Podemos gears up for next year's Spanish elections with revamped economic plan

Pablo Iglesias with economists Navarro (right) and Torres López (left)  

With the next general election only one year away, Spain's anti-establishment party Podemos last week unveiled a revamped package of economic proposals written for them by Spanish economists Vicenç Navarro and Juan Torres López (in the picture with Podemos leader Pablo Iglesias), and called, 'An economic project for the people'. We went through the 68-page document and pulled out the most interesting bits.

WHAT'S IN THE PLAN?

The euro: a "mouse trap" in need of an overhaul

The document describes the euro in its current form as "a real mouse trap", arguing that "it is materially impossible to pursue policies that satisfy the national interest" within the existing framework. However, as we previously noted on this blog, Podemos stops short of calling for Spain to leave the single currency. Instead, the document says,

"It is fundamental that the Spanish government promotes and achieves as soon as possible strategic agreements with [the governments] of other European countries to change the current conditions of governance of the euro."

So what are the changes Podemos is looking for? The document lists a few:

• "Flexibilisation" of the EU's Stability and Growth Pact (EU fiscal rules) - although no further details are provided as to what this would involve in practice.

• "Change the rules that prevent the ECB from financing governments", while establishing a number of conditions under which this can be done. 

• Amend the ECB's statute to include "full employment" among its policy targets.

• Make the ECB accountable to the European Parliament, which should also be in charge of appointing ECB members.

• "Create mechanisms that guarantee the pooling of debt and the effective supervision of the financial system at the European level".

• Scrap the balanced budget rule from the Spanish Constitution - which is basically tantamount to rejecting the EU's 'fiscal compact' on budgetary discipline.

• Achieve real coordination of economic policies in the Eurozone.

Debt restructuring: a matter of when, not if

The document presents an "orderly restructuring" of Spanish debt as the only real way to revive the country's economy. It reads,

"In Spain as in [the rest of] Europe, there is no way to achieve sufficient [economic] recovery unless debt decreases, and debt cannot decrease unless the recovery materialises. The only way out of this vicious circle is an as orderly as possible restructuring of European and Spanish debt. Therefore, the question is not whether one wishes to implement it or not, but rather in what conditions it will happen, because it is materially inevitable that it is implemented sooner or later." 

Other economic measures 

The document contains a number of other economic measures to be adopted at the national level, some of which could have a significant impact:

• Raise the statutory minimum wage.

• Scrap the labour market reform passed by Mariano Rajoy's centre-right government.

• Legally enshrine a 35-hour working week.

• Bring the legal retirement age back to 65 years - although with some flexibility depending on the nature of the job.

• Increase public spending and challenge "the false idea that in Spain there is an excess of public resources, too many civil servants or public sector employees in the administration, and excessive spending on public goods and services". 

On the revenue side of public finances, Podemos seems to primarily focus its attention on stepping up the fight against tax evasion and increasing wealth taxation - although the document does mention the need to avoid "any type of unnecessary [public] spending", thereby making budget savings.

WHAT'S NOT IN THE PLAN?

Compared to the European election manifesto of Podemos, which we analysed here, there are at least two big changes:

• The idea of a 'basic universal income' for every citizen has been dropped. According to the party's own estimates, the measure would have cost the Spanish government some €145 billion - roughly 14.5% of Spanish GDP. Instead, the new document proposes "emergency plans" to help people at risk of social exclusion.

• The proposal to hold a 'citizens' audit' of Spanish public debt, potentially leading to a selective default, is also no longer there - and has been replaced by the call for debt restructuring.

HOW HAVE THE TWO MAIN TRADITIONAL PARTIES REACTED TO THE PLAN?

The day after Podemos unveiled its new economic plan, Spanish Economy Minister Luis de Guindos was asked about it at a press conference. All he said was, "I don't think anyone wants to go back to the [economic] situation we were in three years ago". 

As regards the Socialist Party, the new leader Pedro Sánchez said, "I'd like [Podemos] to be consistent and not to fall into ideological opportunism", and stressed that Podemos was already "reneging" on some of the proposals included in its European election manifesto (as we noted above). Sánchez also said he's against the 35-hour working week.

OPEN EUROPE'S TAKE

It is very interesting how Podemos has ditched at least two of its most radical economic proposals. With a view to next year's general election, the move is most certainly aimed at winning over undecided/disappointed voters from the centre of the political spectrum, while also preempting criticism from the two mainstream parties - the ruling centre-right Partido Popular and the Socialist Party - that Podemos is telling fairy-tales to the Spanish electorate because it is pursuing unrealistic policies.

For the rest, this revamped economic plan seems to fit perfectly with our description of Podemos as a 'shadow eurosceptic' party: it doesn't openly call for Spain to leave the euro, but many of its proposals are incompatible with Eurozone membership under current terms.

Interestingly, many of the proposals actually involve transferring more power and sovereignty to Europe, even over sensitive fiscal issues. The scrutiny this is put under in Spain will be important. It is also not clear exactly how power would be pooled and managed at the Eurozone level under the proposals of Podemos.

