been accelerating, boosting tax revenue. Last week, the Finance Ministry raised its 2014 tax revenue forecast by €290m, or about 0.4% of GDP. It expects the economy to grow by 2.3% this year and 3.0% in 2015.

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    July 01, 2014

    Mark Schieritz says the BIS’ annual report is unbelievably conservative and questions the BIS’ denial of the potential effectiveness of fiscal policy;
    • we argue the BIS is probably right to use the concept of a balance sheet recession, but we are puzzled about its optimism on inflation;

    July 01, 2014

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    Schieritz on the BIS

    Mark Schieritz takes a swipe at the conservatism of the Bank for International Settlements (see their annual report yesterday). He says it could have been written by the Bundesbank. The BIS understands this crisis as a balance sheet recession. But why should macroeconomic policy not work in such a circumstance? Why should one necessarily conclude that fiscal policy is ineffective? 

    What struck as puzzling is the BIS’ unbridled optimism on inflation. If you start with a framework of a Richard Koo-style balance sheet recession – which is probably a good starting point – should one not at least consider the possibility of a persistent fall in the inflation rate, which is what happened during Japan’s great balance sheet recession? As Koo has pointed out many times in the context of Japan, and as Schieritz argues in his piece, fiscal policy can become very powerful in those episodes. What strikes us about the BIS’ framework is not so much their conservatism (they are central bankers after all), but their inconsistency. This is neither neo-Classical, nor Keynesian, nor Monetarist. There may indeed be some parallels between the BIS and the Bundesbank. German conservatives embraced monetarism when it coincided with their world-view, and dumped it when that was no longer the case. This is why in Germany today almost nobody cares about low M3 growth rates, while pretending to be worried about asset prices, or whatever else would allow them to raise interest rates. Perhaps the BIS could enlighten us about the nature of its analytical framework. At least then, we could have a proper discussion.
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    June 26, 2014

    Germany's Laender budget deficit increased by €6bn, with budget situation worsening in eleven out of sixteen Laender;

      June 26, 2014

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      German Laender struggle with higher debt

      The German state might have a budget surplus but the regions struggle with rising debt. In eleven of Germany's 16 regions, the budget situation is currently worse than a year ago. Saxony, Bavaria and Lower Saxony are currently the only three Laender with a surplus; a year ago there were five. The regions spent €6bn more than their revenue income in the first five months this year, increasing the deficit to €1.8bn compared with the same period last year.  The reason for this development is increasing spending, Spiegel Online picked up from a Handelsblatt article. For staff, investment and the municipalities, the provinces spent more money on a broad front. Total expenditure increased by 4%, while revenues were only 2.7 % higher than the same period last year. Only the lower 8.3% interest expenditure prevented an even worse record, the newspaper writes. Also in the German towns and cities, social spending get out of hand. The local umbrella organizations expect an increase in cost in the region around €1.8bn annually. Social spending is the reason why the communes will not achieve a balanced budget for some time.

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      June 26, 2014

      Guntram Wolff argues that EU member states should forego a grand debate on fiscal rules, but should instead focus on investment;

        June 26, 2014

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        Wolff says don’t waste time on fiscal rules, focus on investment

        Guntram Wolff says the debate on fiscal rules is counter-productive. He makes three points. The first is there is not sufficient fiscal space in several countries for large-scale stimulus spending. The best governments can do is a reform of the state, and an adjustment in fiscal expenditures from social spending to growth enhancing public goods. The second is an explicit recognition that debt sustainability is hard to achieve when inflation rates are low, and those countries with fiscal headroom should invest in infrastructure, education or R&D. The third is a plea for more investment into European public goods.

