If EU law is followed, Scotland will join the EU just before Serbia

Our Director Mats Persson writes on his Telegraph blog:

The UK must be the first country, with the forthcoming Scottish and EU referenda, to simultaneously have an intense political debate about the difficulty or otherwise of both joining and leaving the EU. Traditional assumptions are being bent in all sorts of directions, with senior UK politicians approvingly citing EU Commission President Jose Manuel Barroso for suggesting it would be “very difficult, if not impossible” for an independent Scotland to join the EU.

Like Catalonia in Spain, rightly or wrongly, Alex Salmond’s case rests in part on the argument that "if we leave one club, we can safely join another." It’s an insurance policy against the uncertainty which is a such a killer in any referendum to change the status quo. So is Barroso right?

Iceland’s accession talks with the EU – which were terminated since the Icelanders turned cold on the idea – would, in purely legal terms, come close to those of Scotland. Iceland is part of the European Economic Area, and therefore almost an EU member. Scotland has been an EU member for 40 years. Both would face tricky negotiations, like protecting their fishing industries.

There are basically six steps (by my rough categorisation). Salmond’s biggest problem is that for half of these, each of the 28 EU states, including rUK and Spain, has a veto:

Step 1 – Scotland applies to join the EU: Under EU law, it would have to be an independent country to apply.

Step 2 – The European Commission “screens” Scottish law to see if the country is compatible with EU membership – this won’t be an issue.

Step 3 – EU governments decide whether to approve Scotland’s EU application. All EU states have a veto.

Step 4 – The EU and Scotland begin negotiations over individual EU policy areas. There are now 35 so-called “accession chapters” covering everything from the euro to employment law to the EU budget. Each country has a veto over the decision to both open and then to close every single chapter – ask Turkey how easy that has proven (read: Cyprus and France). It’s in these talks that Salmond would need to deliver on his pledge to get an opt-out from the euro, as well as replicating the UK’s special deals on the EU budget, crime and immigration and passport controls.

Step 5 – When the 35th chapter is agreed, the Accession Treaty with the Scottish terms of entry is drafted.

Step 6 – This Treaty must then be ratified by the Parliaments of each EU country and the European Parliament. If one says no, the deal falls.

Iceland officially applied to the EU in June 2009. In 2013, when the bid was dropped, it had completed about a third of the negotiations. So if the letter of the law is followed, Scotland might join the EU just before Serbia, several years from now.

However, in the EU, political expediency tends to trump the letter of the law. I suspect that, given the stakes, if the Scots do pull the trigger, the EU will engage in the kind of legal acrobatics that it’s proven so good at in order to fast-track an independent Scotland to membership, with or without a euro opt-out (though, as Andrew Lilico has pointed out, there might be a range of practical currency issues).

No matter what, it would be a mess. In truth, we have little idea what’s going to happen if Scotland goes independent. And I suspect that in itself undermines Salmond’s case.

From the archives: The story of the 3% deficit limit

Okay, we know this is not exactly breaking news (the original story is from September 2012), but it came to our attention again and we felt compelled to post on it.

Back in the heyday of the eurozone crisis, Le Parisien interviewed Guy Abeille (see picture), a senior official at the French Finance Ministry who is thought to have 'invented' the 3% deficit-to-GDP limit later enshrined in the EU treaties and the cornerstone of the famed Stability and Growth Pact.

And Monsieur Abeille made some rather extraordinary revelations:

We came up with this number in less than an hour. It was born on the corner of a table, without any theoretical reflection.

It was a night of May 1981. Pierre Bilger, the Budget Director at the time, summoned us. He told us: [French President François] Mitterrand want us to provide him quickly with an easy rule, that sounds as coming from an economist, and can be opposed to the ministers that walk into his office asking for money.

We needed something simple...We were going towards FF 100bn deficit. That represented a deficit of over 2% [of GDP]. 1%? We dropped that number, impossible to achieve. 2%? That put us under too much pressure. 3%? It's a good number, a number that has gone through the ages, it made one think of the Trinity.

Mitterrand wanted a rule, we gave him one. 

In other words, it seems the deficit rule that has made so many politicians lose sleep, especially in the eurozone periphery, was cooked up in less time than it takes to roast a chicken and wasn't based on any economic theory or even best practice.

We also can't help but be reminded of the famed response of  a senior Anglo Irish Bank member when asked how he came up with the original bailout figure for the bank (which proved far too low) - I "picked it out of my a*se". Quite. And it seems he wasn't the first either.

Summer is over as Spain adapts to life outside its bank bailout programme

Spain's first day outside its EU-IMF bank bailout programme started with the publication of the new data on unemployment from the country's national statistics institute (INE). As we predicted on this blog last year (see here and here), the figures after the end of the summer - when a lot more seasonal jobs are on offer - look less encouraging than in the previous two quarters.

Let's start with the headline figures. In the last quarter of 2013, the general unemployment rate increased slightly from the previous quarter - from 25.98% to 26.03%. This means that, at the end of last year, 5,896,300 people in Spain were out of work.

It's worth looking at the figures a bit more in detail:

• The number of unemployed people went down by 8,400 in the fourth quarter of 2013, and by 69,000 in the year as a whole. This is positive, but has to be weighed against a significant fall in the economically active population - those working or actively looking for a job.

• Spain's active population decreased by 73,400 in the last quarter of 2013 alone, and by 267,900 in the year as a whole. As a result, the active population is now 59.43% of the total - the lowest level since the first quarter of 2008. The upshot of this is that, while the number of unemployed people may fall, a lot are simply switching to being economically inactive.

• The number of employed people went down, both in the fourth quarter of 2013 (-65,000 from Q3) and in the year as a whole (-198,900). However, it has to be said that the decline is less sharp than in the previous years.

• On a more positive note, the seasonally adjusted employment rate went up slightly (0.29%) in the fourth quarter of 2013, and it's the first time it happens since the first quarter of 2008. Similarly, the seasonally adjusted unemployment rate decreased by 1.22% from Q3. Again, though, this has to be put into perspective - notably with the reduction in the economically active population.

• One of the most concerning points comes with the level of long-term unemployment, which towards the end of last year reached new record highs. Over 13% of the active population have now been unemployed for twelve months or more (click on the graph below to enlarge). The knock-on effects of this are significant. It is well proven that the longer people are unemployed for, the harder it is for them to find work. It also diminishes their skill level and hampers future earning potential. This is worsened by the fact that, in Spain, many of these are likely to be younger workers.

The latest unemployment figures show that, despite some encouraging signals, it will still take time before Spanish citizens feel the recovery has started. It also means the Spanish government may consider a second round of reforms - perhaps more targeted at closing the gap between the education system and the needs of the labour market.   

