Blue sky thinking reaches Frankfurt (Getty)
Mario Draghi, European Central Bank president, has revived the idea of “reform contracts” — a policy that emerged in Brussels wonk circles last year and entails the EU contractually binding eurozone countries to economic reforms.
Speaking in Berlin on Monday, Mr Draghi told an audience of businesspeople that the eurozone needed two things to achieve sustainable growth: stabilisation and greater competitiveness.
To achieve the latter, he mentioned the need for “better ways of measuring economic performance – for example, more structural indicators of competitiveness.” And went on: Read more
The tests on 88 EU lenders holding 65 per cent of the bloc’s total assets over the coming months are structured to determine how well banks would hold up in a severe economic crisis. Criteria for banks’ passing or failing the test are due to be set next month.
The documents, seen by Reuters, show that the adverse scenarios include: Read more
Irish bond yields have dropped back as European officials have dramatically scaled back the impact of a sovereign default on bondholders.
Bondholders had been selling off peripheral eurozone debt – particularly Irish – since Brussels announced they might need to accept a loss – or haircut – in the value of their holdings should a default occur. This effectively reduced the future value of bonds held. The precise nature of who would lose what has remained unclear, as the sell-off sent bond prices down and yields above 9 per cent yesterday for Irish 10-year debt.
Now finance ministers appear to have backtracked, saying Read more
In the early days of the telephone, human operators played a crucial role: you called the operator, asked for the Joneses at a certain address, and she called them for you and connected you. Telephones were never forecast to be ubiquitous: their number would be forever constrained by the cost and availability of human operators required to make the system work.
Few people – if any – envisaged automatic connection. When it finally came along, no doubt it was unpopular with telephone operators. But the sacrifice of their jobs – painful as it was – paved the way for the highly efficient system we know today. It is unlikely the telephone operators were consulted on the matter, much less given the deciding vote.
So there is a level on which it seems strange that EU policymakers should get to choose whether or not they remain a part of the fiscal sanctions process. Euro member states might be punished if they are fiscally irresponsible, going forwards, but then again they might not: it will depend upon votes by policymakers. The ECB’s proposal for semi-automatic sanctions has been thwarted: the decision to punish will remain lengthy – and political.
There is a problem with this. Read more
Stephanie Flanders reminds us that it takes two to tango in her latest blog post. The story concerns proposals that might fine euro members for failing to keep public finances within certain boundaries. Over to Ms Flanders:
There would be fines in the region of 0.2% of GDP for countries who borrow too much, and also smaller financial penalties for countries that don’t try hard enough to improve their competitiveness.
I’m told that competitiveness would be measured by a “persistent current account imbalance”. But as this blog has pointed out many times, it takes two to create a current account gap: if one country has a deficit, someone else must have a surplus.
In fact, all the signs are that the new system will have the same asymmetry that we see in the global economy more generally. Countries with deficits are pressured to reform, but the countries with surpluses are under no pressure to change their policies at all.
Personal and company savings* have fallen significantly in Greece and Hungary since the start of the year, while rising across most EU members. Perhaps more surprisingly, deposits in the Netherlands also fell.
More than offsetting the falls, deposits increased in the UK, Italy and Cyprus – the latter may be because, as Ralph points out, withdrawals from Greece are flowing into neighbouring Cyprus. Read more
Irish unemployment rose to 13.3 per cent in May, the highest rise among the 30 countries reported by Eurostat in its monthly unemployment bulletin. The previous rate, in April, was 12.9 per cent.
Hungarians, by contrast, recorded the greatest drop in unemployed, with 10.4 per cent, down from 10.9 per cent last month. Overall, six countries reported increasing unemployment, 10 recorded falling unemployment, and 14 remained static. Latvia, Spain and Estonia are still at the top of the European league with almost one in five of their labur force out of work, although two of these have not yet recorded up-to-date May figures. Read more
European Union governments that persistently violate the bloc’s rules on low budget deficits and public debts could be denied EU financial aid under proposals unveiled on Wednesday by policymakers in Brussels.
The European Commission, which enforces the EU’s fiscal rules, also suggested that countries in the 16-nation eurozone should have to pay interest-bearing deposits into an EU fund if they ignored warnings to keep their public finances in order. Read more
Anti-contagion measures being discussed right now by EU finance ministers might be just a smokescreen for unprecedented action by the ECB. So says Erik Nielsen, chief European economist at Goldman Sachs.