        Points one and two constitute an ideal first-best scenario, but we do not think it is going to happen for political reasons. Renzi does not have sufficient political capital to undertake such a radical shift. And Germany will not breach its own “debt brake” – a constitutional law after all - for the benefit of third countries. The ECB, meanwhile, has clearly recognised that low inflation is a problem, but it is not clear that the tool they deployed will address the problem. It is going to very hard to pull the eurozone out of its misery by reliance on domestic programmes.
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        June 26, 2014

        A Ceps paper confirms Paul de Grauwe’s financial fragility hypothesis, and the notion that the OMT was instrumental in reversing the crisis;

          June 26, 2014

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          Testing Paul de Grauwe’s financial stability hypothesis

          Orkun Saka, Ana-Maria Fuertes and Elena Kalotychou have been testing Paul de Grauwe financial fragility hypothesis, which says countries in a monetary union are prone to financial contagions. They provide further statistical evidence in support of the theory, and especially in support of the role played by the ECB’s OMT programme. However, the fragility is not gone. One source of potential conflict is the legal uncertainty resulting from the ruling of the German constitutional court. The finding of their study strongly supports the notion of a common backstop. 

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          June 25, 2014

          Ken Rogoff, meanwhile, argues that the eurozone should not force the periphery to repay all its debt, and should instead go down the route of a debt restrucuting – it wil be costly, but not as costly as the alternatives.

            June 25, 2014

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            Rogoff on how the eurozone should resolve the sovereign debt crisis

            Ken Rogoff, writing in FAZ, has a good comment in FAZ, warning Germany not to force the debt repayment of its eurozone debtors. He writes that even if Northern Europe were to succeed to force the periphery to do repay the debt, it would be a mistake. It would be much better to accept a drastic reduction in sovereign debt through the bail-in of private creditors and with the help of maturity extensions. There will be losses to the northern European states, but these losses will be smaller than the losses of a permanently depressed eurozone. That would also much more powerful than a fiscal stimulus programme for Germany. 

            We continue to disagree with him on the effectiveness of fiscal policy, which we think is particularly useful in times of a balance sheet recession. But his main point is very important – that a debt conference is the way to go. There can be no sustainable economic recovery given some of the large sovereign and private sector debt exposures.
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            June 24, 2014

            With Jean-Claude Juncker now firmly on course for the Commission presidency, the other jobs are falling into place, according to one report: Helle Thornig-Schmidt for the European Council presidency, Federica Mogherini or Frans Timmermans for Perm Rep, Martin Schulz as Parliament president for a full-term, Pierre Moscovici for the eurogroup, and Jyrki Katainen as successor to Olli Rehn;

              June 24, 2014

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              With Juncker as Commission president, the other jobs are falling into place

              The Socialists leaders agreed that in return for supporting Jean-Claude Juncker, they want their own people for the two other big jobs – president of the EU Council and Perm Rep. The front runner for the Council presidency is Helle Thornig-Schmidt, who is also supported by Merkel, and who seems to enjoy broad support.

              On the Commission presidency, the European Council will take a formal vote – at the insistence of David Cameron who seems hell-bent to be demonstratively outvoted.

              The most informed article on the ensuing jobs carousel came from Corriere della Sera this morning, which reports that Matteo Renzi is pushing hard for Federica Mogherini, his foreign minister, as the Perm Rep to succeed Catherine Ashton. Italy is seeking one high profile appointment given the strong performance of the Italian PD in the European electiosn.

              Martin Schulz is to be re-elected president of the European Parliament – for a full term of five years.

              The article said the French would get Pierre Moscovici as the permanent head of the eurogroup. The most likely Commissioner for Economic Affairs will be Jyrki Katainen, the outgoing Finnish prime minister. The German Commissioner Günter Oettinger is to be reappointed in his current role as energy Commissioner. 