What's the best place to publish an ECB letter setting out your country's economic policies?

Former Spanish Socialist Prime Minister José Luis Rodríguez Zapatero has upset quite a few people after he included the letter he received from the ECB and the Bank of Spain in August 2011 in his recently published memoirs. Though bits and pieces of the letter had already been disclosed, the full content was never really made public. In a radio interview today, Zapatero has justified his decision to keep the content of the message secret at the time because at least part of it "would have put stability at risk".

Courtesy of El País, we have had a look at the letter – and we thought it was worth translating a few key points:

• The first priority identified by the ECB and the Bank of Spain is labour market reform. The letter reads, “We deem it necessary to adopt additional measures that improve the functioning of the labour market […] We are enormously concerned about the fact that the [Spanish] government has not adopted any measure to abolish inflation-indexing clauses. Such clauses are not an appropriate element for the labour markets in a monetary union, as they represent a structural obstacle to the adjustment of labour costs.” 

• The letter goes on, “The government should also adopt exceptional measures to promote wage moderation in the private sector [...] We suggest revising other labour market regulations shortly, with a view at speeding up the re-integration of unemployed people in the labour market [...] We see important advantages in the adoption of a new exceptional work contract that is applied for a limited period of time, and where compensation for dismissal is very low.” 

• The second priority is the adoption of “bold measures to ensure the sustainability of public finances. The government should prove in a clear manner, by action, its unconditional commitment to the achievement of its fiscal policy targets, irrespective of the economic situation. To this end, we urge the government to announce, by the end of this month, additional measures of structural fiscal consolidation for the remainder of 2011 worth at least more than 0.5% of GDP.” “Simultaneously”, continues the text, “the application of national fiscal norms must be continued in order to ensure [central] control over regional and local budgets (including the authorisation for debt emissions by regional governments).” 

• The third priority is product market reform. According to the letter, the Spanish government should “increase the competitiveness of the energy sector in order for prices to better reflect the cost of energy” and “increase the competitiveness of the services sector, in particular by addressing the regulation of professional services.” 

Therefore, as in the case of Italy (see our blog post from September 2011), the letter was a lot more than just a push to shape up. It was a detailed and quite prescriptive to-do list in return for ECB bond-buying - even boiling down to specific policy measures and the size of fiscal cuts. Furthermore, it did not shy away from touching on politically sensitive issues for Spain – just think of the demand for more central control over regional spending or the abolition of wage indexation.

All this put the ECB squarely in the realm of domestic fiscal policy, somewhere many would agree it should not be. In any case, any country considering applying for an OMT bond-buying programme should consider these points when wondering how prescriptive the conditionality might be.

The closing paragraph of the letter sounds a lot like a warning. It reads, “We are confident that the [Spanish] government is aware of its highest responsibility in the good functioning of the eurozone in the current [economic] conjunction, and that it will adopt in a decisive manner the necessary measures to regain the confidence of the markets in the sustainability of its policies. Such measures […] should greatly benefit not only the Spanish economy, but also the eurozone as a whole.”

Therefore, it is no surprise that many of the letter’s ‘suggestions’ have become government policy – though under the centre-right cabinet led by Mariano Rajoy, who took office at the end of 2011.

European Commission forecasts fragile recovery in the eurozone

The European Commission today released its autumn 2013 economic forecast. The EC broadly sees a

recovery in the eurozone, but does highlight that it remains fragile and that unemployment is expected to increase while further austerity also seems likely. The key figures have been widely covered so we won’t rehash them here. Below we pick out a few key points from some key countries which caught our eye.

CYPRUS
Not much new in what remains a dire forecast for Cyprus. In an otherwise sea of declining figures, net exports remains the one hope as a source of positive growth. Ultimately, any success in this area will be determined by the removal of capital controls. Until this is cleared up, significant uncertainty will remain.

FRANCE
France is facing low growth for this and next year (0.2% and 0.9% respectively). In the meantime, unemployment is going to increase slightly, as “the positive effects of the recent labour market reform are only expected to be visible from 2015.” Unsurprisingly, the Commission notes that most of the adjustment in France has so far come from tax hikes – and warns that “GDP growth significantly below potential and revenue shortfalls, which may be due to unusually low tax elasticity with respect to GDP, are having a negative impact on the nominal deficit.” Actually, the Commission already believes that, absent new measures, France will miss its deficit targets for 2014 and 2015.

GREECE
Despite a positive tone, the figures still make for difficult reading. The forecast recovery is reliant on jumps in exports and in particular tourism, something which is far from guaranteed particularly if the euro remains strong. Also, investment is expected to go from a 5.9% contraction in 2013 to 5.3% growth in 2014. Even from a low base, this looks like a heroic turnaround. Unemployment is also expected to begin dropping next year, over the course of the crisis forecasts on this front have proven misguided. The signs suggest it could still increase slightly or at least remain elevated.

IRELAND
Importantly, the adjustment in Ireland will become increasingly reliant on domestic consumption and investment, the outlook of which remains uncertain. Exports will continue to contribute but significantly less so than recently, while public spending will continue to be a drag on GDP.

ITALY
In line with the IMF, the Commission sees the Italian economy shrinking by a further 1.8% this year and then go back to limited growth next year. The Commission admits that its prediction “does not incorporate the benefits from the full implementation of the adopted structural reforms, as they could take more time to materialise.” Interestingly, the report seems to suggest that the potential benefits of “projected moderate wage growth” in terms of price competitiveness could be offset by the appreciation of the euro vis-à-vis other currencies. As regards Italy’s gigantic public debt, the Commission believes it will begin to fall only in 2015.

PORTUGAL
Again a familiar story, with a tentative turnaround off the back of increasing investment and exports. However, the Commission highlights an important downside risk from the interventions of the Portuguese Constitutional Court, which have already threatened to derail Portugal’s bailout programme. EU Economic and Monetary Affairs Commissioner Olli Rehn reiterated this point in his press conference.

SPAIN
Despite some positive signs, the Commission is quite clear that “still large adjustment needs will constrain the strength of the recovery” in Spain. Furthermore, “financing conditions for households and companies remain relatively tight, in particular for smaller borrowers.” Confirming our previous analysis (see here and here), the Commission notes that the recent decline in Spanish unemployment “was largely driven by a contraction of the labour force and some seasonal factors.” On the deficit side, the Commission has no good news for Spain. Without additional measures, the deficit is expected to increase to 6.6% of GDP in 2015. Remember, Spain has already been given two extra years to cut its deficit and bring it below 3% of GDP by 2016.  

SLOVENIA
Along with Cyprus, the only country forecast to contract next year. Reliant on exports to limit this contract as domestic demand, investment and public spending collapse. The key will be the upcoming bank recapitalisation which the Commission forecasts will cost 1.8% of GDP (as we have noted before, this cost could end up being higher). Whether the government can afford this without external help remains to be seen.

