Economic growth

Peter Spiegel

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Amid the doom and gloom surrounding the eurozone’s continued inability to shake off the funk that set in after the sovereign debt crisis started six years ago, policymakers have recently been able to latch on to a bit of sunshine that Brussels has dubbed “temporary tailwinds”. These “tailwinds” are not the kind of good news normally associated with a strong economic recovery, such as companies expanding or workers’ wages increasing. Instead, they’re called “tailwinds” because they make it easier for those things to start happening – a little wind at the back of those thinking about investing in a new plant or hiring more people.

For the eurozone, these tailwinds take three forms: lower oil prices, which fatten the wallets of consumers and energy-intensive industries; a weak euro, which makes European products cheaper to sell overseas; and “accommodative” monetary policy, which lowers interest rates and makes it cheaper for investors to borrow money and build things.

There’s nothing much EU policymakers can do to affect the price of oil, though lifting Iranian sanctions has contributed to the perception the world is now awash with supplies. But yesterday Mario Draghi, the European Central Bank president, did a whole lot for the other two “tailwinds” with just a few sentences of central-bank-ese. First, he described “heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks” – by which he mostly meant recent market upheaval in China. He also noted that eurozone inflation, which is supposed to be running at about 2 per cent each year, remained “weaker than expected”. Then he unleashed the sentence that got everyone really excited: “It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March.” Which means that his already-accommodative monetary policy is likely to get even more accommodative in just a few weeks. Read more

Peter Spiegel

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The reformers: economy minister Emmanuel Macron, left, with prime minister Manuel Valls

Le Monde called it François Hollande’s “last-chance plan”. Struggling with an unemployment rate that stubbornly remains above 10 per cent, and saddled with a promise not to seek re-election in 2017 unless joblessness falls, the French president on Monday unveiled a €2bn scheme aimed at reversing an “economic emergency” facing his country.

The measures themselves are mostly targeted at the young: a €2,000 subsidy for each young worker hired by small companies; creating 500,000 vocational training schemes; and a programme to boost apprenticeships. The price-tag may be high, but taken together the initiatives appear less ambitious than the so-called “Loi Macron”, an economic reform plan passed a year ago under the aegis of Mr Hollande’s youthful economic minister. That plan has failed to produce any signs that unemployment is dropping, raising questions over whether the new programme will provide much help.

As with the Loi Macron, Mr Hollande’s new plan seemed to please nobody. Reformers like Mr Macron and Manuel Valls, the prime minister, are viewed with suspicion from within the ruling Socialists because of their “liberal” views. But the measures backed by the two men never seem to go far enough to please business interests, either.

The French business daily Les Echos has a useful summary of reactions from business and labour leaders, with Medef, the main French employers’ association, offering a rather tepid endorsement by calling it a step “in the right direction.” The head Medef’s sister organisation for small and medium-sized businesses was similarly lukewarm, saying he was doubtful it would have any long-term effects. Predictably, the Républicains, as party boss Nicolas Sarkozy has re-branded the French centre-right, were withering in their criticism. The conservative Le Figaro quotes party spokesman William Larrivé calling the plan “an insult” to France’s unemployedRead more

Duncan Robinson

An airport that loses €275 per passenger. A €16.5m runway that has never been used by the aircraft for which it was built. Another airport that receives 0.4 per cent of the travellers that were forecast.
 Read more

Peter Spiegel

Juncker speaks to the press at last week's Group of 20 meeting in Brisbane

Just how does Jean-Claude Juncker plan on getting to €300bn?

With the formal unveiling of his highly-anticipated plan to stimulate growth in the EU just days away – officials say the Commission will decide on it early next week – politicians both in Brussels and in national capitals are abuzz about whether the financial engineering involved will make the €300bn credible.

Emmanuel Macron, the influential French economy minister, has already expressed concern, and in a meeting with a small group of reporters ahead of today’s announcement of his own stimulus plan, Belgium’s Guy Verhofstadt, head of the European Parliament’s centrist Liberals, said he worried the programme would just move around existing funding.

As we reported earlier this week, the plan will take existing cash from the EU budget and the European Investment Bank and use it as seed money for new investment funds in order to attract private capital. The public money would act as a “first loss” tranche, taking the first hit if the investment goes bad, and giving private investors more senior status – something officials hope will “crowd in” all that private cash currently sitting on the sidelines.

The two questions that will be closely watched is just how much public money will be used – and how much new private capital the Commission will forecast coming in over the plan’s three-year period.

According to documents obtained by Brussels Blog, the answer to question one – how much public money will be used – will not only include EU budget and EIB money, but also funds committed by national governments. For instance, the €10bn in new public spending announced this month by Wolfgang Schäuble, the German finance ministry, appears to be counted in the €300bn plan.