              Perhaps someone can explain to us why Jyrki Katainen resigns as PM to take up Olli Rehn’s job? We know that Katainen has run the National Coalition for ten years, and that perhaps it was time for a change. But it is unusual for a former prime minister to settle for a job as a member of the Commission.
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              June 23, 2014

              Arnaud Montebourg got himself a deal to allow French state to become main shareholder in Alstrom ahead of the agreed alliance between Alstom and GE;
              • David Barroux argues that this type of interference will have knock-on effects on global companies’ willingness to invest in France;

              June 23, 2014

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              The return of old-style industrial policy in France

              The French government sealed a last minute deal on Sunday for the French state to become the main shareholder in Alstom to guarantee the "efficiency, solidity and sustainability" of the agreed alliance between Alstom and General Electric. Economy minister Arnaud Montebourg succeeded to secure an option to buy 20% of Alstom from Bouygues at an unspecified discount, provided the market value is at least €35 per share. If by then the state has not bought 20%, either from Bouygues or on the market, it has the right to purchase up to 15% at a similar discount whatever the market price. Alstom shares closed at €28.00 on Friday, Reuters reports.

              In Les Echos, David Barroux said this partial nationalisation was not necessary for the deal with GE, as Montebourg already exerted a heavy influence on the negotiations. The only reason for this extra expense of €2bn is political, to hammer down the message that if the state wants to, it 'can do'. Barroux warns that this way of political interference will certainly have a knock- on effect on other international companies who seek to invest in France.

              Cecile Cornudet remarks that Montebourg and Segolene Royal, who announced a state share in Ecomouv to control eco-tax collection, demonstrate that the government can influence the course of action. The problem is that their message runs somewhat contrary to the government's message for the last two years, that France should reduce its debts.

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              June 19, 2014

              ALDE is now accepting multiple member parties from Spain, which are at loggerheads at home;

                June 19, 2014

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                The ALDE rainbow coalition

                After the collapse of the British and German liberals, the ALDE has become a bit desperate to keep its status as it is losing to the ECR its status as the third largest group in the European Parliament. This has led to accepting in its fold parties from the same country which would appear incompatible from the point of view of national politics. Yesterday we presented the Belgian case, today the Spanish. The Spanish contingent in the ALDE consists of CDC (1), PNV (1), C (2) and UPyD (4).

                It used to be that the Catalan nationalists of Convergència (CDC, senior partner of CiU) and the Basque nationalists of PNV were already members of ALDE, but now two nation-wide parties Ciudadanos (C) and Unión Progreso y Democracia (UPyD) have been allowed in. This is an issue because C and UPyD are both virulently anti-nationalist, hence CDC and PNV voted against allowing them in. In particular, UPyD secured a declaration from Guy Verhofstadt that ALDE respects "the territorial integrity of the State", a stick they have already started to beat CiU and PNV with. Amusingly, the Liberal International in April adopted a resolution promising support for “any decision taken by the Catalan people on their future”. Public taunting among these four parties can be expected to continue.

                While CDC are bona-fide liberals the PNV is more of a Christian Democratic party, but it left the EPP in 1999 so as not to share a party with Aznar’s PP, and sought refuge with the Liberals. C started out as a Catalanist anti-nationalist party, and after some success in Catalonia they branched out nationally and earlier this year they joined ELDR. UPyD started out when Rosa Díez, a Basque Socialist who contested the PSOE leadership in 2000, was an MEP in the 2004-9 term, but quit the party in 2007 in protest against Zapatero´s openness to the reform of the Catalan statute (which the PP later successfully challenged before Spain’s Constitutional Court, a development contributing in no small measure to the current Catalan independence movement).

                The N-VA, meanwhile, decided not to take up the Alde offer after all and to join David Cameron's group instead. With its last minute change of mind and its preference for a Eurosceptic group the N-VA looks like it is intended to humiliate Guy Verhofstadt, who told Le Soir that this move was not a good one for Europe.

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                June 18, 2014

                New ministers in Greek cabinet put into question decisions of their predecessors;

                  June 18, 2014

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                  Greek government wavering

                  The new Greek government seems to be wavering on decisions already taken, according to Kathimerini. Among the new ministers seeking a review of recent decisions are Education Minister Andreas Loverdos, who suggested that he could not enforce a budget that he himself had not voted for in Parliament. Also Interior Minister Argyris Dinopoulos appeared to make an overture to local authority employees protesting the mobility scheme, noting that their concern “is not unjustified.”