GERMANY
Unsurprisingly, Germany is in a better shape than its eurozone counterparts – with its economy projected to grow by 1.7% and 1.9% in 2014 and 2015 respectively and the unemployment rate expected to keep going down to 5.1% in two years’ time. According to the European Commission, “After a temporary deceleration in 2013, growth in wages and compensation per employee is set to reaccelerate, so Unit Labour Cost growth would remain above the euro area average” – which should help the rebalancing. Interestingly, the Commission’s own figures also show that Germany is breaching the threshold of 6% of GDP for current account surplus. Will Germany get some sort of official warning for this?

A few interesting points then, but as is often the case with these forecasts, they raise as many questions as they answer. Next week’s assessment of the macroeconomic imbalances may provide a bit more meat to the European Commission’s analysis and given the recent political uproar, its view of current accounts could make for interesting reading. In any case, it’s clear that the EC continues to see this as a very fragile recovery.

'Handygate': The number of EU countries involved growing by the minute

Well, this one snowballed quickly. The number of countries either implicated - or feeling the need to comment on - "Handygate" (as the Germans call it) is growing by the minute. Here's a round-up.

Germany: The fallout over allegations that the NSA hacked Angela Merkel's phone continues. According to Bild am Sonntag, US President Barack Obama was personally briefed about the eavesdropping by NSA Director, Keith Alexander, as far back as 2010. Several papers claim that the American embassy in Berlin was used as a hub for the alleged bugging.

However, according to US officials quoted by the WSJ and FAZ, Obama was unaware of the whole affair. The reason? The NSA has so many tapping operations going on that it wouldn't have been practical to brief the President about all of them. The article suggests the White House did scrap some monitoring programmes upon learning about them, including the one tracking Angela Merkel.

Spain: Spanish daily El Mundo dropped a bit of a bomb today, claiming that the NSA bugged over 60 million phone calls in Spain in just one month - between 10 December 2012 and 8 January 2013. The report, also based on former NSA agent Edward Snowden's secret documents, suggested the eavesdropping didn't involve the actual content of the phone calls - just their duration and where they were being made from. But still.

The Spanish Foreign Ministry summoned the US Ambassador in Madrid, James Costos - who later stressed in a statement that the wire-tapping activities have played "a fundamental role" in protecting both US  interests and those of its allies.

Italy: Italian magazine L'Espresso alleged last week that not only the US, but also the UK had been spying on Rome. The latest is that, according to the Cryptome website, the NSA allegedly bugged some 46 million phone calls in Italy between December 2012 and January 2013. But the Italian intelligence service has urged caution, saying there's "no evidence" supporting the claims.

France: Though the French press has been relatively quiet about the episode today, the country has already summoned the ambassador with the accompanied public outrage from politicians. It seems to be dying down a bit in France, though.

Poland: Notoriously Atlanticist, Warsaw has also been forced to go public, with Polish Foreign Minister Radoslaw Sikorski saying over the weekend that the alleged hacking was a "scandal which undermines trust" and that he would be inquiring with Washington whether Poland was also affected by NSA surveillance. However, asked in the interview whether Poland was under surveillance, he apparently answered with a smile: "We also use surveillance".

Sweden: Foreign Minister Carl Bildt has been taking a chilled approach, insisting that he knows "what kind of world we live in" and that "I never say things over the phone that could hurt Sweden if it ended up with a foreign power."

Netherlands: Prime Minister Mark Rutte has said that "I will support [Merkel] completely in her complaint and say that this is not acceptable. I think we need all the facts on the table first."

Belgium:  Belgian Prime Minister Elio Di Rupo commented, "The idea is to have a working method [at the EU level] by the end of the year, which should avoid that friends spy on each other." However, asked on whether the EU should suspend free trade talks with the US, Di Rupo said, "We want to avoid blackmail."

UK: Finally, though the worst fears over suspension of the EU-US trade deal so far have not materialised (although it's still balanced on a knife's edge), David Cameron remains stuck between a rock (the US) and a hard place (Germany). In the Commons today, Cameron talked up the need for a robust intelligence service, saying it has "also allowed us to warn our EU allies about terrorist plots aimed at their people."

Spanish unemployment: A temporary turnaround?

New data on Spanish unemployment are out today. The headline figures look, once again, rather encouraging. The overall unemployment rate has fallen below 26% in the third quarter of the year, and there are 39,500 employed people more than in the previous quarter.

The number of unemployed people has gone down by 72,800 - which is the largest decrease in a third quarter since 2005.

However, a few points are worth making:

• The rise in the number of employed people is due to an increase in self-employed and temporary workers. The number of employees on permanent contracts has actually fallen by 146,300. One can see the glass half-full or half-empty here. This finding can mean that the Spanish labour market is becoming more flexible, or just that the increase in the number of employed people is driven by seasonal workers - especially in the tourism sector.

• Employment is growing in the services sector, but is decreasing in agriculture, industry and construction. Another sign that the improvement in Q3 figures could be tourism-driven. This is not, in itself, a bad thing - given tourism is definitely one of Spain's key resources and it is obvious that the Spanish economy needs to rebalance (away from construction). But it can't quite be seen as a permanent source of growth, since the flow of tourists is per definition dependent on which season of the year you're in.

• As we noted on this blog when the figures for Q2 came out, the number of active Spaniards (those working or actively searching for work) continues to go down - marking a further 33,300 decrease.

• Seasonally adjusted data show that the unemployment rate has actually increased by 0.21% from the previous quarter, and that the level of employment has not stopped going down since Q2 2008. 

Could the decline in Spanish house prices be bottoming out? Not just yet...

A quick update on Spanish house prices, given that the latest quarterly statistics were released this morning.

As the graph highlights the second quarter of 2013 saw the smallest decrease in house prices quarter on quarter for some time. A few points to note here, though:

• Q1 2013 saw the largest decline for some time so the rebound could be impacted by the fact that the previous decline had been extraordinarily large. The rate of annual decline, at 12%, remains rapid.
• House prices, according to INE, have now fallen by 37% from their peak in Q3 2007. This is clearly a huge decline, but as we have pointed out before, a decline of up to 50% cannot be ruled out, meaning prices may still have some way to go before they bottom out.
• As with other statistics in Spain, there could be some seasonal impact which is yet to be accounted for.
  

