European technocrats squabble over the spoils

Another day, another forum for Europe. This time it is the EuroGroup which is meeting to cement some of the technical details around what was announced at the 19th EU Summit. As I mentioned last week I saw the 19th summit as a political success more than an economic one, and any actionable decisions were likely to take many months and a lot of politicking.

The Finns and the Germans certainly haven’t disappoint over the last 7 days, topped off by Wolfgang Schaeuble in the lead up to today’s meeting:

Spain has specific problems with its banking industry and should recapitalize lenders through the European stabilization fund, known as EFSF, German Finance Minister Wolfgang Schaeuble told El Pais in an interview.

Europe won’t be able to set up a banking supervisor this year that could oversee aid sent directly to Spanish banks with the help of the European Central Bank, Schaeuble told the newspaper.

Funds that are channeled through the EFSF will be loans and not donations and will count towards Spanish debt even though they come with soft terms, Schaeuble told the newspaper.

The statement from the Eurogroup (available below) looks to put some of those concerns to bed, but the wording is still vague and the timelines yet to be agreed:

As an immediate follow-up, the ECB and EFSF have today signed a technical agency agreement, creating the possibility of an efficient conduct of market operations by the EFSF. As soon as the ESM has been established, a similar agreement will be concluded between the ECB and ESM. In addition, the Eurogroup has politically endorsed the ESM investment policy guideline. Thus, by the time of the entry into force of the ESM treaty and the formal approval by the ESM governing bodies, all ESM instruments will be fully operational so that their effectiveness and efficiency would be ensured.

So we are still talking about “the possibility” of something occurring dependent on an another action that is also yet to occur. For those of you who have been following Europe for some time, this is expected behaviour but it in no way sets up Europe to get ahead of the crisis it has created for itself.

There do, however, look to be some wins in the document:

The Eurogroup has today reached a political understanding on the draft MoU underlying the financial assistance for the recapitalisation of financial institutions for Spain, to be provided via the EFSF until the ESM becomes available and then transferred to the ESM without gaining seniority status. The Eurogroup envisages providing the final approval of the programme by 20 July, after national procedures have been completed. The Eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014.

Although, again, the wording is still vague, this appears to be a concession for Spain with the explicit mentioning of “seniority” and the inclusion of statements about extending the budget deficit deadline. This is in contrast to the recent complaints by the Finns so it will be interesting to see if they have anything to say on this matter in the coming days. Given previous experience I doubt very much that this is the end of the discussions as Europe has a history of bold announcements followed by political back steps. As I said last week, it is the wording of the MoU that really matters and we are yet to see that document.

Once again this looks like a political win, but the economic reality is still yet to be addressed. According to the statement Spanish banks will have access to €100bn in funding but, as Wolfgang Schaeuble rightly pointed out, this isn’t a donation. While re-capitalisation funding may be pouring in on one side of the balance sheet asset deterioration continues to eat at the other. From Tinsa, on the Spanish housing market:

By region, “Capitals and Major Cities” recorded the sharpest year-on-year decline in June of 13.5%, closely followed by the municipalities of the “Mediterranean Coast”, which fell by 13.3% compared to the same month in 2011, and “Metropolitan Areas”, which fell by 11.6%. The decline was greater than the market average in all three areas.

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In terms of the cumulative decline in house prices since the top of the market by region, the “Mediterranean Coast” recorded a fall in June of 38.3%; followed by “Capitals and Major Cities” with 33.8%, “Metropolitan Areas” with 31.9%, the “Balearic and Canary Islands” with 25.4% and “Other Municipalities”, which refers to those not included in the other categories, with 24.5%.

And as Reuters reports, although concessions for Spain are very welcome, they may not be enough to get Spain back on track to what could be considered a “recovery”:

Looser budget deficit targets for Spain may still prove difficult to reach, according to an EU document that demands the country be subjected to three-monthly checks, a move that will tighten supervision of the euro zone’s fourth-largest economy.

Europe is set to grant Spain an extra year to reach deficit targets laid down in EU law as the country grapples with recession and a banking crisis, diplomats said.

Although no final decision is expected at a Monday meeting of euro zone finance ministers, a wider gathering of EU finance chiefs on Tuesday is set to ease a debt goal that has pressured Madrid to make cuts blamed for exacerbating a recession.

Spain, however, is obviously not alone. The Troika is back in Greece to assess the country as the news of its economic woes continue:

Greece’s economy will contract at a whopping 6.9 percent this year, taking the budget deficit to 9 percent of gross domestic product, while unemployment will soar to 23.6 percent, according to the latest quarterly report by the Foundation for Economic and Industrial Research (IOBE), whose general director until a few days ago was Yannis Stournaras, the country’s new finance minister.

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The contraction had been forecast at 5 percent for the whole of the year in the previous quarterly report, in early April, but in the second quarter it came to 7.5 percent and it is expected to leap to 8 percent in Q3 due to the decline in tourism traffic and revenues. The forecast for the jobless rate is much higher than that of the European Commission, which was for 19.7 percent.

Overnight we also saw some positive news from France, but again it was tainted by a poor forecast:

France enjoyed a boost in investor confidence with a successful bond auction Monday — but also got a warning from the president that growth so far this year is “nil” and that the country needs to rethink its social model.

France’s government sold €6 billlion in short-term bonds at negative interest rates Monday, as investors flock to the perceived safety of Europe’s larger economies. It was the first time rates entered negative territory, according to the French Treasury.

France’s borrowing costs have been dropping in recent months as those in neighboring Spain have soared and raised fears that it, too, will need a bailout.

France, the No. 2 economy in Europe, has high debts of its own and 10-percent unemployment, and is struggling to avoid a new recession.

“Everybody knows that in the first half of the year, growth will be nil. So we need to mobilize all our forces, all our imagination, all our capacities to achieve lasting growth for the years ahead,” French President Francois Hollande said Monday at a conference with labor and business leaders meant to lay the groundwork for new jobs policies.

You can follow Delusional economics on Twitter @DE_fromMB . He also writes daily for Macro Business, Australia’s leading finance, investment and economics blog, and is a contributing macroeconomic analyst for Macro Investor , Australia’s only full service independent newsletter covering stocks, yield, property and portfolios.