How the limited amount of public funding can be leveraged is far more complex. And by nearly all accounts, the public funding will indeed be limited: the plan is explicitly seeking to avoid any new public debt, and officials acknowledge a significant part of it will involve more efficient use of existing public resources and maximising already-approved instruments. Read more

Peter Spiegel

Rehn, left, with President José Manuel Barroso at Wednesday's press conference

It may have appeared that Olli Rehn, the EU’s economic chief, today was siding with Washington in the going transatlantic tussle over Germany’s current account surplus by launching an inquiry into whether the surplus was harming growth in the rest of Europe.

But Rehn went out of his way to make clear that he was no fan of the US Treasury department report that pushed the dispute into overdrive last month.

Speaking at a press conference announcing the European Commission’s decision to launch the “in-depth review” of Germany’s surplus, Rehn said the US Treasury’s report was “to my taste somewhat simplified and too straight forward”. Read more

Peter Spiegel

Rehn, right, consults with Germany's Wolfgang Schäuble at last month's IMF meetings.

Over the last few weeks, the normally über-dismal science of German economic policymaking has unexpectedly become stuff of international diplomatic brinkmanship, after the US Treasury department accused Berlin of hindering eurozone and global growth by suppressing domestic demand at a time its economy is growing on the backs of foreigners buying German products overseas.

The accusation not only produced the expected counterattack in Berlin, but has become the major debating point among the economic commentariat. Our own Martin Wolf, among others, has taken the side of Washington and our friend and rival Simon Nixon over at the Wall Street Journal today has backed the Germans.

Now comes the one voice that actually can do something about it: Olli Rehn, the European Commission’s economic tsar who just made his views known in a blog post on his website. Why should Rehn’s views take precedence? Thanks to new powers given to Brussels in the wake of the eurozone crisis, he can force countries to revise their economic policies – including an oversized current account surplus – through something soporifically known as the Macroeconomic Imbalance Procedure.

On Wednesday, Rehn will announce his decision on whether Germany will be put in the dock for exactly what the US has been accusing it of: building up a current account surplus at the expense of its trading partners. And if Rehn’s blog post is any indication, he’s heading in exactly that direction. Read more

Peter Spiegel

Did tight-fisted budget policies in Germany help make the eurozone crisis deeper and more difficult for struggling bailout countries like Greece and Portugal?

That appears to be the conclusions of a study by a top European Commission economist that was published online Monday – but then quickly taken down by EU officials.

Our eagle-eyed friend and rival Nikos Chrysoloras, Brussels correspondent for the Greek daily Kathimerini, was able to download the report and note its findings before the link went dark (Nikos kindly provided Brussels Blog a copy, which we’ve posted here).

Shortly after being contacted by Brussels Blog, officials said they would republish the 28-page study, titled “Fiscal consolidation and spillovers in the Euro area periphery and core”, once a few charts were fixed. And as Brussels Blog was writing this post, it was indeed republished here.

Still, the paper’s day-long disappearance looks suspicious given the hard-hitting nature of its findings. For some, they may not be surprising. Many economists have argued that it was the simultaneous austerity undertaken by nearly all eurozone countries over the course of the crisis that pushed the bloc into a deeper recession than predicted, hitting Greece and other weak economies particularly hard.

But coming from the European Commission’s economic and financial affairs directorate – which was responsible for helping administer Greek and Portuguese bailouts as well as provide semi-mandatory policy advice to other eurozone economies – the criticism of Berlin is unexpected, to say the least. Read more

What has become an increasingly touchy EU-Russia trade relationship took another tit-for-tat turn on Thursday when Brussels escalated a WTO case against Moscow over vehicle recycling fees.

The EU believes a recycling fee Russia charges on imported cars is less about good environmental policy and more a way to squelch foreign competition. The fee does not apply to cars built in Russia or its closest trading partners,Kazakhstan and Belarus.

Brussels complained to the WTO about the levy in July, marking the first case against Russia since it joined the global trade body with much fanfare in 2012 – 19 years after its initial application. On Thursday, the EU asked for a panel to rule on the matter after – to little surprise – settlement talks with Moscow proved fruitless. A result could take months.

“We’ve used all the possible avenues to find with Russia a mutually acceptable solution,” said Karel De Gucht, the EU trade commissioner. “As the fee continues to severely hamper exports of a sector that is key for Europe’s economy, we are left with no choice but to ask for a WTO ruling.” Read more

My big fat Greek presidency it will not be. When Athens takes the reins of the EU’s rotating presidency in January, the government will manage the event like a family throwing a frugal wedding.

That is only to be expected since Greece’s crisis-hit economy is now enduring its sixth year of recession, the public coffers are bare and unemployment is nearing 30 per cent. Dishing out huge amounts of cash to impress visiting diplomats would likely provoke outrage from a citizenry that is increasingly unhappy with the EU, as it is.