• As the graph above shows there is also a wide range of regional variation with some of the richer areas beginning to fair better.
• The year-on-year decline, from Q2 2012 to Q2 2013 is seen to be around 8.8% by INE. However, recent statistics from Tinsa put the decline over the same period at 10.5%. It’s hard to say which is more accurate but this is a notoriously difficult area to accurately measure. There is some (fair) concern that the indices may fail to capture the true decline in house prices in Spain as they do not accurately reflect market transactions, so any data should be read with that in mind.
• Interestingly, it has also been suggested that that while domestic demand has continued to fall, 2013 Q2 saw a pick up in interest from foreign buyers. This could be a positive sign, although (as we have pointed out for the wider economy) foreign demand is not likely to be sufficient to offset a cratering in domestic demand.
• The growing difference between new and second-hand housing is also interesting, if not unexpected. The construction sector will likely continue to struggle as long as new buildings do. The slightly positive signs for second-hand housing could also be positive for the banks, since the majority of their mortgage portfolios will be linked to these properties – if they begin to show signs of recovery the mortgage books may begin to look less toxic (early days though yet). Clearly, as the decline continues and other factors (such as unemployment) continue to push up the level of bad loans that banks hold, they are likely to continue to struggle.
• All that said, the problems with prices of new houses do not bode well for the significant amount of unsold new housing stock floating around in Spain (though to be around 1 million properties) or the large swaths of un-developed land owned by the banks. Clearly these factors will drag on the economy for some time.

Housing, real estate and construction are likely to continue to be a drag on Spanish economy. The concerning point remains that the Spanish economy has been slow to adjust and rebalance towards new areas for growth. Meanwhile, with the ECB's asset quality review (aka 'stress tests') coming up at the start of next year, the attention to the state of bank balance sheets and their links to the housing crisis are likely to once again intensify.

Some ratings still matter in the eurozone

A general view seems to have come to pass (and not without good reason), that ratings actions in the eurozone have much less significance these days. This is mostly because the ratings agencies tend to 'lag' the market – meaning that a downgrade only comes once everyone already knows a specific country is struggling. The main outcome is usually a bad-tempered back-and-forth between governments and the agency in question, and then another call for EU regulation of rating agencies.

However, sometimes a rating change comes along that could have some material impact. In this case, it comes from a lesser known agency – Dominion Bond Rating Service (DBRS). In an interview with Spanish daily Expansión this morning, their Head of Sovereign ratings Fergus McCormick warned that Spain’s rating remains under pressure and that it is too early to tell if the crisis has bottomed out (as many in the Spanish government have suggested might be the case). DBRS' latest report on Spain, from March this year, also struck a more cautious tone.

This is interesting because, as Reuters pointed out in July, DBRS is the last rating agency to give Spain (and Italy for that matter) an A rating.

As the article also explained, this could cause problems for Spanish banks for the following reasons:

• They hold a large amount of Spanish government bonds as collateral for their borrowing from the ECB;
• Under ECB rules, the ECB judges collateral based on the highest single rating from four eligible agencies (S&P, Moody’s, Fitch and DBRS);
• The value of these bonds is subject to a haircut – for example a highly rated 10yr+ government bond would be subject to a 5% haircut, meaning a bank could borrow up to 95% of the bond's value under the ECB’s liquidity operations (see here for the full ECB collateral haircuts);
• However, once the rating falls, the haircut to such a bond jumps to 13%. This means banks using such bonds as collateral would have to reduce the amount they borrow from the ECB or produce more collateral to cover their current level of lending.

As of July 2013, Spanish banks were borrowing a combined total of €252 billion from the ECB, although this is well down from a peak of €411 billion in August 2012. This suggests that Spanish banks should have plenty of surplus collateral to fill any hole that opens - the muted market reaction so far also suggests as much. That said, the banks are currently de-leveraging significantly (selling off assets to reduce their balance sheets) and running a tight line in terms of balancing the books and trying to keep costs as low as possible. A hit such as the one described above is likely to be far from welcome.

The EU budget is a disaster that cannot save Greece

Our Director Mats Persson argues on his Telegraph blog:

Ever driven on a motorway in Spain or Portugal? You’ll notice it’s not exactly the M25 – often, cars are few and far in between (some pretty heavy congestion around Gibraltar not included).

According to some estimates, 25 per cent of the EU’s so-called regional funds in Portugal has been invested in roads, heavily contributing to a ridiculous situation where the country has 60 per cent more kilometres of motorway per inhabitant than Germany and four times more than Britain (H/T FT). Meanwhile, around one third of EU structural funds in Spain has been invested in infrastructure, further inflating an already critical construction bubble, while, like in Portugal, creating a whole host of ghost roads, airports and harbours. The EU’s own auditors have hammered EU spending on roads, noting that 74 per cent of the project they monitored in a recent investigation recorded less traffic than expected.

Welcome to the folly of the EU budget. This economic anomaly is at best irrelevant for the Eurozone crisis – at worst outright damaging.

Consider Greece. In the last week, there has been some talk of the EU budget being used in a third bailout for Greece. Although it’s not entirely clear how this could work – or how even how credible this speculation is – one way could be to reduce the amount of its own cash the Greek government needs to put up in order to unlock EU funds, known as co-financing. Depending on the circumstances, this usually ranges between 25% and 60% of a total grant. Greece currently has special permission to put up only five percent, and it wants this extended to the next EU budget period, to run between 2014 and 2020.

This is politically convenient since it draws from a cash allocation that has already been agreed (easier to sell to German taxpayers) while not coming with new, tough bailout conditions (easier to sell to Greek citizens). However, such an arrangement will also do absolutely nothing to save Greece:

• Most fundamentally, a quick look at the records shows that Greece has been allocated over €64bn in structural funds over the last two decades (to which the UK has contributed around 12%). Per capita, this is amongst the highest in the EU, yet the country is still bust and uncompetitive. 

• It follows therefore that it’s the wrong type of funding for Greece. It can’t be used for health spending, education or to recapitalise banks, for example, areas where the fiscal shortfall in Greece is / has been the most critical. It can, however, be spent on roads. 

• Like the structural funds in general, it risks creating an opportunity cost by diverting limited public investment away from where it can have the greatest impact. 

• Reducing the co-financing rate gets us away from the structural funds actually being a fiscal burden – Greece can’t afford putting up the matching cash (the structural funds tend to be oddly pro-cyclical). However, the trade-off is that it eliminates any form conditionality attached to the money. Is this really the way forward? 

• It’s a bureaucratic nightmare to get to the actual cash – exactly what Greece doesn't need. 

This also illustrates why (almost) the entire EU budget is pretty much a running disaster, in desperate need of root-and-branch reform.

See you in Court? UK-Spanish dispute over Gibraltar rumbles on

The HMS Westminster leaving Portsmouth for Gibraltar

A week on there appears to have been no progress on the Gibraltar front - the Gibraltarian authorities are still not budging over the artificial reef, the Spanish are maintaining their additional burdensome controls and the UK is still "considering" a legal challenge under EU law.