In the meantime, it is undeniable that the extraordinary rise of the party led by Pablo Iglesias has already made an impact on the Spanish political debate. To mention but two examples:

• The Socialist Party has toughened up its anti-austerity rhetoric. The party's new leader, Pedro Sánchez, has himself proposed scrapping the balanced budget rule from the Spanish Constitution - despite voting for it back in 2011.

• Yesterday, for the first time, the deputy leader of Partido Popular María Dolores de Cospedal admitted in a TV interview that her party would "consider" forming an unprecedented grand coalition with the Socialist Party if it failed to win an absolute majority in next year's elections. This may well be a sign of concern that a left-wing coalition between Podemos and the Socialist Party could force Partido Popular out of power.

Everything seems to suggest Spain will be one of the Eurozone countries to watch next year. 

How close did the Dutch come to ditching the euro?

The Guilder - was it close to making a comeback? 

Yesterday, former Dutch Finance Mininister Jan Kees de Jager, who held the role until November 2012, revealed something very interesting. Apparently, the Dutch government, together with the German govenrment, made contingency plans during the height of the eurozone crisis for the two countries to ditch the euro. A “team” of lawyers, foreign policy experts and economists were employed to investigate different scenarios,. One was to reintroduce the “guilder”:

"The team met regularly on Friday afternoons, but could also be present very quickly in case we needed to make a decision"

He also revealed how Germany was closely involved but other countries were less keen to prepare:

"Some countries considered the fact that several scenarios were being discussed in Europe already very scary. Remarkably enough they did not do this. We were one of the few countries[to discuss scenarios], together with Germany. We even had a team discussing scenarios, Germany-Netherlands.”

Finance Minister Jeroen Dijsselbloem also admitted that the Dutch government was at one point “preparing for the worst case scenario”, saying:  

 “Heads of government, including the Dutch cabinet, always said: ‘We want to keep the euro together and to keep the euro as a single currency.’ That said, we also looked at what would happen if that didn't succeed”.

Dijsselbloem added that no guilder notes were actually printed, and unlike de Jager, he refused to confirm whether Germany had made similar preparations.

This of course is in line with what we've heard before. The Dutch Central Bank has already admitted it made some contingency plans for a euro exit in 2012, while De Volkskrant has revealed that, in June 2012, Prime Minister Mark Rutte threatened the possibility of the Netherlands exiting the euro. Nevertheless, the detail and the format of the planning highlights just how seriously this was taken.

We can't help but feel it puts the continuous protestations by ECB President Mario Draghi that the single currency is  "irreversible" into a new light...

Can the real Super Mario please stand up?

Former Italian Prime Minister Mario Monti may be out of Italian politics, but it's fair to say he still likes to talk - especially when travelling abroad.

In an interview with Belgian daily De Morgen and Dutch daily De Volkskrant, Monti seems to hint at what many Bundesbank-fearing Germans already suspected: that the ECB's pledge to do "whatever it takes" (i.e. the OMT, the new bond-buying scheme) was de facto grounded in a political decision - contrary to what the ECB's mandate dictates.

Here is what Monti said in the interview:

[At the June 2012 European Council], I have used my full negotiating position in order to get a line approved that looks boring at first glance. At 4 am, the signatures of all leaders had been provided, including the ones of [German Chancellor Angela] Merkel, of my good friend the Dutch Prime Minister Mark Rutte, and of Finnish Prime Minister Jyrki Katainen, you can say the monetary firepower from the North [...] The line established, in short, that eurozone countries who did their homework, like Italy, were guaranteed ECB support. That statement – at the highest political level – didn’t impress the markets, because the leaders did have the authority, but no money. One month later, ECB President Mario Draghi came out with his famous statement: the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. That did calm the markets, because Draghi did have the money. 

Monti is clearly trying to claim some credit - and the headline of the interview in De Volkskrant is actually "Mario Monti: the man who saved Europe". However, if Monti is right, it clearly means that the ECB's political independence was seriously compromised, since, strictly speaking, there should be no link whatsoever between a political agreement and ECB action..

Draghi's statement is one of the main reasons behind the fall in borrowing costs for countries in the eurozone periphery - some of which have yet to deliver on real economic reform. Monti may have given Draghi some of the credit - but he has also given fuel to those Germans who fear the ECB's independence is a thing of the past.

What’s wrong with Finland? Part 2

Since our last post on this issue things seem to have only got worse for Finland.

The European Commission’s latest economic forecast (see table below, click to enlarge) made pretty dire reading with Finland expected to be one of the worst performers in terms of economic growth over the next two years.

Furthermore, it seems that the credit rating agency S&P has finally caught up with our analysis of Finland, putting its AAA rating on negative outlook, suggesting that it may lose it in the next couple of years. Similar to our concerns about the rebalancing of the Finnish economy, the demographic problems and a stubborn lack of competitiveness, S&P noted:

“Finland’s persistent subpar growth rate reflects deep structural demographic and economic imbalances that hamper the government’s efforts to achieve fiscal consolidation. We consider that there are downside risks to growth and policy implementation.”

