Eurozone Blog

The whole point of this article is to scare people – and it may well succeed. The indefatigable FAZ Eurosceptic Holger Steltzner writes that everybody who is saving up for retirement is penalised because Mario Draghi is debasing your money. He says savers only get returns of half a percentage point, which is more than eaten up by inflation. And despite the negative real return, savers still have to pay taxes on the tiny nominal returns they are earning. He argues that the combination of ultra-low interest rates and high taxes takes away all incentives for saving. After a rant about asset prices, and how low interest rates take away all incentives for reform, he conclude that the only positive thing has been the ECB’s recent publication of household asset wealth, which shows that the Germans are the poorest households in the whole of the eurozone. 

Philip Stephens writes that Britain’s Eurosceptic Conservatives are winning the debate. No matter how much David Cameron concedes to them, they come back and want more. The next demand will be that Mr Cameron set out his demands for the negotiation with the EU over a new deal for Britain, outlining which powers will be repatriated to Westminster, including a list of policy opt-outs. Stephens says that while Germany is horrified by the idea of a British departure, there are also red lines Berlin cannot step over, for it would otherwise threatening to unravel of the entire EU. Stephens concludes that there is, of course, the not completely unlikely possibility, that Cameron fails to win the elections, but Ed Milliband may not be strong enough to win without also making a referendum pledge. A Labour government would quite likely lose such a plebiscite.

“So there’s the final rub. Mr Cameron could lose the election and bequeath, as a deferred legacy, Britain’s flight from Europe.”

In his Spiegel Online column Wolfgang Munchau writes that his estimate for the total amount of bank re-capitalisation is between €500bn and €1000bn, but the banking union currently being set up is not going to deliver this restructuring. He said the banking union is a serious project, but it will take at least five years, if not more, until it can fulfil at least some of the fundamental economic functions of a banking union. It is thus a banking crisis for the next crisis. In the meantime, the only alternative is for governments to do this nationally, but citing the Spanish example, he says governments are reluctant to recognize the losses in their system as everybody fears a loss of competitiveness – even after an agreement on the new bail-in rules. His forecast is that Europe’s banks will remain under-capitalised for the rest of this decade, in a re-run of Japan’s experience.

An OECD report (press release) on Wednesday showed income inequality as measured by the Gini coefficient grew more in the first three years of the crisis to 2010 than in the previous 12 years. El Diario highlights that the largest increase in the Gini was registered in Spain, with an increase of 2.9%, followed by Slovakia, France and Sweden. Before taxes and social transfers, the largest increase In income inequality were registered in Ireland (10% increase in Gini) and again Spain (7%). The report also indicates that poverty rates for youth and children grew in 2007-10 from 12-13% to 14% while the poverty rate for the elderly dropped from 15% to 12%, confirming a previously identified trend for young people to replace the elderly at the group most at risk of poverty in the OECD. The largest increases in child poverty (above 2%) were in Turkey, Spain, Belgium, Slovenia and Hungary.

In a related story by El Pais, a report by the Economic Research Institute of the Valencian region shows not only rising poverty in Spain, but also a divergence in poverty rates among Spanish regions, with increases in the poverty rate as high as 21% in the Canary Islands, 18% in Valencia or 16% in Andalusia. Poverty rates decreases in the Basque Country (-2%), Rioja (-5%) and Navarra (-7%).

Spiegel writes that immigration from Spain to Germany grew from about 6000 to 9000 in the previous year of a pilot program by the Chamber of Crafts of Munich and Upper Bavaria aiming to "address the shortage of medium-skilled specialised workers" among German SMEs. Perhaps stereotypically, Spiegel's story opens with a young Spanish construction worker with no German, originally a welder in shipbuilding, one of 11 people involved in the pilot program. The Spiegel story points out the parallels with the 1960s 'guest worker' program, but also the differences. Officials are aware that Germany assumed that the Gastarbeiter would not stay long-term and would eventually return to their home countries, which didn't happen. Today's programs are more focused on integration, including language classes ad help navigating day-to-day bureaucratic hurdles in a new country.

La Repubblica reports, Enrico Letta decided to suspend the IMU property tax only for primary residences, homes, but not on companies plants, which will be discussed at a future cabinet session. According to government sources, the scrap of the IMU will cost €10bn instead the €8bn expected. 

Francois Hollande and Manuel Barroso had a meeting, but it did not seem to make a jot of a difference. Despite all the politeness both men only reinforced their own message, writes Les Echos about the press conference afterwards. Barroso reminded France to launch reforms not to please Brussels but for the sake of its own competitiveness, while Hollande reminded Barroso to put the same effort in growth enhancing measures as it does for deficit reduction plans. 

There have several really bad economic reports about the Italian economy, which all paint a picture of austerity have gone terribly wrong.

La Repubblica reports that the Italian Banking Association (ABI) said the bad loans in banks’ portfolios have reached €64.3bn in March, rising by 4.3% against the March 2012 and by 33% against the previous month. According to ABI the bank loans in Italy to households and non-financial companies dropped 3.1% in March versus the same month in 2012, falling to €1.46bn. The overall bank loans, including lending to financial companies and the public sector, decreased by 2.12% to €1.907bn in the same month. The credit crunch is far from over, with estimates saying the low point is going to be in the second half of the year.