As we have argued, neither a challenge on free movement rules nor one on "proportional" border checks carries a guarantee of success due to the ambiguity of EU law. Equally, the Spanish feel they have a strong legal case against the artificial reef based on the very specific wording of the 1713 Treaty of Utrecht - meaning a retaliatory case is not out of the question.

An alternative could be an individual or collective challenge by Gibraltarians (or even Spaniards working in Gibraltar) to the Strasbourg-based European Court of Human Rights, but that could take a long time.

Since then, tensions have escalated with the dispatching of several Royal Navy vessels to Gibraltar (reportedly as part of a long planned manoeuvre) and claims in the Spanish media that the country could from a united diplomatic front with Argentina, which of course has its own axe to grind with the UK. Although we think a diplomatic solution is still the most likely outcome, if none of the sides are willing to back down the UK may be forced to actually initiate legal proceedings, most likely under a 'fast-track' arrangement, as it will by then not have many other practical options.

While initiating a legal challenge may itself force all the sides to resume negotiations, should Madrid still not back down and should the ECJ rule in its favour, this dispute may have more fundamental repercussions on the UK's future in the EU.

Between a rock and a hard place: Is Spain breaching EU law by making life difficult for Gibraltarians?

The 'Gibraltar question' has consistently been the biggest bone of contention in UK-Spanish relations ever since the 1713 Treaty of Utrecht which saw the territory permanently ceded to Britain. Although the issue never goes away, every now and then it flares up, and the decision by the Gibraltar authorities to construct an artificial reef - to prevent alleged incursions from Spanish fishing vessels - has been the latest trigger.

The Spanish authorities do have the scope to make life difficult for the Rock's inhabitants, and Spanish Foreign Minister García-Margallo has commented that this time, "the party is over". Madrid has already introduced stringent border checks on people travelling in and out of the territory - resulting in up to seven hour queues on the border (in stifling heat) - and further actions have been threatened, including €50 levy on cars entering and leaving the territory, as well as a tax crackdown on Gibraltarians who live on the Spanish side of the border.

Leaving aside the question of whether this is even in Spain's own interest given its own economic problems (thousands of Spanish citizens work in Gibraltar), are these types of measures - particularly the levy - even permitted under EU free movement rules? EU law prohibits discrimination against citizens of other member states when it comes to free movement, and the UK has indicated it could issue a legal challenge.

So does the UK have a good case? Article 45 of the EU Treaties which establish the principle of free movement states that:

2. Such freedom of movement shall entail the abolition of any discrimination based on nationality between workers of the Member States as regards employment, remuneration and other conditions of work and employment. 

3. It shall entail the right, subject to limitations justified on grounds of public policy, public security or public health: 
(a) to accept offers of employment actually made; 
(b) to move freely within the territory of Member States for this purpose; 

Discrimination is clearly prohibited for the purposes of employment, as is the ability to "move freely" within member states for this purpose, although exemptions for "public policy" and "public security" are quite vague. However, the right to free movement covers the right to live and work in another member state, it does not address the more specific issue of travelling between two member states for this purpose.

The UK and/or the Gibralterian authorities could however argue that the burdensome checks are a de facto impediment to the ability of British and Spanish citizens to exercise their right to work in another member state (i.e. on the other side of the border) and are therefore illegal under EU law. This is particularly true as the restrictions would not apply to the other border crossings, such as the Portuguese or French ones, although the Spanish could counter that the levy would be no different to localised toll roads or charges.

On the border crossing issue, EU member states are still allowed to police their own external borders, but internal border controls have been abolished in the Schengen area of which the UK is not a part. Therefore, Spanish authorities have the right to impose border controls, but according to a Commission source they have to be "proportional".

In other words, we have absolutely no idea whether the UK would be successful should it take Spain to the ECJ. The wonders of EU law...

Let's have a look beyond the (rather encouraging) headline figures on Spanish unemployment

The Spanish National Statistics Institute (INE) has this morning published its latest unemployment data. The headline figures look encouraging. In the second quarter of 2013, the number of unemployed people went down by 225,200 - and is now slightly below six million. The total unemployment rate now stands at 26.3%, while youth unemployment rate is 56.1%.

However, a few points are worth keeping in mind when assessing the importance of these figures:

• The figures are not seasonally adjusted, so the decrease is clearly linked to the arrival of the summer - when a lot more seasonal jobs are on offer. The two Spanish regions where the number of employed people increased the most were the Balearic Islands (Ibiza, Formentera, Mallorca and Menorca) and Andalusia - top tourist summer destinations.

• A similar phenomenon took place last summer. The initial, non-seasonally adjusted figures for June 2012 showed a 0.2% drop in unemployment from May 2012. However, once these figures were seasonally adjusted the result was actually a 0.2% increase. The graph below highlights this well, showing that there is a similar dip in unemployment every year when the summer approaches (data are from the EU's statistics office Eurostat, click to enlarge).

• Part of the decrease in the unemployment rate is also due to a reduction in Spain's active population (those working or actively searching for work) - 76,100 people less over the same period. To fully judge the importance of the figures, it is also worth looking at the level of employment which is not impacted by such a change in activity. The figures for June 2013 showed employment increased by only 149,000, much lower than the overall fall in unemployment.

• A final point to keep in mind is the on-going emigration of Spaniards. This has reached record levels with close to 60,000 Spaniards emigrating in 2012 and many immigrants also moving elsewhere. This is obviously linked to people dropping out of the active labour force. We may well see future declines in unemployment but they will be meaningless if they simply arise from less people actively searching for work or moving abroad to find work elsewhere.

Unsurprisingly, the Spanish government had predicted "good" data - and will probably hail the new figures as a success of its policies. But once the summer is over, as happened last year, the figures may ultimately tell a rather different story.  

Slush fund scandal reignites in Spain, but risk of early elections remains small

UPDATE (16:00): Another interesting fact from the Rajoy-Tusk presser. When a foreign leader comes to Spain on an official visit, the protocol establishes that, at the joint press conference, Spanish journalists and their counterparts from the visitor's country are only allowed two questions each.

Today, it had been agreed that the two questions from the Spanish side would come from El Mundo and the news agency EFE. However, Rajoy unexpectedly gave the floor to a journalist from ABC.

Asked by his colleagues at the end of the presser, the ABC journalist explained that he had received a phone call from his editor dictating him the exact wording of the question he had to put to Rajoy - who then replied by reading a short written statement he had prepared.

UPDATE (15:00): At the joint press conference with his Polish counterpart Donald Tusk, Spanish Prime Minister Mariano Rajoy said, "I'm going to fulfill the mandate I was given by the Spaniards" - a clear indication that he's not planning to resign.

