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Friday, August 30, 2013

Europe reacts to David Cameron's defeat on Syria

Europe has reacted with surprise - and a degree of shock - to David Cameron's defeat in the House of Commons, which has de facto ruled out British participation in any potential military operation in Syria, at least for now. Here is a first round-up.

In an interview with Le Monde, French President François Hollande commented the outcome of the vote as follows,
Each country is sovereign [and can decide] to take part in a [military] operation or not. This is valid for the UK as well as for France.
Hollande suggests France could go ahead with or without the UK, and says,
If the [UN] Security Council is unable to act, a coalition will be formed. It will have to be the largest possible…It will have the support of the Europeans. But there are only few countries that have the capacity to inflict a sanction through the appropriate means. France is one of them. It’s ready [to act]. It will decide its position in close contact with its allies.
An editorial in Le Monde carries the headline, "The Commons vote against...Tony Blair", and notes,
It's the trauma of the Iraqi episode…that explains the 'no' of the British parliament to a [military] action in Syria. It's not David Cameron…who has been defeated. Rather, he pays for Tony Blair – as Mr Cameron himself acknowledged during the debate. 
As regards the international implications of yesterday's vote, the article goes on,
Washington has indicated that the decision of the UK – the privileged ally, the one of the 'special relationship' – would not stop the US intervening. But [the UK’s decision] can’t not embarrass Paris – even though, officially, France’s position remains that it is impossible not to react to the use of chemical weapons.
Germany's Die Welt has a comment piece entitled, "Cameron experiences his greatest humiliation". The article notes,
The refusal of the British House of Commons to participate in a military strike against Syria has left Cameron badly damaged - and with him the 'special relationship' with the United States.
Die Welt's chief correspondent Michael Strümer stresses how, once again, when it comes to 'hard power' the EU disappears. He writes,
While all eyes are on Washington, New York, Moscow, and on Damascus, Ankara, Cairo and Jerusalem, awkward silence reigns in Brussels…In the corridors of powerlessness in Brussels you can sense frustration and little momentum.
Christian Zaschke of Süddeutsche Zeitung describes the vote as,
A political slap in the face of historic proportions” for the Prime Minister, adding that it will define his tenure…On the international stage, [Britain] will be taken less seriously.
In Denmark, the only other EU country that has signalled it might take part in a strike, political leaders have this morning signalled that the country remains committed - although Foreign Minister Villy Søvndal also warned that the UK vote "calls for reflection".

When asked about the vote, Polish Foreign Minister Radoslaw Sikorski dodged the question, replying that it is important to have confidence in the UN inspectors' evidence. Sikorski also suggested that a possible solution could be for Russia to secure the Syrian regime's chemical weapons stockpiles - as the majority of them dates from Soviet times.
In Spain, an article in El País under the headline, "A blow to Cameron", argues that, as a result of the vote,
The British Prime Minister sees his authority seriously dwindled and, in an unprecedented event in the country’s modern history, has lost control over foreign policy.
Italian political commentator Gianni Riotta notes in La Stampa,
Paradoxically, Hollande, a French Socialist, seems to be the ‘hawk number one’. After securing a very prudent pension reform, he’s now trying to use strength against an ex colony inherited by the Turks to titillate the nation’s imperial pride – although Cameron’s defeat will lead him to take a milder stance.
We will keep updating the blog with any other interesting reactions throughout the day.

Thursday, August 29, 2013

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

Wednesday, August 28, 2013

Syria: The Ins, the Outs - and the Maybes

As we noted in our previous blog post, Syria has again shown that the EU holds almost as many foreign policy positions as there are states - though we should also remember that this is an extremely complex and senstitive situation.

However, as we also note below, EU countries seem to be coalesing around at least three positions at present. One group - the UK, France and Denmark - is commited to military action with or without the UN. The second group are the definite 'outs' and the largest group is made up of those still waiting to make up their minds. Added to that there is perhaps a fourth group made up of a number of smaller states who have not expressed a clear opinion.

The table below divided the 28 EU member states into these four groups, based on our reading of the current stated positions. This is of course a very fluid table - heavily dependent on evidence, events and developments - and as ever, we welcome reader comments in case we've missed something or if a country's position changes.
Click to enlarge

Syria: Who’s in and who’s out?