                  Administrative staff at universities who have been affected by the mobility scheme are planning a fresh wave of action following a long strike last fall that paralyzed the higher education sector. The staff object to a government decision to rehire 600 staff who were put in a mobility scheme last year but to leave another 500 or so out of a job. The senate of Athens University described the new move as “very displeasing and a total reversal of everything that has been discussed and agreed over the past six months with the government,” condemning “the government’s inconceivable wavering,”

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                  June 18, 2014

                  the EP's liberal Alde group under Guy Verhofstadt voted to admit Flemish separatist party N-VA, the fact that its Belgian parties are opponents with the N-VA at home was irrelevant;

                    June 18, 2014

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                    Allies in Europe, opponents at home?

                    We were a bit surprised to read this morning that the EP's liberal group ALDE has voted in favour of admitting the four MEPs from the Flemish seperatist party N-VA, should they apply to join, European Voice reports. ALDE group is led by Guy Verhofstadt, one of three Flemish liberal MEPs, who are political opponents of N-VA in Flanders, and it includes three MEPs from the francophone Belgian liberal party, Mouvement Réformateur (MR), who said they would vote against N-VA joining. But ALDE got the two third majority of its members it needed to accept the N-VA in the group. N-VA has already announced that it wants to leave the Greens/European Free Alliance, the group to which it is currently affiliated, but it has yet to decide where it might move to. The Flemish party will take a decision on group membership tomorrow (18 June). Verhofstadt was re-appointed unopposed as the ALDE group leader.

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                    June 17, 2014

                    A Dutch newspaper quotes a German official as saying that a British EU exit was now accepted as “collateral damage” to a Juncker presidency of the European Commission;
                    • the FT quotes a British diplomat as saying the UK will not accept this outcome, and warning about the EU sleepwalking into an institutional crisis;
                    • the reports also suggest that Merkel wants the vote taken next week in order to avoid a long drawn-out battle that might damage UK/German relations further;
                    • Wolfgang Munchau writes that this was an accident waiting to happen – the culmination of a long-drawn out process of mutual alienation;

                    June 17, 2014

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                    Merkel and van Rompuy to propose Juncker

                    We noted the story by the Volkskrant over the weekend that Herman van Rompuy has now concluded that only Jean-Claude Juncker can now be a candidate for the president of the European Commission.

                    The Volkskrant obtained a diplomatic summary according to which Merkel agreed with that position. The risk of a British exit is considered as “collateral damage”, the paper quotes an official close to Merkel. The Dutch prime minister Mark Rutte was siding with Merkel. Merkel wants to conclude this quickly to avoid a toxic London-vs-Berlin type debate.

                    The FT has a few more details from the summary of Merkel’s views. It, too, obtained a copy of the document, and said it was written by an EU diplomat, summerising Merkel’s views.

                    “The chancellor made it very clear in the first meeting that she is facing increasing domestic pressure which now risks becoming damaging to her, and damaging to Europe…Her concerns are that the longer the debate goes on, the more toxic it is becoming, not least in the British tabloids.”

                    The FT writes that Cameron still hoped that Rutte, Matteo Renzi, Fredrik Reinfeldt and Viktor Orbán would side with him. The article also reflected views within the UK that a Juncker appointment could push British public opinion closer towards an EU exit.

                    This article said that the conclusions in the paper were not yet a final position. Von Rompuy has not concluded the consultations yet, and Merkel could still change her mind. But there is clearly no other candidate right now other than Juncker. The FT also a comment by Ivan Rogers, Britain’s representative to the EU, how said the EU was “sleepwalking into an institutional crisis”, adding ominously that “the UK [would not] accept the outcome of such a process”.

