Ten things that David Cameron should NOT say to Angela Merkel

UK PM David Cameron is today meeting German Chancellor Angela Merkel, as part of British efforts to explain to EU partners the thinking behind Cameron's recent EU speech. As we've argued repeatedly, this is the UK's most important bilateral relationship in Europe. So what could Cameron tell Merkel to convince her that his vision of Europe is worth investing in? Well, see here and here for some suggestions.

But knowing British diplomacy, equally important is what Cameron SHOULDN'T say. So after consulting our esteemed colleagues at Open Europe Berlin, we give you ten quips that most certainly wouldn't go down well with the Iron Chancellor - and that Cameron best stay well clear of. Here goes:

1. "How's that new exciting anti-euro party coming along?"

2. "Could you explain this ‘Target 2’ thingy…[pause]…how big!?” 

3. "We have formed this new ECR group in European Parliament - thought you might want to get involved?” 

4. "I always thought the ECB should become more activist."

5. "We’ve got some very clever people in the City who could design those Eurobonds for you. It's the 'inexorable logic' of a monetary union don't you know?" 

 6. "We’ve got a new central bank governor, he’s foreign, and he has stressed the need for ‘flexible inflation targeting’, why are you guys so uptight about Mario?" 

7. "Can you point me to that no-bailout clause in the EU treaties again?" 

8. "Have you been following Berlusconi’s political comeback? Very interesting…" 

9. "Those tweets of yours are hilarious – who says Germans don’t have a sense of humour?" 

10. "So Angela, Nick Clegg and Philipp Rösler - want to swap?" 

One of those is an actual Cameron quote - a free copy of an Open Europe report of choice for those who can figure out which....

Bad news for Italy and Spain from the IMF

The IMF released a few new reports on the global economy today and a raft of new data. There is plenty of interesting stuff in there which we are still pouring over, but a couple of graphs caught our eye straightaway.

First up is a graph from the IMF's Global Finacial Stability Report (update) looking at the now infamous Target 2 imbalances in the eurozone. We've steered clear of this debate for the most part recently, but the graph (below) very clearly highlights an interesting phenomenon:

The chart demonstrates the huge level of capital outflows from Spain and Italy at the start of this year. This is mostly a result of investors and depositors pulling funds out of these countries and moving them into alternative assets, often in northern European countries. The latter fact is confirmed by the ensuing increase in Target 2 imbalances, suggesting this money is moving to elsewhere in the eurozone 'Eurosystem' but has yet to be settled (as is the nature of Target 2). The importance of this movement shouldn't be underestimated. It speaks to the increasing sovereign bank loop as domestic banks step in to cover the outflow of capital, raiseing questions over how long these governments can issue debt if investors are so intent on pulling capital out of the country. It also makes one wonder over the stability of banks (especially in Spain) if they are facing deposit outflows and lowered demand for their financial instruments from foreign investors. In other words, a worrying graph for these countries.

The second interesting graph comes from the IMF's Fiscal Monitor and it provides no less of a worrying picture for Spain:

Specifically the table suggests that the IMF does not now believe that the level of Spanish debt will stabilise within the next five years. That is significant - the IMF is now predicting that Spain will face a further five years of an increasing debt burden. It also confirms our macroeconomic predictions in our recent report on the Spanish bailout and the potential negative impact it could have on Spanish debt sustainability (at the time seen as overly pessimistic by some):

Not much good news for Italy or Spain (alas, as per usual). With the 20 July meeting now looming large some definitive answers are needed, at least in terms of the Spanish bailout.