Tuesday, 27 September 2011

Open Europe

Europe

Eurozone leaders continue to disagree over increase of bailout fund

Financial markets rebounded this morning on the continuing rumours that eurozone leaders are working on a grand plan to save the eurozone. Most reports suggest the plan will involve an increase in the lending capacity of the EFSF, the eurozone’s bailout fund, although there are numerous options for how this could be done, including: a straight increase in guarantees, leveraging the fund through the ECB and turning the fund into a bank so that it can borrow from the ECB or from financial markets. CNBC had a unique report which suggested that EFSF funds would be used to create a special purpose vehicle with the European Investment Bank, although the report was described as “bizarre” by a European official, reports Reuters. Greek Prime Minister George Papandreou is meeting German Chancellor Angela Merkel today to discuss the plans, with the issue of a Greek default likely to be top of the agenda.

Despite the positive reports, comments by eurozone leaders suggests confusion still reigns and that the exact nature of the deal is yet to be decided. German finance minister Wolfgang Schäuble denied that a fivefold increase in the EFSF was imminent saying, “No, that is clear... We do not intend to increase it,” reports CityAM. Schäuble’s comments were echoed by a number of German politicians. Carsten Schneider, the SDP’s Finance spokesman said: "A new multi-trillion programme is being cooked up in Washington and Brussels, while the wool is being pulled over the eyes of Bundestag and German public. This is unacceptable."

On Spain’s public broadcaster TVE, Spanish Economy Minister Elena Salgado insisted that increasing the EFSF to €2 trillion “is not on the table and has not been discussed,” stressing the need for “some verbal discipline.” Additionally, in a press conference jointly held with Finnish Prime Minister Jyrki Katainen, Dutch Prime Minister Mark Rutte said, “There are no plans in the Netherlands and, as far as I know, in Finland to increase the amount of money we put into the EFSF.”

Meanwhile, in a sign that the approval of the current expansion of the EFSF is moving along, parliaments in Finland, Germany, Slovenia, Estonia and Austria will all vote on the issue this week, with most expected to vote in favour, although this is not yet assured in Finland. The Greek parliament is today expected to approve the new property tax increase albeit by a small majority. The WSJ reports that a Commission spokesman confirmed yesterday that the decision on whether to release the next tranche of Greek bailout funds has been delayed again until mid-October.

The ECB scaled back its purchases of government bonds last week, buying only €3.9bn, in a move widely seen to highlight the ECB’s growing reluctance to continue its bond buying programme. Yves Mersch, Head on Luxembourg’s Central Bank also refused to rule out an interest rate cut yesterday.

Mats Persson: Topping up bailout fund through ECB could prove to be “non-starter”

In an opinion piece in today’s CityAM, Open Europe’s Director Mats Persson writes that despite the positive news that eurozone leaders are now acknowledging that a Greek default might be necessary and the importance of recapitalising Europe’s banks, the alleged proposal for a new eurozone rescue package, based on leveraging the European Financial Stability Facility (EFSF) through the balance sheet of the European Central Bank (ECB), is a non-starter. He argues that: “the plan would require a radical reworking of the EFSF framework, since it is not designed to be leveraged or be subordinate to the ECB in terms of covering losses [and] using the ECB’s balance sheet to top up the EFSF would further expose the former to even more risky debt”. He notes that under the proposals “the ECB would fully enter the domain of fiscal policy”, which would be unacceptable to Germans. He argues that “a growing number of Germans now view the ECB with growing suspicion, as was seen in the dramatic resignation last month of Juergen Stark, the German representative on the ECB’s executive board, allegedly over the bank’s decision to start buying Italian and Spanish government bonds. One step further, and German support for the entire euro project could start to diminish.”