So how frugal is Greece planning to be? The government has set a €50m budget for the six-month affair, down from the €60m to €80m spent by predecessors like Ireland,Cyprus,Denmark and Lithuania. Officials say they are hoping that the final bill comes to even less.

The Greeks have found a few simple ways to cut costs. They will limit the number of ministerial meetings that will be held in their country to just 13 – keeping as much of the work in the EU’s Brussels headquarters as possible. All of the Greek meetings will be hosted in Athens. Read more

It’s hard enough to get 27 member states to agree unanimously on a seven-year, €1,000bn budget – as anyone following the latest EU summit wrestling match can attest. But completing an EU budget deal requires one more thing: the consent of the European parliament.

Martin Schulz, the German social democrat and parliament president, reminded EU leaders and the Brussels press pack of this fact on Thursday evening. In a mildly foreboding press conference, Schulz re-stated his threat that leaders should be prepared for MEPs to block any budget proposal that strays too far from the €1,033bn proposal submitted more than a year ago by the European commission, the EU’s executive arm.

“Yes, we are prepared to make savings, but we are not prepared to have the European Union budget simply amputated,” he said.

Schulz declined to say whether the latest €960bn proposal being considered by Herman Van Rompuy, the European council president, crossed the line from extreme weight loss to amputation. But he was clearly displeased. Read more

Peter Spiegel

Over the course of the eurozone crisis, the relationship between EU leaders and credit-rating agencies has been, at best, a love-hate one, with officials frequently lashing out at the three major sovereign raters for the timing and severity of their downgrades.

So it was probably with some Schadenfreude that those same officials learned of the news that the US Justice Department will soon file a civil suit against Standard & Poor’s – arguably the most prominent of the rating agencies – for misleading investors when it gave gold-plated endorsements to US mortgage-related securities before the 2008 financial crisis.

But what happens when S&P starts pointing out that some of the most criticised eurozone policies – the austerity measures aimed at forcing internal devaluations in struggling peripheral countries – may be working? The silence thus far has been deafening. Read more

Peter Spiegel

IMF managing director Christine Lagarde, during this morning's news conference in Tokyo.

IMF chief Christine Lagarde’s declaration this morning that Greece should be given two more years to hit tough budget targets embedded in its €174bn bailout programme – coming fast on the heels of German chancellor Angela Merkel’s highly symbolic trip to Athens – are the clearest public signs yet of what EU officials have been acknowledging privately for weeks: Greece is going to get the extra time it wants.

But what is equally clear after this week’s pre-Tokyo meeting of EU finance ministers in Luxembourg is there is no agreement on how to pay for those two additional years, and eurozone leaders are beginning to worry that the politics of the Greek bailout are once again about to get very ugly.

The mantra from eurozone ministers has been that Greece will get more time but not more money. Privately, officials acknowledge this is impossible. Extending the bailout programme two years, when added to the policy stasis in Athens during two rounds of elections and a stomach-churning drop in economic growth, means eurozone lenders are going to have to find more money for Athens from somewhere. Read more

Peter Spiegel

IMF's Blanchard unveils report at Tokyo gathering of finance ministers and central bankers.

[UPDATE] After a meeting of EU finance ministers in Luxembourg, Olli Rehn, the European Commission’s economic chief, said he would read the IMF’s analysis on the way back to Brussels. But he cautioned that while the impact of austerity on growth was important to consider, it was also essential to take into account the “confidence effect” budget consolidation has. He pointed to Belgium, which has gone from market laggard to nearly a safe haven after implementing tough austerity measures earlier this year.

Although the headlines generated by last night’s release of the IMF’s annual World Economic Outlook focused on the downgrading of global growth prospects, for the eurozone crisis the most important item in the 250-page report may just be a three-page box on how austerity measures affect struggling economies.

The box – co-authored by IMF chief economist Olivier Blanchard and staff economist Daniel Leigh – argues in stark language that the IMF as well as other major international institutions, including the European Commission, have consistently underestimated the impact austerity has on growth.

For a eurozone crisis response that has piled harsh austerity medicine on not only bailout countries but “core” members with high debt levels –Italy, France and Belgium, for instance – the IMF finding could shake up the debate on how tough Brussels should continue to be on eurozone debtors. As French economist Jean Pisani-Ferry, director of the influential Brussels think tank Bruegel, tweeted yesterday:

[blackbirdpie url="https://twitter.com/BruegelPisani/status/255520457976061952"] Read more

Greek protesters prepare for Chancellor Angela Merkel's visit this morning in central Athens.

Since coming a surprise second in June’s Greek elections, Syriza, the radical left-wing coalition, can point to at least one (admittedly modest) success in addressing the country’s monstrous unemployment problem: It has found a job for Aphrodite Babassi.