Plenty to ponder over Syria
Following the alleged use of chemical weapons by the Assad’s regime in Syria, the stakes have been raised. But as the calls for international military intervention grows louder, how have Europe’s various players been lining up? Well, the EU is certainly not “speaking with one voice.” Somehow neither the Lisbon Treaty, nor the EEAS nor the arrival of Cathy Ashton has managed to magically replace 28 individual foreign policies with a single EU one. (We remain shocked!)

So when it comes to Syria, there are now three key questions for the member states: whether to take part in military action; whether to back military action without necessarily taking part and, crucially, whether to do either of these two without a UN mandate. The last is obviously key as Russia is liley to veto any UN resolution with teeth, and has already made it clear it would consider any intervention without a UN mandate a "crude violation of international law".  

So far, we count three EU countries that have signalled willingness to participate militarily even if a UN mandate isn't forthcoming – the UK, France and DenmarkFrance and the UK - that between them account for most of the EU's military spending - are as usual the key players in the EU when matters are moved into the domain of hard power. David Cameron will today present a draft resolution proposing action against Assad's regime in the UN Security Council "authorising necessary measures to protect civilians" in Syria. Writing in the Telegraph today, British Foreign Minister William Hague argues that:
“this is the moment for democratic nations to live up to their values…We cannot allow the use of chemical weapons in the 21st century to go unchallenged. That would send a signal to the Syrian regime that they will never face any consequences for their actions, no matter how barbarous."
Meanwhile, French President Francois Hollande said yesterday that “France is ready to punish those who took the heinous decision to gas innocents," while French foreign minister, Laurent Fabius told Europe 1 radio on Monday: "The only option that I am ruling out is to do nothing." 

Both, it would appear, very much keep the option open to press ahead without the UN. 

Germany is more hesitant. There is virtually zero chance of Berlin playing a major part in any military operation of any sort. The question is - and this is what the German debate is centred around - will it back military action without a UN resolution. Remember, Germany ended up on the same side as Russia and China - against the UK and France - in abstaining on a UN Security Council vote on Libya back in 2011. However, this move was also triggered a domestic and international political backlash, which the Germans haven't forgotten. The country's Foreign Ministry has welcomed the UK's motion at the UN.
And there's no lack of scepticism. Phillipp Missfelder, the foreign affairs spokesman for German Chancellor Angela Merkel's CDU party, said that,"The [German] army has, through its current international operations, already reached the breaking point," and that military action without a UN mandate is "hard to imagine." However, interestingly, fellow CDU MP Ruprecht Polenz, Chairman of the Foreign Affairs Committee of the Bundestag, said that military action against Syria without a UN mandate could be "legitimate", citing Kosovo as a precedence, adding that the use of chemical weapons was a "serious, brutal taboo, which may not remain without consequences”. However, he stopped short of explicitly calling for German involvement. 

The SPD's chairman Sigmar Gabriel has suggested that German involvement should be limited to the diplomatic front, specifically that Chancellor Merkel ought to fly to Moscow to convince Russian President Putin to change his policy.

According to Number 10, Chancellor Merkel and David Cameron discussed the situation and “agreed that such an attack demanded a firm response from the international community.” (Not that this fairly generic statement tells us much.) Germany clearly remains nervous about foreign policy meddling. 

So far Italy is leaning back too. "Italy will not take part in any military solutions without a UN Security Council mandate," according to its Foreign Minister Emma Bonino. "Even the option of a limited intervention risks becoming unlimited," said Bonino, adding that Italy was "already stretched and even over-stretched" militarily in other parts of the world.

Despite Poland's support for the EU developing a stronger and more coherent military presence, Polish Prime Minister Donald Tusk confirmed today that “Poland does not envisage taking part in a military intervention in Syria. In any form.”

Like many others, Spain 
hasn't yet made up its mind but it is sticking to the hope of a UN resolution. Deputy Secretary General of the Partido Popular, Carlos Floriano, said Wednesday, that the Government will decide its stance “[once it is] aware perfectly of every detail." Meanwhile the Spanish Foreign Ministry said it hoped the UN Security Council “can make decisions that comply with international law.” 

Of the smaller countries, "non-aligned" Sweden is as usual calling  for “the broadest international support possible” but leaving it open how to approach a US/UK/France led operation absent a UN solution. Fellow "non alinged" country Austria is also staying quiet. Portugal says it won’t comment on potential action, with the Ministry of Foreign affairs simply issuing the generic statement that “it is in close coordination with its partners and allies.”