“We believe that the economy remains vulnerable to any slowdown of economic activity in the euro area or among other major trading partners, such as Russia.”

As the second part of the quote suggests, the situation in Ukraine and the potential sanctions on Russia are also likely to worsen the outlook for Finland.

The graphs above (data from Bank of Finland) highlight that Russia accounts for a decent chunk of Finnish trade and given the dwindling sources of growth any hit to this could certainly hamper the rebalancing of the economy and the reform/recovery process.

Furthermore, as we have flagged up before, Finland is one of the many countries heavily reliant on Russia for gas and energy more generally. With Putin’s threat to cut off gas to Ukraine the situation has potentially escalated another step, at least in economic terms, Finland is one (of the many countries, including Russia) which is on the front line.

Once again, all this is not to say that Finland is an economic basket case, far from it, but that even the healthy economies in Europe are undergoing some serious overhauls and reforms, further complicating the crisis response and, now, dealing with issues such as the Ukraine-Russia crisis.

Greece exits the wilderness and returns to the markets

It has been labelled by some as the “amazing comeback”. Greece has this morning sold €3 billion of five-year bonds at an interest rate of 4.95% - and the demand exceeded €20 billion.

To be fair, the turnaround in investor sentiment with regards to Greek debt is pretty astonishing and the demand for the first Greek bond issue has outstripped even the most optimistic forecasts. As the newswires pointed out this morning, it increased quite significantly overnight:

But this outcome has left a few people scratching their heads and wondering what this means for Greece and the eurozone – both of which continue to struggle when judged on a broader set of data indicators. Below, we try to address some of these questions in a reader-friendly Q&A.

Why has demand been so strong?

There are a couple of reasons for this, and they have little to do with Greece.

• The bond auction remains small, and the yield fairly decent relative to other peripheral economies and 'junk' or high yield bonds of similar length. And there will always be investors looking for a better return. After all, even in the immediate aftermath of the Greek debt restructuring there were plenty of investors willing to take a punt on the newly formed bonds in the secondary market – and many of them ended up with good returns.
• This links to a broader problem in Europe, and even in developed economies – the shortage of safe assets and the lack of yield. Given the rock-bottom interest rates and dwindling inflation, the level of return available on many financial instruments is not what it used to be, and investors are keen to find new avenues to boost their gains.

But isn’t there a huge amount of risk involved?

Actually, given the structure of the deal and the environment involved, maybe not as much as one would expect (click on the graph to enlarge).

• Firstly, the bonds will be issued under English law. This will stop them being restructured in a similar fashion to the previous Greek bonds, meaning that the investors have significantly stronger legal protection.
• Secondly, the maturity of the debt is quite short, especially relative to the very long term (20+ years) maturity on the loans from the eurozone. This ensures that payment of these bonds falls well before Greece needs to start paying off its official loans – as the graph above highlights.
• Thirdly, the ECB’s promise to purchase government bonds if the crisis escalates again still stands. Furthermore, this has been combined with greater support from the eurozone for Greece and a new aversion to write downs of sovereign debt. 
• All of this means the likelihood of losses on Greek private sector debt has been significantly reduced. It has not been eliminated, but if any write-down were to be forthcoming it would most likely be losses on official sector loans, not least because they now make up 66% of Greek debt.

This has almost come out of nowhere in the past week or two: why such a rush?

• The first, obvious reason is Greece’s need for further funding. The issue of a funding gap this year and over the coming years (estimated to be around €20bn up to 2016) has been well covered. This bond issue, combined with some new fiscal measures and probably the leftover capital in the Greek bank bailout fund, will help fill most of that fiscal gap over the next couple of years. It also potentially paves the way for further debt issues.
• However, there are deeper political reasons. As shown by yesterday’s anti-austerity strikes, this morning's bombing outside the Bank of Greece and the dwindling majority of the government in parliament (which now stands at only two seats), there still is a significant amount of political uncertainty around. The government seems to harbour hopes that this return to the markets will galvanise its support, and act as a symbol of the turnaround it has helped to create.
• Furthermore, with the European elections around the corner and the opposition SYRIZA party looking set to do well, the government seems to believe that this issue could somewhat also boost their support at the polls.

But how much of a turnaround does this really signify for Greece?

While it’s certainly a positive, the macro level data for Greece remains worrying. As the charts below show (courtesy of Natixis), unemployment remains very high. In particular, youth and long-term unemployment are both stubbornly high, and threaten to become a drag on the economy in the longer term. While business activity has stopped its decline, the hope of a swift recovery is yet to be based on clear evidence. There is a long way to go in the structural reform programme, as highlighted by the 329 reforms recommended by the OECD.