Meanwhile, the first details from Mr Bárcenas's court hearing are emerging. For the first time, he admitted that he was indeed the author of the 'parallel' accounting books published by El País earlier this year (see our blog from last January for further details). Mr Bárcenas reportedly also declared that he made cash payments to Rajoy himself and María Dolores de Cospedal, the Secretary General of Partido Popular, in 2008, 2009 and as recently as March 2010. 

OUR ORIGINAL BLOG POST (11:30)

Remember the slush fund scandal that broke out earlier this year in Spain? Prime Minister Mariano Rajoy and other senior members of the ruling Partido Popular allegedly received illegal cash payments from the party's former treasurer, Luis Bárcenas (in the picture). All these payments were registered in 'parallel' accounting books that were leaked to the Spanish press (see our blog from last January for further details).

After a couple of months of relative calm, the scandal is now reigniting. El Mundo yesterday published several screenshots from Mr Bárcenas's mobile, allegedly showing that Rajoy sent him supportive text messages after the scandal was exposed - the most recent one in March - and asked him to keep calm and deny the existence of the secret accounting books.

Unsurprisingly, the opposition Socialist Party has called for Rajoy to resign "immediately" in light of the latest revelations. Equally unsurprisingly, Rajoy's office denies any wrongdoing and accuses Mr Bárcenas of trying to "deviate attention" from his own judicial problems.

So what happens next? The following points are worth keeping in mind:

• Partido Popular holds an absolute majority in the Spanish parliament, so it looks quite hard for the opposition to force Rajoy out. Indeed, the Spanish Prime Minister could still choose to step down voluntarily or be forced to do so by his own party - but neither option seems to be on the table at the moment;

• Even if Rajoy resigned, he would have the right to indicate his successor - and the King of Spain would have to appoint this person as the new Prime Minister until the end of the current parliamentary term;

• Crucially, the Socialist Party itself has made no mention of early elections so far. They simply want Rajoy to quit and be replaced by someone else from his party. An understandable position, given how badly the Socialist Party is doing in the latest opinion polls.

Therefore, the risk of snap elections remains small for now - although the scandal will inevitably cast a shadow over Rajoy's government, at least until things become clearer.

Today, all eyes in Spain will be on two key events: Mr Bárcenas is due to appear in court, and is expected to provide some more details about the latest events. To add a further twist to the story, his lawyer yesterday said Mr Bárcenas didn't know anything about the publication of his exchange of text messages with Rajoy by El Mundo.

The Spanish Prime Minister is also due to speak in public, in a joint press conference with his Polish counterpart Donald Tusk - which is also going to be interesting. We will keep a close eye on anything coming from Spain throughout the day, so keep following us on Twitter @OpenEurope and @LondonerVince.

Services liberalisation: David Cameron has one more reason to love Spain

We reported in today's press summary that Spain's Prime Minister Mariano Rajoy and opposition leader Alfredo Pérez Rubalcaba have agreed to adopt a common position ahead of the 27-28 June EU summit. The full document - a draft resolution due to be voted on by the Spanish parliament a couple of days before the summit - is now available online.

We found the following paragraph very interesting (the emphasis is ours). The Spanish parliament urges the government to,

"Favour progress on the completion of the internal market through the swift adoption of the pending legislative proposals under the Single Market Act I and II. Particular attention shall also be paid to the full and effective implementation of the Services Directive."

We couldn't agree more. As we stressed in a recent report, the services sector represents a huge untapped source of growth for the EU. A quick reminder of the figures we're talking about:

• Further liberalisation of services by fully implementing the existing Services Directive and implementing a new 'country of origin' principle would result in a permanent boost to EU-wide GDP of up to an extra €294 billion a year;

• If Spain, the UK and the other ten EU countries that signed a 'pro-growth letter' in February 2012 decided to press ahead among themselves and open up their services markets under the so-called 'enhanced cooperation' procedure, this would still drive EU-wide GDP up by some €148 billion a year.

¿Por qué no?

The march of eurozone unemployment continues

An unstoppable march? Maybe. The consistent monthly practice of smashing unemployment records in the eurozone continued in April with the overall total reaching 12.2% while youth unemployment hit a whopping 24.4%.

• As the graph highlights (click to enlarge) youth unemployment has risen a staggering amount in some countries since the start of the crisis (for countries where April data is not yet available the latest month available was used).
• The problems in Greece are well documented but some very large economies also have some very serious problems with youth unemployment. In April it stood at 56.4% in Spain, 42.5% in Portugal and 40.5% Italy.
• The longer this goes on the more problems it will cause both economically and socially. It creates a split within society with many young people seeing a very bleak future; traditionally this has also fed populism and the rise of extreme political parties.
• Economically it hurts the long term productive potential of the economy as some of these young people see their productivity reduced by long stints out of work, while many others will look for work abroad potentially creating a 'brain drain' and worsening an already troubling demographic problems.

Despite much fanfare, the European Commission recommends much of the same for the eurozone

The Commission has today released its country-specific recommendations on economic policy. Below, we highlight the most important suggestions made to some of the key eurozone countries.

SPAIN

• According to the European Commission, Spain should “improve the efficiency and quality of public expenditure at all levels of government”. Clearly, this is easier said than done, given the well-known problems the Spanish government is having in trying to rein in regional spending.
• The European Commission also seems to suggest that the 2012 labour market reform – one of the flagship measures adopted by Mariano Rajoy’s government – may need tweaks. In particular, Spain should reform its active labour market policies.
• Spain should also push ahead with the liberalisation of closed professions and improve the business environment in general – for instance by cutting the amount of paperwork, a notorious issue in the country.
• Spain should “further limit the application of VAT rates”. This might be controversial, as the Spanish government has said several times it is opposed to further VAT hikes.
• According to the Commission, the reform of Spain’s pension system should be finalised by the end of the year.

FRANCE

The recommendations for France include quite a few suggestions which may be hard to digest for François Hollande’s socialist government.

• France should do more to cut labour costs, in particular by reducing social security contributions for employers.
• The European Commission says France should adopt new measures by the end of the year to “bring its pension system into balance in a sustainable manner no later than 2020.” The Commission suggests various ways of doing this, including “adapting indexation rules” (remove/reform the link between inflation and pensions increases, in plain English) and raise the retirement age. This is unlikely to go down well in Paris.
• France should improve the business environment and help its firms become more competitive;
• France’s unemployment benefit system should be “urgently” reformed, so that it is sustainable but also “provides adequate incentives to return to work”.
• France should do more to tackle labour market segmentation, and remove “unjustified restrictions in the access to and exercise of professional services.”