NATO-member Denmark, on the other hand, yesterday signalled that it’s willing to take part in military action even absent a UN-solution, with a series of pretty robust statements from senior Danish politicians. According to an opinion poll published today, 64% of Danes are opposed to such a move, however. 

Greece is likely to come under pressure to open up its strategically important bases to the US but ANSA quotes Greek officials as saying they have themselves “ruled out the possibility of active military involvement”. 

So what about the EU institutions themselves?  We 
wouldn't want to forget those. They are sticking to the ‘UN Security Council’ line. As Baroness Ashton said on Monday, "Of course the Security Council is extremely important in this. It is the role of the Security Council to look and see how the international community can and should respond."

With Hermann van Rompuy, President of the European Council, also urging similar action on Syria via the UN Security Council, this begs the question, what happens if that isn't forthcoming and the UK/France and US continue to push for military action? This then has the potential to become one of the biggest foreign policy clashes between the UK/France and Brussels since the new EU foreign policy architecture was put into place.

Tuesday, August 27, 2013

German election update: Lucke hits back

An interesting story caught our eye in today's Welt concerning next month's German elections. Bernd Lucke, the head of the anti-euro Alternative für Deutschland party (seemingly undaunted by a recent attempted assault on his person) has written a letter to German President Joachim Gauck asking for access to documents in which the German government has simulated different scenarios to save the euro, citing Germany's freedom of information laws. The move fits with the party's theme of "having courage for the truth" (Mut zur Wahrheit), which it accuses other German political parties of lacking.

This comes after the same request addressed to the Chancellery, Bundesbank and German banking supervisor Bafin was rejected on the basis that the information is held by the eurozone's network of central banks, and therefore falls outside the scope of German law. Lucke has criticised such "questionable" behaviour on the part of German officials, while noting that the Bundesbank's refusal to reveal the information shows that it is de facto supporting the German government when it should be a politically independent actor.

While we're not expecting the information to become public soon, the documents would certainly make for interesting reading as they would reveal how the German government assessed the costs of a breakup, and therefore whether its subsequent policies for dealing with the crisis have indeed been 'alternativlos' as Merkel has argued, or whether alternative policies were jettisoned due to the short-term political and/or economic implications.

Thursday, August 22, 2013

Eurozone private sector growth beats expectations, but hides divergence

This morning saw the release of the latest set of Markit Purchasing Managers’ Index (PMI) - a set of indicators used to measure the economic health of the manufacturing and service sectors. The figures for the eurozone as a whole once again beat expectations.
Eurozone Composite PMI (Aug A) M/M 51.7 vs. Exp. 50.9 (Prev. 50.5)
Eurozone Services PMI (Aug A) M/M 51.0 vs. Exp. 50.2 (Prev. 49.8)
Eurozone Manufacturing PMI (Aug A) M/M 51.3 vs. Exp. 50.8 (Prev. 50.3)

German Flash Composite PMI (Aug A) M/M 53.4 (Prev. 52.8)
German Services PMI (Aug) M/M 52.4 vs. Exp. 51.8 (Prev. 51.3)
German Flash Manufacturing PMI (Aug A) M/M 52.0 vs. Exp. 51.2 (Prev. 50.7)

French Composite PMI (Aug) M/M 47.9 (Prev. 49.1)
French Services PMI (Aug) M/M 47.7 vs. Exp. 49.2 (Prev. 48.6)
French Manufacturing PMI (Aug P) M/M 49.7 vs. Exp. 50.2 (Prev. 49.7)
We covered this issue in detail last month and, needless to say, our thoughts haven’t changed much in such a short space of time, but there are a couple of points to note.
  • Again, this is another small positive piece of data for the eurozone, in particular the eurozone services PMI is at its highest point for 2 years while the manufacturing at its highest since June 2011.
  • That said, the on-going problem of divergence (which we have discussed before) continues to loom large. As Germany continues to post strong economic data, France looks to be showing signs of struggling, despite its unexpectedly positive GDP growth in the second quarter of this year. This divergence has the potential to become a serious problem for both the ECB (in terms of trying to balance its monetary policy) but also for the Franco-German axis which has long been at the core of the eurozone and vital to its stability.
  • This turnaround in economic data for the eurozone has unfortunately coincided with problems/issues elsewhere in the global economy. The Chinese economy (a big source of trade for the eurozone) has shown signs of stumbling, while the US Fed is toying with the prospect of tightening its monetary policy - this could impact global liquidity and sentiment with suitably negative knock-on effects for the eurozone. With Germany leading the way as an export orientated country and many in the periphery  looking to copy this (through choice or Troika programme), the eurozone continues to be reliant on external demand.
  • The combination of positive economic data and long term forecasts of loose ECB policy are helping boost sentiment in the eurozone more broadly. However, some significant questions are looming, notably how to fund the likes of Greece, Portugal and Ireland as their bailout funding winds down over the next year. These issues have so far been pushed into the long grass but the time is quickly approaching where answers are needed, unfortunately indicators here are much less positive than the PMIs. More ad-hoc structures seem to be the likely outcome.