Babassi, a Syriza supporter who appeared in the FT’s pages in May, had been jobless for three years before she took a post in July on the staff of one of the party’s new members of parliament, Afrodite Stapouli, researching science policy.

We bumped into Babassi, 27, at Syntagma Square on Monday night, where – as she prepared to protest against the pending visit of German Chancellor Angela Merkel – she recalled the joy of receiving her first pay check. Read more

Peter Spiegel

Spain's Mariano Rajoy, after a meeting at the Spanish parliament in Madrid earlier this month

The recent turn in market sentiment against Spain has led to a somewhat unanswerable debate in European policy circles about what, exactly, the markets are worried about: Is it that the new Rajoy government tried to break from tough EU-mandated deficit limits last month…or the fact they eventually agreed to stick to next year’s stringent target?

If Standard & Poor’s downgrade of Spanish debt last night is any indication, it appears the markets are more concerned about the latter than the former.

Most senior EU officials have a different view, arguing that by unilaterally declaring he was going to ignore the EU-mandated 4.4 per cent debt-to-gross domestic target for 2012, prime minister Mariano Rajoy spooked the bond market by signalling Spain had lost its sense of discipline.

But S&P makes a different argument. Read more

Peter Spiegel

Denmark's Margrethe Vestager, center, with her counterparts in Copenhagen this weekend.

Following our story Saturday and subsequent blog post on two confidential economic analyses prepared for European finance ministers in Copenhagen which paint a less-than-confident picture of the eurozone crisis, we here at Brussels Blog have received multiple requests for more on their contents. Read more

Peter Spiegel

US treasury secretary Timothy Geithner

Timothy Geithner, the US treasury secretary, has occasionally irked his European counterparts with attempts to influence the eurozone’s crisis policymaking, but European officials will be closely listening to him as the clock ticks down to next month’s spring meetings of the International Monetary Fund.

European Union leaders hope to get non-eurozone backing to double the IMF’s funding to $1tn at the gathering. Although the US won’t contribute, Washington is the IMF’s largest shareholder and is widely believed to be behind the insistence of Christine Lagarde, the IMF chief, that no increase will be forthcoming unless the eurozone increases the size of its own €500bn rescue system.

Those interested in tea leaf reading will get their chance today, when Geithner testifies on Capital Hill on the eurozone crisis. The House financial services committee, where Geithner will appear, helpfully released his testimony last night, and it makes clear Geithner is in no mood to back down. Read more

Peter Spiegel

Portuguese prime minister Pedro Passos Coelho arriving at Monday's EU summit in Brussels

As financial markets watch with nervous anticipation the outcome of the tense negotiations over Greece’s debt restructuring, there is clear evidence that bond investors believe Portugal could be next, despite repeated insistence by European leaders that Greece is “an exceptional and unique case” – a stance reiterated at Monday’s summit.

Portugal’s benchmark 10-year bonds were over 17.3 per cent this week, though things have eased off a bit today. Those are levels seen only by Greece and are a sign the markets don’t believe Lisbon will be able to return to the private markets when its bailout ends next year. Default, the thinking goes, then becomes inevitable.

But are Greece and Portugal really comparable? Portugal certainly shares more problems with Greece (slow growth, uncompetitive economy) than with Ireland and Spain (housing bubbles, bank collapses). But unlike Greece, where talk of an inevitable default was the topic of whispered gossip in Brussels’ corridors from almost the moment of its first €110bn bailout, there is no such buzz about Portugal.

More concretely, the latest report by the European Commission on the €78bn Portuguese bail-out, published just a couple weeks ago, paints a much different picture for Lisbon than for Athens. An in-depth look at the largely overlooked report after the jump… Read more

Peter Spiegel

French president Nicolas Sarkozy arrives at the summit this morning.

The big European Union summit will be divided in two parts today, with all 27 EU leaders meeting in the morning before the session is narrowed to the 17 members of the eurozone in the afternoon.

The Brussels Blog has obtained a copy of the 12-page draft of the morning gathering’s communiqué, circulated to summiteers this morning, and unless things change at the meeting, it looks like there will be no final decision on the one thing the 27 had hoped to finish today – a plan to recapitalise Europe’s banks.

The draft “welcomes progress made” by EU finance ministers during their 10-hour meeting on Saturday, but says the work will not be officially signed off until another meeting on Wednesday – the first official acknowledgement that leaders from all 27 EU countries (and not just the eurozone) will have to meet again next week. Whether that meeting will be the heads of all 27 governments or just their finance ministers remains to be seen. Read more

From our foreign affairs blog:

Welcome to our continuing coverage of the eurozone crisis. All times are London time. Curated by Esther Bintliff and John Aglionby on the world news desk in London, with contributions from FT correspondents around the world. This post should update automatically every few minutes, although it may take longer on mobile devices.

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