More broadly, Greece’s long term strategy for competing and growing in the eurozone remains unclear, and it has zero room to absorb further economic shocks. Citi - forever bearish on Greece - took it upon themselves to be the buzzkill amongst all this optimisim with the chart below (via FT Alphaville). Ultimately, it remains a small symbolic step, especially given the size of the bond issue.

 Will Greece get to spend this money as it wishes?

That seems hopeful at best. While Greece may have a little more flexibility compared to when the funding comes from official loans, of which almost every penny is clearly assigned, there will be little wiggle room. As even those countries outside bailout programmes have found, the oversight at the eurozone level is now quite significant. Greece’s budget still has to be agreed in tandem with the EU/IMF/ECB Troika, and little flexibility is likely to be allowed, especially since there is already an outstanding funding gap which needs to be filled.

Meet the new French cabinet

The new French cabinet has just been unveiled (the picture comes from Le Figaro's website). A few ministers have been re-shuffled around, but actually there are only two new entries compared to the previous team: Ségolène Royal as Environment and Energy Minister, and François Rebsamen as Employment Minister.

The most interesting change took place in the Economy and Finance Ministry. Pierre Moscovici has not held onto this post (which means we may see him in Brussels soon as France's next European Commissioner), and his portfolio has been split into two: Michel Sapin is the new Finance and Public Accounts Minister, while Arnaud Montebourg is the new Economy and Industry Minister.

From the names of the two ministries, we assume Sapin will be the one leading in negotiations over deficit targets with the European Commission in future. Similar to his predecessor Moscovici, Monsieur Sapin seems to think France needs to take the medicine and continue with deficit reduction. He said in a radio interview last year,

There's a state, but it's totally bankrupt. This is the reason why we had to put in place deficit reduction programmes, and no siren must divert us from this objective.

It will be interesting to see how he will interact with Arnaud Montebourg, who recently described the people in charge of competition and state aid policy at the European Commission as "talibans of the law" and "fundamentalists who apply the [legislative] texts blindly to the detriment of European interests." Montebourg is also one of the most vocal supporters of a devaluation of the euro to help French exports.

We don't know the rationale behind the decision to split the Economy and Finance Minister yet. One idea could be achieving some sort of good cop (Sapin) / bad cop (Montebourg) dynamic when negotiating with Brussels. That said, after adding the views of the new Prime Minister Manuel Valls and President François Hollande into the mix, it could become tricky to figure out who is in control and which direction the French government actually wants to head on economic policy.

With regards to other ministers, Laurent Fabius, Jean-Yves Le Drian and Christiane Taubira have all kept their jobs as Foreign, Defence and Justice Ministers respectively. Budget Minister Bernard Cazeneuve is the new Interior Minister. The budget portfolio has been moved to the Public Accounts part of Sapin's post.

The next step for Manuel Valls and his cabinet is a vote of confidence in the lower house of the French Parliament, the National Assembly, which should take place on Tuesday.

Follow us on Twitter @OpenEurope for more updates.

Hollande expected to announce cabinet reshuffle after local election 'punishment'

If you want to get a sense of how badly the latest French local elections went for President François Hollande, have a look at today's front page of left-leaning French daily Libération:

 

The headline means 'The punishment', and it summarises the outcome of the local vote pretty well. According to data from the French Interior Ministry, the centre-right (that is, the opposition UMP and its allies) gained 139 towns with more than 10,000 inhabitants compared to the 2008 local elections. The centre-left (Hollande's Socialist Party and its allies) lost 160. The fact that the Socialist Party managed to retain Paris - where Anne Hidalgo was elected as the city's first female mayor - cannot compensate for what was an unequivocal defeat nationwide.

Marine Le Pen's anti-EU Front National took control of eleven towns - in addition to Hénin-Beaumont, where the party won an outright victory in the first round. Though not impressive in absolute terms (see this blog post from last week for some more background information), the score is nonetheless politically significant. It shows how French voters increasingly see Front National not just as a mere 'protest party', but as a credible alternative for power - albeit so far only at the local level and in a very limited number of towns.

Meanwhile, the immediate consequence of yesterday's local election fiasco is that Hollande is expected to announce a cabinet reshuffle any moment. The French President has just come out of a two-hour meeting with Prime Minister Jean-Marc Ayrault, whose departure looks very likely, judging by the headlines in the French press over the past few days.

Interior Minister Manuel Valls, who enjoys a pretty high approval rating compared to his fellow cabinet members (in part thanks to his tough stance on certain crime and migration issues), is broadly seen as the favourite to replace Ayrault as Prime Minister. Laurent Fabius, currently serving as Foreign Minister, is another name being mentioned by the French media. 

However, in light of the latest macroeconomic indicators, the impression remains that moving a few ministers around will not be enough to restore the French government's credibility vis-à-vis the electorate - unless the policies also change and France makes some real progress in pushing ahead with the reforms needed to restore its competitiveness within the eurozone.

What’s wrong with Finland?

That seems a strange question to ask. The country is a paid-up member of the eurozone core and is one of the few countries in the world to have a triple A credit rating from all three top agencies (S&P, Moody's & Fitch) and a stable outlook from all.