ITALY

As we noted several times, Mario Monti’s technocratic government did a good job in cutting Italy’s deficit – less so in implementing structural reforms. Here is what the European Commission would like Italy to do:

• Make sure that the reforms initiated by Monti's government are properly implemented (some of them require enacting legislation).
• Push ahead with labour market reform. Wages should be better aligned to productivity, and more should be done to bring young people and women into work.
• The tax burden should move from labour and capital to consumption, property and the environment. Sure enough, this is going to be controversial, given that the new Italian government is trying to avoid a VAT increase scheduled by its predecessor for 1 July 2013 and is also considering scrapping a property tax on first homes.
• Continue with liberalisation of the services market and opening up of closed professions – which seems to be an issue affecting all the Mediterranean eurozone countries.
• Needless to say, all this has to happen without breaching the EU’s deficit limit of 3% of GDP and in parallel to a reduction of Italy’s gigantic public debt (forecast to be over 132% of GDP in 2014).

SLOVENIA

• As we have previously warned, the Commission flags up the risk of the heavily indebted corporate sector and how this in closely intertwined with the fate of shaky banks.
• Of the largest domestic banks the Commission warns, “Their dependence on the state for capital is a substantial threat to the economy” and that “Further recapitalisations are foreseen in the stability programme”. The Commission does not give an estimate of the recap needs but it’s clear there is concern that it could impact the Slovenian economic situation. To this end it also called for an independent review of the Slovenian banking sector.
• Government growth forecasts are seen to be overly optimistic, particularly next year's, this could be further hampered by the banking sector.
• Significant push needed on cutting wages and increasing productivity, true in most places but especially on Slovenia when costs have been on a rapid rise in recent years.
• Need to push on with privatisations and come up with a clear policy framework to do so. More structure needed, particularly if investors are to be convinced.
• “Further reform efforts are required to improve the sustainability of pension expenditure in the long-term, including through aligning the statutory retirement age with gains in life expectancy and by further restricting early retirement.” – numerous concerns expressed about long term liabilities of the state.

GERMANY

• “Germany should do more to open up their services sector by removing unjustified restrictions and barriers to entry, thereby leading to lower price levels, making services more affordable for lower income groups.” – particularly calls for the opening up of public procurement, professional services and retail services.
• “Sustain conditions that enable wage growth to support domestic demand.” – although it sounds innocuous this could be very controversial in Germany. It essentially seems to endorse the calls for Germany to spend more and allow inflation to help rebalance the eurozone. Germans fear of inflation is well known but they also fear a decrease in the competitiveness.

BELGIUM

Some press reports were (perhaps a bit hurriedly, given how the EU works) suggesting that Belgium could today become the first eurozone country to face sanctions for missing its deficit targets. But EU Economic and Monetary Affairs Commissioner Olli Rehn just told journalists in Brussels that “it would be neither fair or legally sound to apply fines retroactively”, so Elio Di Rupo & co. have been let off the hook for now. These are the key recommendations:

• Transpose the ‘balanced budget rule’ enshrined in the fiscal treaty into national law; 
•  Step up efforts to “close the gap between the effective and statutory retirement age”. In other words, the European Commission thinks there are too many early retirements in Belgium at the moment. On pensions, Belgium should also “accelerate the adoption of a decision to link the statutory retirement age to life expectancy” – which could mean further retirement age increases in future; 
•  Less taxes on labour and better alignment of wages to productivity to restore competitiveness; 
• Remove barriers in the services sector. 

So, for all the talk of this being the ‘end of austerity’ or ‘austerity in retreat’, is much really changing? Sure, there is some tinkering with timelines for deficit reduction (Spain, France and others have been given more time to cut public deficit), but ultimately the eurozone is still going along the same policy path - just slightly more slowly. Cases in point are the countries above, since the clear themes running through all of them are the need for structural reform, welfare reform, fiscal consolidation and liberalising the economy. These are things which have long been advocated and are clearly necessary. The question remains whether they can all be done at the same time by a group of countries which are closely interlinked, and many of which are currently in recession.

Is the IMF turning bearish on Spain?

It’s been a busy week for the IMF, releasing their latest iterations of the World Economic Outlook, Global Financial Stability Report and the Fiscal Monitor. We’ve been poring over the reports and will continue to do so (see here for some initial thoughts on the WEO). One forecast in particular caught our eye – Spain's.

The IMF seems to have turned significantly more pessimistic on the prospect of a Spanish recovery. The charts below provide a comparison with the previous WEO forecasts (highlighting how these forecasts tend to be overly optimistic) - which very much confirms what we have noted before about the real risks in Spain.

The latest projections for the Spanish deficit (the dark blue line in the above chart) definitely represent a break from previous forecasts. In particular, the forecast for 2014 is 2.3% of GDP higher than in October. The IMF says this is:

“Reflecting the worse unemployment outlook and the lack of specified medium-term measures.”

Translation: the government does not have the necessary budget cuts and reforms in place to meet its desired deficit path – step it up Rajoy.

Such an increase manifests itself in the debt level projections as well. Worryingly, these no longer peak in 2015/16 and level off thereafter. Instead, Spanish debt to GDP is forecast to reach 111% in 2018 and looks set to keep growing rather than peaking and levelling off.

Effectively, this graph also highlights how the forecasts have progressed as the crisis in Spain has evolved from from financial, to a sovereign liquidity crisis and now into a sovereign solvency one. As the IMF notes, sustaining this will be tough:

“[Countries such as Spain] would need to maintain large primary surpluses over the medium term. In the absence of entitlement reforms, projected increases in age-related spending mean that additional measures will still be needed over time, however, to keep the primary surplus constant.”

Translation: Spain needs to run large primary surpluses for a long time, but in the face of increasing welfare and pension spending, this will need to come from a series of additional and painful cuts.

So the IMF does not paint a pretty picture for Spain. Longer and deeper recession, larger deficits at a time when it needs to be moving to surplus and increasing debt, in turn raising questions about the country's solvency. Let’s not forget, that’s before bringing the bust banking sector into the discussion. Plenty for Rajoy to get on with then…

Update 16:20 18/04/13:
Christine Lagarde has reportedly suggested that Spain should be allowed to ease its austerity programme. Lagarde argues that, although Spain needs fiscal consolidation, it does not need to be front loaded. Such an argument is not going to sit well with the eurozone and will increase the tensions within the Troika (some of which were outlined in this FT article earlier today). As the graph below shows such an approach may not fit well with the IMF own growth forecasts. Even with a 7% deficit, growth next year in Spain will be 0.7% according to the IMF. How much more would need to be spent to get to a respectable 1.5% GDP growth? Double the deficit?

Maybe not something this extreme but with debt already heading towards an unsustainble path it's not clear that there is much scope for further spending, while markets may put pressure back onto Spain once again. This raises the prospect of a further bailout or transfers from other eurozone states, but as we pointed out at length yesterday, Lagarde is talking about something very different than removing austerity in that case.

