Wednesday, 20 July 2011

Open Europe

Europe

Merkel dampens expectations ahead of eurozone summit;
IMF slams Europe’s handling of the crisis

In the run up to tomorrow’s eurozone summit, German Chancellor Angela Merkel warned yesterday that there would not be “one spectacular event that solves everything” and that “further steps will be necessary” to solve the crisis, dampening expectations that a deal will be reached on a second Greek bailout.Handelsblatt reports that Merkel is coming under increasing pressure from MPs in the governing coalition to accept a significant write-down on Greek debt. However, the German Chancellor has insisted that she will “not give in” on a restructuring or Eurobonds. Merkel will hold a pre-summit meeting with French President Nicolas Sarkozy in Berlin today.

The IMF called for greater fiscal union yesterday, with Antonio Borges, Director of the IMF's European department, saying, "To put the crisis behind, we need more Europe, not less. And we need it now.” An IMF report released yesterday called for “decisive action” on the crisis, warning that without a solution the crisis could cause problems for the global economy. IMF staff also called for the temporary eurozone bailout fund, the EFSF, to be used to purchase government bonds directly and to recapitalise banks. FT Deutschland reports that tomorrow’s summit will consider introducing a flexible credit line to the EFSF, which could issue loans to Spain and Italy outside of a full bailout agreement, as well as an increase in the size of the bailout fund.

Meanwhile, divisions remain between the ECB and Germany over how to structure a second Greek bailout. A plan involving a bank levy, which could raise €30bn over three years, is gaining ground among European officials, according to the FT. However, the German, French and British Banking Federations have suggested that it would be an inefficient and poorly targeted way of raising funds for a Greek bailout, adding that it looks to be politically motivated. Reuters suggests that the threat of a bank tax may be a way to force banks to accept voluntary losses on their holdings of Greek debt.

Ewald Nowotny, Governor of Austria’s Central Bank, caused Greek two-year borrowing costs to jump nearly 5% yesterday when he suggested that a short-term “selective default” by Greece might not have “major negative consequences” – the first time a member of the ECB Governing Council has broken rank on the issue.

Spain managed to auction €4.45bn of short term debt yesterday but at significantly higher costs, with the borrowing cost on twelve-month debt 1% higher compared to last month. Open Europe’s Raoul Ruparel is quoted in the Telegraph suggesting that contagion fears may be changing Italian and Spanish views on private sector involvement in a second Greek bailout. Open Europe’s finding that the ECB has an exposure of €444bn to struggling eurozone economies is cited byKurier.

UK opposes Commission’s plans for mandatory EU-wide bank capital rules
The FT reports that the Commission is expected to push ahead with mandatory EU bank capital rules, despite strong objections from the UK and other countries that want their regulators to have flexibility to impose higher standards. The rules as drafted would require all EU banks to hold top quality capital equivalent to 7% of their assets, adjusted for risk – well below the 10% requirement that the UK’s Independent Commission on Banking may impose on domestic retail banking operations. Spain, Sweden and several eastern and central European states are thought to support the UK’s position.

Speaking on the BBC’s Today programme, NATO Secretary General Anders Fogh Rasmussen has warned that “the Europeans couldn’t [carry out the operations in Libya] on their own and in that respect it is a matter of concern that we have seen substantial defence cuts in nearly all NATO ally nations. The fact is that the influence of Europe on the international scene will gradually decline.”

Eurozone comment round-up
Writing in the FT, columnist Alan Beattie argues that the “risk to [the IMF’s] reputation is beginning to outweigh the benefit from its presence” in Greece, and that “the possibility that the fund will disengage from Greece is increasingly under discussion in Washington…The IMF is supposed to be there to smooth over liquidity problems, not to pour good money after bad by lending to insolvent governments. If the eurozone wants to follow a boneheaded rescue strategy, let it pay for it."

Writing in the WSJ, columnist Simon Nixon argues that the ECB must say 'no more' to “flexibility demands”, and that, “It is up to politicians to decide if it is in the interests of the people of Europe to save the euro - and to take the necessary measures to support it. If the politicians are unable or unwilling to save the euro, taxpayers in solvent countries won't easily forgive the ECB if by its actions it has amplified the financial linkages and increased their own losses”.

In an op-ed in FAZ, the five ‘economic wise men’ advising the German government propose a plan B for Greece, “based on the assumption that recovery of financial stability in Greece needs a partial write-off [of Greek debt]. A 50% write-off should be aimed for. This would decrease Greece’s debt from 160% to 106% [of GDP]. Rating agencies would consider that as a default.”

An editorial in El País argues, “The credibility of Europe…depends on European finance ministers emitting a clear message about the second Greek bailout plan” tomorrow, this is especially important for Italy and Spain “that have to pay the costs of European indecision.”

According to Jyllands-posten, Danish Tax Minister Peder Christensen has encouraged the European Commission to take the dispute over the country’s reintroduction of border controls to court, rather than making ambiguous statements over their validity. “That way we would find out exactly what concrete breach Denmark has committed,” he told DR News.

The BBC reports that the European Commission has approved seven schemes set up to ensure that biofuels used in the EU are produced in an environmentally sustainable way. The EU wants renewable energy – including biofuel – to have at least a 10% share of transport fuel by 2020.

European Voice reports that member states have reacted with hostility to a request by the European Court of Justice to appoint at least twelve extra judges to help it cope with a growing backlog of cases.

An article in the IHT notes that the European Commission is due to release a report on organised crime in Romania and Bulgaria today.
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Posted by Britannia Radio at 17:27