However, as the chart to the left shows (taken from the most recent Finnish Central Bank Macroeconomic bulletin) and today’s GDP data confirm (the Finnish economy contracted by 0.8% in Q4 2013) suggests all might not be well.

GDP growth has stagnated and is now teetering on the edge of slipping into its third recession in six years. But what has been causing this? The chart below on the right provides some insight.

The first point to note is the collapse in the electrical and electronics industry. This has been largely down to the struggles of Nokia. Formerly a dominant player in the telecoms market the firm has failed to adapt to the changing nature of the market, in particular the smart phone phenomenon, and has seen its market share, profits and share value eroded. The sector has also suffered knock on effects of the reduced global demand in the wake of the financial crisis, the threat of low cost emerging markets and the struggling domestic demand due to falling confidence.

Similarly the large metals industry has also been hit by the global downturn and has struggled with price competitiveness. In particular the ship building industry would have been doubly hit by the struggles in global trade and is yet to truly recover.

It was previously said that Finland lived off its forests. This is no longer true, or at least it is no longer able to fully. The forest industry and the related wood, textiles and paper industry have struggled with changing technologies. Demand for paper and related products has fallen substantially as digital replacements grow and environmental concerns take hold. Again cheap emerging market products may also threaten in this area.

The combination of all this has been falling employment and an accompanied fall in domestic demand, keeping downward pressure on the economy. At the same time Finland is also beginning to run into the same demographic problem facing much of the developed world – the decline of the working age population and the increase in the number of dependants.

It’s clear that Finland remains a very strong and healthy economy. However, it is clearly undergoing some serious structural changes and may continue to post low growth figures for some time to come. Fortunately, public debt remains low at around 59% of GDP, while the deficit continues to be under control at 2.4% of GDP, and unemployment remains at just 8.1% despite recent increases. This should give the country plenty of space to conduct the structural changes needed.

That said, the case of Finland provides further evidence (as we have pointed out for Germany) that the peripheral eurozone countries aren’t the only ones undergoing significant changes.

Italian PM Letta will resign: What happens next?

Italian Prime Minister Enrico Letta has announced he will tender his resignation to Italian President Giorgio Napolitano tomorrow. The dramatic development comes after Italy's centre-left leader Matteo Renzi addressed a meeting of his Democratic Party earlier today. A few minutes before Renzi took the floor, it emerged Letta would not be attending the meeting - a clear sign of where things were going.

The three key points of Renzi's speech were:

• Letta has done a great job, but it's time to give way to a new government (that Renzi will lead);
• Snap elections now would be too risky, primarily because the electoral law hasn't been changed yet;
• The new government will aim to stay in office until 2018 - when the current parliamentary term expires.

It now seems certain that the 'staffetta' (relay) will materialise - and we expressed our thoughts on the move in our previous blog post.

So what happens next? If you're regular readers of this blog, you should know the drill by now - but just in case:

• Letta will meet President Napolitano tomorrow, and will hand in his resignation;

• Napolitano will then have to consult all the political groups holding seats in the Italian parliament. The timetable is usually announced after the Prime Minister resigns, but we reckon it could happen over the weekend; 

• After the talks, Napolitano should give Renzi the mandate to form the new government - presumably early next week;

• After holding his own round of talks with other political leaders, Renzi should then unveil the list of ministers (we'd expect a rather substantial reshuffle from the current cabinet), and should be sworn in;

• After being sworn in, Renzi will have to face a vote of confidence in both houses of the Italian parliament - which, as things stand now, should be a mere formality. 

This is all you need to know to make sense of the latest political developments in Italy. For real-time updates, you can follow us on Twitter @OpenEurope and @LondonerVince.

Italian government on the brink (again): Has Renzi's hour come?

‘Staffetta’ is the most used word in the Italian media these days. It literally means ‘relay’, and it refers to the

possibility of Prime Minister Enrico Letta handing over power to a new coalition government led by Matteo Renzi – the Mayor of Florence who was elected as the new leader of Mr Letta’s centre-left Democratic Party in December.

The two are holding talks in Rome as we write this blog post, ahead of a key party meeting scheduled for tomorrow. Speculation is growing in some Italian papers that Mr Renzi already has a list of ministers in mind.

If the takeover does materialise, as looks increasingly likely if you scan the Italian press, a few points are worth keeping in mind:

• The change of government would not change the numbers in the Italian parliament, where no party holds a majority in the Senate, the upper chamber. Renzi may be able to muster wider parliamentary support than Letta, but he would still be stuck with a diverse coalition with smaller centrist and centre-right parties – meaning that the difficulties in pushing ahead any significant political and/or economic reform would not evaporate. 

• The handover of power would happen without an election, something which could backfire in terms of Renzi’s image vis-à-vis the electorate – not least because the Mayor of Florence has been clearly saying that he wasn’t keen on replacing Letta without a vote. 