As La Stampa reports, Italian industrial production fell 5.2% in March compared to the same month in 2012, Eurostat said, which shows that there will be no exit from the recession this year. According to Eurostat this was the worst figure of the Eurozone’ big economies. By comparison, industrial production, on a year-on-year basis, was down 1.5% in Germany in March and 1.6% in France.

The Italian housing market, meanwhile, slumped to its lowest level since 1985 last year, according to a common report released by the inland revenue agency and ABI. As reported by L’Unità, during last year 448,364 properties were sold, or 27.5% fewer than in 2011. According to ABI this is the worst annual performance since 1985, when 430,000 homes were sold. The expectations for the current year is for another drop to  400,000 properties. The weak property market could represent a problem also the construction sector, one of the cornerstones of the Italian economy, ABI said. 

Speaking on the sidelines of the EcoFin, EU Economic Affairs Commissioner Olli Rehn said that Spain "has made significant efforts" but "needs to make hard-hitting reforms", reports El Pais which interprets these words as implying that the European Commission will not directly punish Spain for the size of its macroeconomic imbalances, but instead will demand additional reforms. An unnamed EU source is quoted saying that "Spain's to-do list is longer than the list of things already done" in the eyes of "Brussels and Spain's European partners". Long-sought reforms in Spain include pension reforms, an additional labour reform to reduce the duality between permanent and temporary employment and allow wages to be adjusted to the business cycle, additional tax measures, and the liberalization of regulated professions.

In France rumours of a cabinet reshuffle were fuelled by new calls from high ranking Socialists. Within the last two days Laurent Fabius, Segolene Royal and Bruno le Roux went public by calling for a reshuffle and for a stronger leadership at the dispute-ridden finance ministry.   "I ran Bercy in the past and it's true that it needs a boss," Fabius told RTL radio. "At the moment you have several bosses. Whatever the quality of the men and women and their level of agreement, I think that stronger coordination would be more useful.” Reuters quotes. Bruno Le Roux on Canal+ remarked that seven ministers are too much and favours for a reduction.  Francois Hollande is due to give an extended news conference on Thursday at which will attempt to reassert his leadership on policy and may give more hints on the timing and shape of any reshuffle.

Reuters has the report that Ireland's public sector unions may agree a new pay deal with the government by Friday, quoting an official. Public sector workers rejected an extension to a three-year-old pay deal in April, frustrating plans for deeper budget cuts. The pay deal rejected in April, which proposed pay cuts for higher earners, longer working hours and cuts in premium payments, would have saved €1bn over three years.

Noah Smith has a good discussion on why do people support austerity? His conjecture is that Austerians have another agenda, which is not really economic efficiency, but about social and political change.

“I want to suggest a fifth possibility. I conjecture that "austerians" are concerned that anti-recessionary macro policy will allow a country to "muddle through" a crisis without improving its institutions. In other words, they fear that a successful stimulus would be wasting a good crisis.”

77% of the French believe European economic integration has weakened the French economy, according to a survey by the Pew Research Centre. The survey also showed only 41% of French respondents had a favourable opinion of the EU, down from 60% in 2012. Even in Eurosceptic Britain, more people (43%) have a favourable view, writes the FT. “No European country is becoming more dispirited and disillusioned faster than France,” concludes the Pew study, which polled some 8,000 respondent in eight EU countries. In its economic gloom, French attitudes have also sharply diverged from German public opinion, which is leading the charts with the most favourable views about the EU and feeling good about their economy. Interestingly, Germans are also among the least likely of those surveyed to see inflation as a very big problem. Despite the disillusion about European integrate the euro remains popular: more than six-in-ten people want to keep the euro as their currency in Greece (69%), Spain (67%), Germany (66%), Italy (64%) and France (63%). And support for the euro has actually increased in Italy and Spain since last year.

Enrico Letta said four issues will top the government’s agenda in its first 100 days in office, as Il Corriere della Sera reports. After the retreat in a Tuscany, Letta unveiled his four-point plan, which includes creating jobs for youth, agreeing on changes to the IMU real-estate tax with Silvio Berlusconi, a tax break to encourage entrepreneurs, and political reforms to cut public spending. The plan is part of the "wise men group" agenda and will include a "Convention" that will be set up to agree constitutional reforms and will be led by the House and Senate Constitutional Affairs committee chiefs. Letta also said the cabinet will decide on the IMU on Friday. The expectation is for a suspension of June payments for primary residences and industrial plants of SMEs. 

The German government is demanding more labour market reforms from Europe's crisis countries, Spiegel wrote over the weekend. In contrast to the Commission's leniency towards Spain and France on deficits, a report by Chancellor Merkel's office urges further saving efforts and criticises the previous reforms as insufficient. The report prescribes further labour market liberalization in Italy and a loosening of "rigidities" in the Greek and Spanish job markets.

For its part, the European Commission is advising Spain that a single employment contract to end the segmentation of the Spanish labout market "might be a possibility", El Pais reports. Speaking in Madrid at the opening of a seminar on the "youth guarantee" (see press release), Employment Commissioner László Ándor said that the difference between temporary and permanent employment is widest in Spain, among all EU countries.

Speaking to the press in Madrid as he hosted Portuguese PM Pedro Passos Coelho, Spain's Mariano Rajoy praised his labour minister and said he has no intention of reforming Spain's labour laws further as suggested by the European Commission and demanded by Germany, writes ABC. Rajoy and Passos Coelho agreed on the need for banking union, and Europe-level policies for youth employment. Rajoy also supported "any measures" towards improving liquidity for SMEs and families.