Markets reacted negatively to the Greek bail-out, with equities falling, the euro falling and a rising cost of risk. In other words, markets began to price in a greater chance of contagion. EU finance ministers meeting today want to agree anti-contagion measures before markets open tomorrow. A statement issued Friday said all institutions of the euro area agreed “to use the full range of means available to ensure the stability of the euro area”. Read more
Below is a table showing the size of bilateral loans we believe will be due from each eurozone country. Figures are based on the ECB subscriptions ratio.
We are filling in the right-hand side as we see parliamentary approvals. Read more
So this is what ‘no change’ looks like: 123,000 more people unemployed in just one month. Most European unemployment rates rose last month, but the headline figure remained at 10 per cent because of falling unemployment rates and large populations in a handful of countries. Latvia is still suffering terribly, with unemployment rising to 22.3 per cent from 21.6 per cent in a single month.
Inflation is a better picture, with levels mostly close to target and almost all trends looking healthier. Slovakia and Estonia have pulled themselves out of deflation for the first time in months; Irish deflation is steady; and even Latvia’s deflation has tempered a little, from 4.3 to 4 per cent. Greece, and perhaps surprisingly, Norway, are experiencing steady-ish rises to 3.9 and 3.6 per cent, respectively. Only in Iceland is the trend a real cause for concern: inflation is still rising quickly, from 10.7 per cent last month, to 11.6 per cent this month. The spread of inflation among the countries – a very crude measure – has risen from 15 percentage points last month to 15.6pp this month.
Officials in Berlin have admitted they are looking at how to construct a “firewall” to prevent the Greek debt crisis spiralling out of control, raising hopes in the markets of a European rescue plan for Greece.
Current discussions concern reducing contagion rather than helping Greece, however. “We’re thinking about what we should do if the crisis spills from Greece into other euro countries. So it’s more about finding firewalls, containing the problem, than principally about helping the Greeks,” said one official. He added there were “no concrete plans” as yet. Read more
Brussels has just approved €6.9bn of ‘urgent rescue aid’ for ABN Amro and Fortis Bank. The cash is destined to separate Fortis from both its Netherland unit and its (2007-acquired) ABN Amro operations. The separated parts will then be merged. The various units have insufficient cash to achieve the reconstruction by themselves.
Meanwhile the Irish government is set to acquire further stakes in its top banks as a result of loans being transferred to the country’s “bad bank”, central bank governor Patrick Honohan said today. “It is pretty clear the government will be acquiring additional equity stakes,” Mr Honohan told an event at Trinity College Dublin.
A change in travel plans by Jean-Claude Trichet, European Central Bank president, has caused a flurry of excitement in financial markets this morning. He is leaving early a Reserve Bank of Australia conference in Sydney in order to get back for Thursday’s European Union leaders summit in Brussels. The buzz in markets is that this could be a sign that a bail-out is being prepared for Greece.
It is a good story to trade on (the euro is up a bit) but is such speculation credible? I am not so sure. It didn’t help that the first reports said Mr Trichet was returning for an extraordinary meeting of the ECB’s governing council - an understandable mistake for anyone in Australia not familiar with the EU’s array of councils and presidents.
But my understanding is that the ECB president always intended to be at Thursday’s summit in Brussels, which was Read more
If nothing else, a positive aspect of Greece’s plight has been the wave of ideas on how the eurozone could operate more effectively in the future.
A big shortcoming identified by many has been the lack of proper “crisis management” procedures, which have arguably exacerbated Greece’s difficulties. Now – just in time for the EU leaders’ summit in Brussels this week – comes an ingenious solution for a European Monetary Fund, put forward by Daniel Gros, director of the Brussels-based Centre for European Policy Studies, and Thomas Mayer, chief economist at Deutsche Bank.
Their idea is for a sort of eurozone version of the International Monetary Fund, which could provide emergency loans to struggling countries or ensure a default was orderly, with minimum effect for other eurozone countries. It would be funded by contributions from countries in the weakest financial position, calculated according to how grievous was their abuse of the EU’s fiscal rules as set out in its ”stability and growth pact”. Read more