• Therefore, a better option at this point might be to pass a new electoral law quickly and call snap elections. The electoral law currently being discussed is not perfect, but it would make sure that the winning party/coalition would secure a solid majority in both houses of the Italian parliament. It could be done in time for the beginning of Italy’s rotating EU Presidency on 1 July. Indeed, this would mean two months of political paralysis because of the electoral campaign. But despite all the good intentions, Mr Letta’s government has so far hardly delivered on the big reforms it was supposed to implement. Most importantly, at the end of the process Italy would have a government which has actually come out of the polls – rather than negotiations among party leaders.

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.   

EU immigration and the impact of the eurozone crisis

It has been a big news week for immigration. And today the ONS has published its latest migration figures, which shows that net migration to the UK has risen slightly year on year. The focus is understandably on the latest net migration figure, because it is David Cameron's policy to get this figure into the tens rather than hundreds of thousands by the time of the next election (you can present the numbers in different ways, but the net figure is the one that the Government has targeted).

However, it is interesting to look at the longer term trends and how the breakdown of net migration to the UK is changing (see the chart below, which excludes British citizens):

Since 2010 there has been a marked decline in non-EU net immigration. As a proportion of non-British immigration to the UK, it has dropped from 73% in June 2010 to 57% in June 2013. In the last year alone, it has fallen from 172,000 to 140,000.

Meanwhile, this year, net migration from the EU has gone up by 72,000 to 106,000.

But, as the chart above shows, the recent increase in net EU migration has come from the older, more established (and traditionally more wealthy) EU member states (the EU15), not the new member states from central and eastern Europe that joined in 2004 (the EU8).

One can speculate about the cause of this, but it would seem that the crisis in the peripheral eurozone countries has made the UK a popular destination for migrants from countries such as Spain, Italy, Portugal and Greece.

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.

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. 

European Council draft conclusions: have Merkel's 'reform contracts' made a comeback?

As we noted in our previous blog post - and as we predicted in our briefing trailing the German elections - Angela Merkel could now well be pushing for so-called 'reform contracts' or 'competitiveness pacts' (which is what they're called in the CDU/CSU manifesto). The idea involves trading exceptionally strong reform commitments in the eurozone periphery in return for German cash.

We've managed to get our hands on an updated version of the draft European Council conclusions (which is doing the rounds in Brussels) ahead of the meeting of EU leaders later this week.

And what do you know, the following paragraphs have made it in (our emphasis):

"The Commission will provide a first overview of the implementation of country-specific recommendations that will be a basis for the monitoring of their implementation. This will also assess growth and jobs enhancing policies and measures, including the performance of labour and product markets, the efficiency of public service, as well as education and innovation in the Euro area.

On this basis, work will be carried forward to strengthen economic policy coordination, including on the main features of contractual arrangements and of associated solidarity mechanisms."

It's a vague formulation - and hard to know exactly what it means - but we think it's at least fair to assume that the idea is back on the agenda (our view is it never quite went away). As we've argued repeatedly, the kind of beefed-up supervision and enforcement that the Germans have in mind would most likely require EU treaty change. The nature, scope and timing of such a Treaty change is anyone's guess at the moment, however.

Berlusconi virtually out of Italian parliament, but clearly not yet out of Italian politics

The Italian Senate's Immunities Committee has recommended that Silvio Berlusconi be ousted from parliament as a result of his recent tax fraud conviction. The Committee will now submit a motion to the full Senate for approval within the next 20 days. The final plenary vote is supposed to be a mere rubber-stamping exercise, so we wouldn't expect any surprise. 

A couple of quick thoughts:

• The expulsion from parliament would certainly be a hard blow for Berlusconi, but wouldn't mean the end of his political career. With all due differences, comedian Beppe Grillo has shown that it's fully possible to lead a party from outside parliament. 

• Most importantly, Berlusconi's large public support is unlikely to evaporate overnight. In the eyes of many Italians, Il Cavaliere remains the example of a successful self-made entrepreneur - and the victim of a conspiracy of left-leaning judges.

• Indeed, once the process to expel him from parliament is completed, Berlusconi will find himself with a couple more trials under way - and no more parliamentary immunity. However, he remains unlikely to spend any time behind bars because of his age.

• That said, the key aspect at this stage is perhaps what will happen to Berlusconi's party in the near future. As we noted in our previous blog posts, the confidence vote in the Italian Senate earlier this week triggered a mutiny that ultimately forced Berlusconi to an unexpected U-turn. Things seem to have cooled down a bit, but the risk of a party split off the back of Wednesday's rebellion remains. This would be a bigger setback than the loss of a seat in parliament.

• On a more general note, one of the reasons why Berlusconi still looks likely to remain a rather influential figure in Italian politics is the lack of an obvious substitute to take the lead of Italy's centre-right forces. So far, Berlusconi has to a large extent, either by hook or by crook, been able to keep his side of the political divide together. The day he leaves the stage, we may well witness the fragmentation of that side of the Italian political spectrum. The impact of such a split on the country's political stability is difficult to predict at this stage.

