It is the day before Europe is saved forever… again … and everyone seems to be getting nervous. Bond yields on the periphery and Belgium are heading back in the wrong direction, with big moves on Spanish paper. CDS reflects similar trends with Spain and Belgium again the big movers.
In the lead up to the October summit it became obvious that there really wasn’t a plan when members of foreign cabinets, the German parliament, the ECB and the German central bank all released press statements contradicting Angela Merkel and each other. In the end Merkel told them all to keep quiet. One wonders why she didn’t learn her lesson and do the same thing this time:
Germany rejected comments by French Prime Minister Francois Fillon that Chancellor Angela Merkel agreed to drop demands on investors to accept losses in any sovereign default, saying that International Monetary Fund rules will ensure private-sector involvement.
“We only made it clear that the kind of PSI you had with Greece is an extreme case that won’t be repeated,” Steffen Seibert, Merkel’s chief spokesman, said by text message late yesterday. So-called collective action clauses “will stay, so the investors will only encounter risks in Europe that they already know from everywhere else in the world.”
Overnight the Telegraph UK published a letter from Merkozy to the European council president, Herman Van Rompuy, outlining their vision for the economic future of Europe. The things that struck me most about it is the complete lack of anything new and , as I have been saying is needed to make any of this credible, anything resembling a transition plan. If simply restating the current plans and listing out ideas that everyone is already aware of is the agenda for the next summit then asset values are in big trouble.
The letter does mention that Europe is going to “foster growth through greater competitiveness as well as greater convergence of economic policies at least amongst Euro Area Member States”. It is anyone’s guess as to what that actually means, but the list of focus areas is quite telling:
- Financial regulation;
- Labor markets;
- Convergence and harmonisation of corporate tax base and creation of a financial transaction tax;
- Growth supporting policies and more efficient use of European funds in the euro area.
Financial regulation is not new, bringing forward Basel III has been on the table for some time and as we know is having unintended consequences in Eastern Europe. The point about financial regulation does ,however, seem a little ironic given the latest rumour about the ECB and Invisopower!:
The European Central Bank may announce a range of measures tomorrow to stimulate bank lending, said three euro-area officials with knowledge of policy makers’ deliberations.
Options on the table include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.
Labour markets is a given, wages are going to be tied to competitiveness which they always should have been. The reason they didn’t have to be was, once again ironically, mostly because of financial de-regulation. How the transition back is made without destroying the economy is the 4 Trillion Euro question, and it certainly hasn’t been answered yet.
The corporate and transaction tax is interesting. One of the reason Ireland is performing better, at least in a macroeconomic sense, than other periphery nations is because of its competitive corporate tax rate. Any “convergence” of that rate towards other euro nations will see that competitiveness shrink and would damage Ireland’s fragile recovery. In regards to the transaction tax, the UK is not going to be happy. On the back of some further poor economic data this surely going to lead to a showdown with London:
U.K. economic growth slowed in the three months through November, strengthening the case for the Bank of England to loosen monetary policy further, the National Institute of Economic and Social Research said.
Gross domestic product probably rose 0.3 percent, less than the 0.4 percent estimated for the quarter through October, Niesr, whose clients include the Bank of England and the U.K. Treasury, said in an e-mailed statement in London today. Output probably won’t reach its pre-recession peak until 2013, it said.
Growth supporting policies and more efficient use of European funds in the euro area I can only assume means the continuation of austerity policies in the periphery and once again attempting some sort of leveraged private/external/IMF involvement in the existing stability mechanisms. Nothing new there.
As with October’s forum I am starting to sense that the Eurocrats have misunderstood the markets take on the goal of the summit. The letter is completely focussed on implementing policy to move towards a tighter fiscal union but provides no credible framework in which to make that transition. Markets have so far been supportive of the fiscal unification plan but only because they believe it will lead to a relaxing of the reigns on the ECB and it will therefore be allowed “print”. I don’t get the sense that this is the rationale for the Eurocrats, it certainly isn’t present in that letter. It is this divergence of goals that has the potential to lead to a very disappointed market as it did after the last summit.
No wonder everyone is nervous.