The WSJ’s Review & Outlook column notes, “Europe – in the name of averting Greek default – is lurching toward huge and costly policy mistakes. A leveraged, multitrillion-euro ‘bank’ borrowing from the central bank to buy up bonds all over Europe, is not a reasonable way to avoid imposing some losses on the owners of Greek government bonds. If that's the medicine for saving Greece, a full-blown default looks better all the time.” In Italian business daily Il Sole 24 Ore, Donato Masciandaro argues, “The risks of a twin crisis of public and banking debt in Europe must be faced by keeping the two issues separate – through a bad bank – instead of further intertwining them, through a bailout fund.” He suggests that the EFSF should “immediately assume the characteristics of a modern bad bank, holding the bonds of countries which the EU deems at risk of default.”

David Cameron backtracks on campaign for single European Parliament seat?

The Telegraph reports that Conservative and Liberal Democrat MEPs and MPs are “furious” with Prime Minister David Cameron after he abandoned his support for the campaign to reduce the European Parliament’s monthly commute to Strasbourg in order to pursue better relations with France. The arrangement – described by many as a "travelling circus" - costs an additional £150million a year, and is one of the few EU policy areas both coalition parties were able to agree on.

Euractiv notes that the European Commission is set to unveil its proposals for a Financial Transactions Tax on 5 October. Open Europe is quoted saying, “An EU financial transaction tax would be clearly biased against the UK, which is home to Europe’s largest financial centre, in turn requiring a complex burden-sharing arrangement in order to make it equitable”.

EurActiv France reports that yesterday François Hollande – one of the French Socialist Party’s potential candidates for next year’s presidential elections – said that French President Nicolas Sarkozy’s plans to introduce a ‘golden rule’ on balanced budgets in the French Constitution are “dead and buried” now that centre-left parties hold a majority in the French Senate.

According to a leaked draft Commission proposal, due to be published in November, Britain’s Big Four accounting firms may be forced to abandon their consultancy businesses and share audit work with smaller rivals, the FT reports.

The Independent reports that European competition regulators are investigating whether a group of banks, including HSBC, Barclays and Deutsche Bank, are blocking the entry of new players into Europe's online payments market, the system used by consumers to purchase products online.

FAZ reports that a survey published by the European Commission yesterday revealed 56% of Germans believe the Single Market has worsened working conditions in Germany, 65% claimed it only benefits large companies and 64% believe it has brought in too much cheap foreign labour.

La Stampa reports that yesterday the speaker of the lower house of the Italian parliament Gianfranco Fini told a meeting of his party, “It won’t take long before we go to the polls.”

The Sun reports that seven MEPs travelling to the Isle of Mahe in the Seychelles in order to discuss a fisheries deal, check sanitary arrangements for tuna imports and discuss piracy risks will be joined by three administrators, two secretariat officials and ten interpreters at a combined cost of around £104,000.

World

Obama: European debt crisis "scaring the world"
US President Barack Obama has criticised the eurozone’s leaders for not acting fast enough to tackle the financial crisis, arguing that: “Theyhave not fully healed from the crisis back in 2007 and never fully dealt with all the challenges that their banking system faced. It is now being compounded with what is happening in Greece".

UK

Labour leadership apologises for high levels of migration from Eastern Europe
Speaking at the Labour Conference yesterday, Shadow Chancellor Ed Balls apologised for allowing EU immigration from eastern Europe to rise too high. “We should have adopted tougher controls on migration from Eastern Europe,” he said. Similarly, Ed Miliband told Sky News, “I do agree that we got it wrong in a number of respects, including underestimating the level of immigration from Poland, which had a big effect on people in Britain.” The Spectator’s Coffee House Blog however argues that “despite the interventions from Miliband and Balls, the party is bereft of a policy in this area”.

The Telegraph reports that Desmond Swayne MP, the Prime Minister's Parliamentary Private Secretary, said that Nick Clegg and the Liberal Democrats are preventing the Conservatives distancing Britain from the EU. He added, “Anyone who believes that this government can expedite our escape from the EU is living in a world of illusion. Sorry.”

New on the Open Europe Blog

Why topping up the eurozone’s bailout fund through ECB could prove to be non-starter

Increasing the EFSF – the view from Europe

Posted by Britannia Radio at 14:32