Italian PM Letta survives key confidence vote: What's next for Italy?

What looked like an imminent political crisis has just been defused in Italy. As we anticipated in our previous posts (see here and here), Italian Prime Minister Enrico Letta has managed to survive a vote of confidence in the Senate - the upper chamber of the Italian parliament where his Democratic Party doesn't hold a majority.

In a last-minute U-turn, Silvio Berlusconi has decided that his party would support the government after all - turning a potential showdown into a mere formality. Nonetheless, what just happened in the Italian Senate does have consequences for the future of Italian politics. Here are a couple of thoughts.

1. Letta stays on, but uncertainty remains over what his government can deliver

The first, and most obvious, immediate consequence of today's vote is that Enrico Letta can stay on as Italian Prime Minister and maintains, at least on paper, his overwhelming parliamentary majority. However, it remains to be seen what Letta and his cabinet can deliver in terms of bold, concrete measures to get Italy going again - not least because some fundamental differences between the parties forming Italy's ruling coalition will remain.

One may argue that, faced with a party mutiny ahead of today's vote, Berlusconi would have finally learnt his lesson and would think twice before triggering new crises in future. But we wouldn't rule out new coalition rows. Berlusconi is famous for his CEO-style handling of his party, and he tends to take all the big decisions on his own - which makes him a very unpredictable coalition partner.    

Another important issue is: how long will Letta stay in office for? It's no secret that both him and Italian President Giorgio Napolitano would like the current government to continue at least until after Italy's rotating EU Presidency (July-December 2014) - and then perhaps go to early elections at the beginning of 2015. This would still be much earlier than 2018, when the current parliamentary term is supposed to end.

Questions will also remain over whether, if the crisis deepened once again, Italy would really be able to gain access to the ECB’s bond-buying programme, the OMT. As we mentioned above, Letta has clearly won the day - but uncertainty remains over his government's ability to push through unpopular measures.

Crucially, the ECB has made it clear that any country accessing the OMT must have a credible government in place to enforce the necessary conditionality attached to bond purchases (very likely to involve significant structural reform and budget cuts).

2. This is not the end for Berlusconi, but he's just been dealt a hard blow 

There's another reason why today's confidence vote is significant. Looking beyond the appearances (and the last-minute coup de théâtre) Silvio Berlusconi has, in substance, seen his plan to bring Letta's government down disrupted by a rebellion from within his own party. Last weekend's decision to pull his ministers out of cabinet has therefore proved a miscalculation, and will have at least two consequences:

• Berlusconi's threats to bring the government down if he's voted out of parliament as a result of his recent tax fraud conviction are no longer credible; 

• 25 senators from Berlusconi's party have this morning announced the creation of a breakaway group in the Italian Senate, irrespective of how the rest of the party would have voted. Though far from certain at this stage, today's defectors may well decide to follow up and quit Berlusconi's party - which in turn may reduce Il Cavaliere's electoral strength.

Berlusconi has shown his resilience several times, so we are unlikely to be witnessing the end of his political career just yet - even after he's ousted from parliament. Let's not forget that polls suggest he maintains quite large public support, with the help of his control over a large swathe of the media. We wouldn't expect him to take this challenge lying down. That said, his leadership of Italy's centre-right forces has today unequivocally been put into question.

These are our preliminary thoughts. We'll continue monitoring the situation in Italy very closely, so keep following us on Twitter @OpenEurope and @LondonerVince for all the updates.

Things looking rosier for Italian PM Letta, as Berlusconi faces potential mutiny

As we argued in our post yesterday, it was "not unrealistic" for Italian Prime Minister Enrico Letta to win tomorrow's vote of confidence in the Italian Senate, even if, on paper, he didn't have the numbers to do so.

A potentially key development now seems to confirm our first impression. Carlo Giovanardi, a centre-right Senator and a senior member of Silvio Berlusconi's party (see picture), has just confirmed earlier rumours that a new pro-Letta group of 'rebel' centre-right senators is to be formed, and will support the government tomorrow.

Giovanardi said,

"We do have the numbers [to form a new group], we are even more than 40, and we firmly want to maintain the balance of the government. This is why we will give [Letta] our vote of confidence." 

Clearly a game-changer. If this new group comes through with the votes, then Letta will have a much bigger chance of winning the vote of confidence and staying in power.

Equally significantly, if Berlusconi keeps pushing for a showdown but Letta ends up winning the confidence vote thanks to defectors from Il Cavaliere's party, this will almost inevitably have consequences for the future of the centre-right in Italy.  

Keep following us on Twitter @OpenEurope and @LondonerVince for real-time updates.

Italy plunged into fresh political turmoil: End of the line for PM Letta?

UPDATE (18:15) - Silvio Berlusconi has just come out of a meeting with MPs and Senators from his party. According to reports in the Italian media, he has outlined the following roadmap: a quick vote on the 2014 budget and a couple more economic measures (Berlusconi apparently said this can all be done in one week), followed by snap elections.