                    In his Spiegel column, Wolfgang Munchau said Britain’s divorce from the EU is proceeding at a fast and increasing speed. Munchau writes that he, too, has reservations about Juncker, but the treaty is clear in that the European Council nominates, after consultations, and that the EP elects. These terms have precise meanings in constitutional law – to which British published opinion seems oblivious. He writes that the British political parties and the media have persistently underestimated the parliament’s determination while overestimating their own ability to thwart this process. Munchau makes the further point that Britain’s divorce from the EU started with Maastricht and the subsequent exit from the ERM. The EU will not be able to contain a permanent non-eurozone group of members that pursue different interests. The EU exit debate is not really in or out. The UK is not in politically. The debate is about the much narrower question what legal form Britain’s detachment takes. 

                    We were quite struck by the list of the allies who might support Cameron. Renzi has doubts, but never said he would vote against Juncker. His own EU presidency starts in two weeks. He, too, has an overwhelming interest to conclude this issue this month, which would give him time to address the points that really matter to him – changes to the fiscal rules. As for Rutte, the Volkskrant writes that he sides with Merkel. That would leaves Cameron, Orban, and maybe Reinfeldt – all non eurozone interestingly. Even if they get Reinfeldt on board, they are still short of a blocking minority. It really would take all of the leaders listed in the article, especially Renzi. As for Merkel, it appears to us that Cameron and British commentators have misjudged her position. She is not going to take political risks for Britain.
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                    June 17, 2014

                    Tapio Raunio writes that with Alexander Stubb Finland will have a pro-EU leader despite a Eurosceptic public, but therein lies electoral danger;

                      June 17, 2014

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                      Stubb as PM will polarise the next election campaign

                      On the LSE Europe blog  Tapio Raunio argues that Alexander Stubb’s pro-EU views and desire to take Finland into NATO will set the background for the upcoming election campaign, with the Eurosceptic Finns Party in particular likely to lead opposition to the government. Party leader Timo Soini has done his best to distance his party from the more outright nationalist European parties. The Finns Party does not call for Finland’s exit from the EU or the Eurozone, believing instead that in the long run the EU will prove unworkable and will thus inevitably disintegrate. Raunio expects Soini to attack Stubb during the campaign, challenging his federalist and pro-NATO views. In a Eurosceptic country like Finland that might well be a winning strategy, he warns.

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                      June 13, 2014

                      In Ireland rents climbed 9% in May, 20 times more than inflation of 0.4%;

                        June 13, 2014

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                        Irish rents up 9% in May

                        In Ireland, the cost of renting a home rose more than 20 times faster than the average level of inflation over the last year, according to the Irish Times. The data show that private rents were 9% higher in May than a year earlier, while average prices across the economy as a whole rose by just 0.4%.  The climbing rents came as the cost of mortgage interest fell by 9.4% on the back of repeated rate cuts from the ECB. This could mean, in theory at least, that a landlord has seen his or her mortgage costs reduce by close to 10% at a time where rental income before tax has climbed by almost the same measure. 

                        The IMF report showed that Irish house prices were 10% above their long-run average in relation to rents and 7% below their long-run average in relation to incomes.

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                        Towards sanctions

                        • There were reports that EU ambassadors met in an emergency session yesterday to discuss the scope for the next round of sanctions – EU foreign ministers meet today;
                        • the German economics minister, Sigmar Gabriel, also supports sanctions, and says that Germany’s economic interests were not the most important issue;
                        • various leading CDU figures expressed concern that the EU has been too slow in reacting to Vladimir Putin, and expressed outrage at a recent French sale of Mistral helicopters to Russia;
                        • Frankfurter Allgemeine notes that Russians fear sanctions more than we think that they are likely to happen;
                        • Wolfgang Munchau says Gerhard Schroder should resign from his plum job, and says Germany should reorient its strategic thrust in industrial policy away from Russia;
                        • Clifford G. Gaddy and Barry W. Ickes say sanction will hurt the Russians economically, but will not alter Putin’s policies;

                        Further News