Spain's credibility suffers another blow as Eurostat spots some creative accounting

Two weeks ago, we noted on our blog that the Spanish Tax Agency had delayed around €5bn of tax refunds (due in December 2012) deferring payments to January 2013 instead. This contributed to Spain missing its EU-mandated 2012 deficit target (6.74% of GDP, instead of 6.3% of GDP).

We wondered whether the sudden increase in tax refunds (up by 82.8% in January 2013 compared to previous year) would not lead the European Commission to start asking some question. Sure enough.

The EU's statistics office Eurostat has asked Spain to raise its 2012 deficit to 6.98% arguing that Spain was not correctly accounting for tax refunds. Basically, Eurostat rules say tax refunds have to be counted towards the deficit when they are claimed by taxpayers. Spain only includes them when they are paid out.

This means Spain will have to retroactively revise its deficit figures, going all the way back all to 1995. The difference for 2012 in itself is not huge. And Spain remains unlikely to face sanctions, as the European Commission has now shifted its focus to 'structural' deficit, but not inspiring confidence.

In an official note published yesterday, the Spanish Budget Ministry tried to blame Eurostat for the revision of the deficit figure, saying it was due to a methodological change "demanded by Eurostat over the past few days".

But according to a spokeswoman for EU Tax Commissioner Algirdas Semeta quoted by Expansión,

"Eurostat hasn’t changed its methodology or its rules. It has simply found out that the methodology used by Spain was incorrect."

Eurostat has realised this only now because,

"The [spending] pattern suddenly changed…when Spain moved to January 2013 certain payments due in December 2012." 

Eurostat will publish its final deficit figures on 22 April. Spanish Budget Minister Cristóbal Montoro said this month that, if anything, the 2012 deficit figure of 6.74% of GDP would have been revised downwards. He's been proved wrong once. He can only hope it doesn't happen again.  

While everyone is speculating about contagion to other eurozone countries: What are the Italian and Spanish press actually saying about the Cypriot bailout?

Analysts - led by Anglo-Saxon ones - have lined up to say that, following the deposit levy as part of the Cypriot bailout, a bank run on the rest of the Mediterranean is now a near certainty.

New York Times columnist Paul Krugman went the furthest, arguing that

It’s as if the Europeans are holding up a neon sign, written in Greek and Italian, saying “time to stage a run on your banks!”

But for all these speculations, very few analysts have actually bothered to properly assess the mood and immediate reaction in Italy and Spain - whose depositors are meant to be lining up outside banks and cash machines to withdraw all their savings. Surely, the response and tone in the media of these countries on the day following the deal will give a pretty strong indicator as to whether Italian and Spanish depositors will perceive themselves as being 'next in line', or whether, in fact, they consider the Cypriot situation unique.

As Mats Persson argued on his Telegraph blog yesterday,

Fears of deposit-led contagion to other parts of the eurozone should definitely not be be overstated...viewed with a depositor's eyes from Barcelona or Bilbao, Spain may have very little in common with Cyprus.

Of course, this is all very hard to predict and if talks about a bailout kicks of in Spain and Italy, will depositors trust what politicians are telling them? But what do governments and pundits actually say in these two countries? Put differently, what did Spanish and Italians depositors actually hear when they woke up to the news that their Cypriot counterparts will now see their savings taxed?

Here's a summary.

Italy  

Italy has some relatively fresh memories of a deposit levy: the 0.6% prelievo forzoso from all Italian bank accounts enacted by the government led by Giuliano Amato in 1992, when Italian public finances were facing an "extraordinary emergency". So one would expect the Italian media - and Italians themselves - to make a pretty big deal of the Cypriot bailout.

Not quite.  Although Italy's borrowing costs have inevitably been driven up a bit by the news coming from Cyprus, the media is surprisingly relaxed (and certainly no queues outside ATMs). Of the largest Italian papers, only La Repubblica and La Stampa made some room for Cyprus on the front page of today's print edition. Pope Francis and Italy's own political troubles continue to dominate. However, some Italian commentators did flag up the risks involved in the Cypriot bailout for the rest of the eurozone.

Vittorio Da Rold of Il Sole 24 Ore calls the Cypriot bailout "a dangerous precedent which undermines confidence" in the eurozone.

Italian economist Giulio Sapelli put it more bluntly,

Stuff like this can generate bank panic throughout the EU. [European leaders] are crazy.

Ferruccio de Bortoli, editor of Il Corriere della Sera, has tweeted that Cyprus's deposit levy "risks creating uncertainty and fears".

Unsurprisingly, the authorities' reaction was targeted at being a lot more reassuring. Giuseppe Vegas, head of Italy's financial markets watchdog Consob, said,

There are no similarities between Cyprus and Italy...The markets are obviously nervous [over Cyprus], but I wouldn't dramatise.

Spain

Several Spanish dailies ran with Cyprus as front page story today (see here). The most common reference in the Spanish press is to Argentina's corralito - when Argentinians' accounts were frozen to prevent a bank run in the country at the end of 2001.

As in Italy, there are no signs of Spanish depositors taking to the cash points - but the interest rate on Spain's ten-year bonds has reached above 5% this morning. As in Italy, authorities have moved quickly to reassure the citizens that there is no risk of contagion spreading to Spain.

There has been some concern over contagion in the press, though, with Carlos Segovia, Economics Editor of El Mundo, writing,

Analysts from around the world start to doubt that Cyprus’s precedent may one day end up being applicable to other Southern European countries, even partially.

Under the headline, "We are a German colony", the paper's Washington correspondent Pablo Pardo goes all out,

The 'bailout' imposed by the EU [on Cyprus] is the closest thing to an armed robbery against that country's savers.

Spanish economist José Carlos Díez is not happy either. He writes in El País,

The Cypriot bailout deal confirms that there are no signs of intelligent life in Europe.

Spanish business daily El Economista is a bit more relaxed, saying in an editorial that a Cypriot-style corralito is "unthinkable" in bigger eurozone countries like Spain, Portugal or Italy. But the paper also notes,

A haircut should have been applied to bondholders before applying [the deposit levy], which now comes out as an inconsistent measure.

So critical and concerned about precedent set, but no "panic spreads amongst savers" type headlines that we have seen in certain other countries. We certainly do not play down the precedent, or defend the deal, but one should not exaggerate either.

There's no way this [the deposit levy] will be repeated in Spain or Italy, so it's not clear when the great bank run is supposed to take place - not that bank runs are impossible by any stretch of the imagination in these economies, but a deposit tax or even the precedent set here is not likely to be the cause. That said, a real question remains over whether this will hamper future bailouts, future funding from the eurozone or even the fledgling moves towards greater eurozone integration. But that is a slightly different discussion.