Not sure this can represent a good basis for a potential compromise with Enrico Letta's centre-left Democratic Party - not least since Berlusconi's strategy seems to imply a return to the polls without changing Italy's controversial electoral law first. We explained in our original blog post from this morning why this could be a huge gamble.

UPDATE (15:45) - Italy's Minister for Relations with Parliament, Dario Franceschini (from Enrico Letta's party) has just confirmed that the Prime Minister will address the Italian Senate on Wednesday morning and the Chamber of Deputies on Wednesday afternoon.

However, Mr Franceschini also stressed that a confidence vote after the debate is "very likely", but will ultimately "depend on how the debate will go". We think there are two possible interpretations here, depending on whether one wants to see the glass half full or half empty:

1) Mr Letta is still confident Berlusconi could backtrack on his plan to bring the government down;

2) If, based on the statements made by the various political groups during the debate on Wednesday morning, Mr Letta were to deem the confidence vote in the Italian Senate absolutely impossible to win, he may decide to skip it and tender his resignation straight away.

ORIGINAL BLOG POST (9:30)  

For regular readers of this blog (see here, here and here), Silvio Berlusconi pulling the plug on Italy's fragile coalition government was just a matter of time - especially after his conviction for tax fraud. On Saturday, Il Cavaliere ordered ministers from his party to resign and called for snap elections.

The official reason for doing so was the Italian government's inability to scrap a VAT increase planned by the previous technocratic cabinet led by Mario Monti, due to kick in tomorrow. However, it would be naïve to see no correlation with the fact that Berlusconi is to be ousted from parliament within the next few weeks as a result of his tax fraud conviction. 

So what happens next? The moment of truth will be on Wednesday, when Prime Minister Enrico Letta will seek a vote of confidence in both chambers of the Italian parliament. The key vote will be the one in the Senate, the upper chamber, where Mr Letta's centre-left Democratic Party does not command a majority on its own.

Scenario 1 - Letta survives the confidence vote in the Senate

Tough, but definitely not unrealistic. Letta needs around 20 Senators from either Berlusconi's party or Beppe Grillo's Five-Star Movement to break ranks and support him. Over the past few days, politicians from both parties have hinted at possible defections. Crucially, after tendering their resignations, four of Berlusconi's ministers have expressed reservations over their leader's decision to open a new political crisis at this stage. All this suggests Letta does have a chance of winning the vote in the Italian Senate, and staying in power with a different, albeit thinner, parliamentary majority (and after a rather substantial cabinet reshuffle).

However, this would only be a temporary fix. With his new majority, Letta could try and address a couple of urgent issues (a reform of Italy's tortuous electoral law and the budget for 2014 are the most obvious) - and perhaps plan for early elections at some point next year.  

Scenario 2 - Letta loses the confidence vote

If Letta loses the confidence vote, he will have to resign. As we explained several times, the ball would then be in Italian President Giorgio Napolitano's court. Napolitano would have to hold talks with all the political parties and then make a decision: task Letta himself or someone else with forming a new government, or dissolve parliament and call new elections.

New elections in Italy can take place no less than 45 days after parliament is dissolved. The risks of a quick return to the polls are obvious. Voting again with the same electoral law may well lead to another inconclusive outcome - meaning that Italy could be facing a few months of political paralysis at a time when the country can least afford it. As if things were not complicated enough, the electoral law is currently also being examined by the Italian Constitutional Court, with a ruling expected in early December - and is at risk of being declared at least in part unconstitutional.

This is where we are at. Clearly, none of the two scenarios would provide the medium-term political stability Italy needs to get its act together - which in itself is not great news for both the country and the eurozone as a whole. Everything will depend on how Wednesday's vote of confidence goes.

Follow us on Twitter @OpenEurope and @LondonerVince for all the updates. 

When it comes to Europe, Germany’s political elite and public are deeply divided

On the question of Europe, there is a painful gap between the German political elite and the public.

As our recent YouGov Deutschland poll on German voters’ sentiments on Europe showed, the German public is overwhelmingly against further financial support for the eurozone, and believes that the next Chancellor should back efforts to devolve powers back to the member states.

Now, German business-publication, Deutsche Wirtschafts Nachrichten, has conducted a similar poll among all 620 members of the German Bundestag. It’s interesting to compare the results:

• Our poll finds that two thirds of Germans reject any eurozone policies that involve putting any more German money on the line: whether it is further loans to the eurocrisis states, debt write downs or debt pooling.
• On the question of joint-liability, DWN finds that two thirds of MPs advocate precisely those measures that are rejected by two-thirds of citizens: bailouts, debt reduction and debt redemption funds.
• Our poll finds that by a margin of two to one (50% in favour, 26% against), the German public thinks the next Chancellor should back efforts to devolve EU powers back to the member states.
• DWN’s poll finds that only 9% of MPs want to devolve power back to the member-states, with 91% saying that more power should go to Brussels.

Unless the German government finds a way to address this imbalance, then it might have a lot more than disgruntled Southern Europeans to deal with post-election.