Greece almost as worried about a third bailout as Germany...

As a follow up to our earlier post on the German reaction to the revelation of a third Greek bailout, we thought that it was also worth noting that there has been a fairly strong reaction in Greece as well.

As we suggested yesterday, the outrage over a third Greek bailout was unlikely to be confined to Germany, with the Greek themselves coming round to the cold realisation that this could mean many more years under tough bailout conditions. Many of the papers ran headlines expressing as much, with some including some rather ominous pictures of Schäuble…

“Schaueble is threatening us with new help.” (Sytakton, 21.08.13)

“Greece in German urns.” (Ta Nea, 21.08.13)

“Chains with new credit and saving programmes.” (Syriza, opposition party, 21.08.13)

How much more austerity Greece is willing and able to stomach will surely be a big factor in any discussion on future aid. The one saving grace may be that this bailout, whatever form it takes, is likely to be significantly smaller than the previous two, potentially allowing for more flexibility.

That said, as long as Greek debt continues to look inherently unsustainable any easing of conditions may be just a pipe dream. With both sides already expressing concerns over the project, expect another fiery set of negotiations towards the end of this year.

German parties scramble as third Greek bailout drops into the election campaign

The parties scramble on Greece in the election campaign
As we discussed yesterday, Germany has finally owned up to what everyone already knew – Greece needs more help. Not exactly ground breaking news some might say, but given that the German federal elections are 4 weeks away, the response in Germany has been frantic – providing a bit more insight into how each party views the eurozone crisis.

German Chancellor Angela Merkel said yesterday:
“I cannot say today what amount would possibly be needed…I cannot put forward a number, or confirm one. I don't know. One cannot know…We can only decide in the middle of next year." 
“I have to say I am a little surprised. Each Member of Parliament has all materials [relating to Greece.] And that, what [German Finance Minister Wolfgang] Schäuble said yesterday about Greece, everyone already knew that.”
Since Schäuble let the cat out of the bag a few days ago, the government, (via numerous politicians and spokespeople) has been tirelessly trying to display the comments as being in line with existing party policy. It has also tried to dispel the discussion altogether, suggesting no decision will be taken until mid-2014.

As expected in an election campaign, the opposition has jumped on the slip up. In an interview with Osnabrücker Zeitung, SPD Chancellor Candidate Peer Steinbrück said:
“I say clearly that saving Europe and the cohesion of the continent will cost something, also us Germans. It is time that Mrs Merkel tells that honestly to the people.”
In an interview with Handelsblatt, SPD Chairman Sigmar Gabriel said:
“[This] is the difference between the Chancellor and the SPD. Mrs Merkel says Germany will not go into a debt-union. In reality, the Chancellor has already long-organised such debt union secretly via the ECB. Mr Draghi has taken over state financing in the crisis states. But even before the election, the bill is going to arrive, in that Greece will guaranteed apply for another debt haircut.”
Former German Chancellor Gerhard Schröder also made his first foray into the election, telling a party rally:
“It is a big lie that Germany will not have to pay for Europe.”
For all the SPD's attempts to push the CDU into admitting that the eurozone will need further aid, it still isn’t entirely clear what the SPD sees as the solution to the eurozone crisis. This has hampered its attempts to take advantage of the situation. It’s also telling that interventions by SPD party 'big beasts' seem to make Chancellor candidate Steinbrück look timid and uninspiring -- rather than helping him.

The Bavarian sister party of the CDU has been notoriously pessimistic over the eurozone crisis and is, expectedly, none too happy about the timing and the substance of the admission that Greece needs more aid.

CSU leader and President of Barvaria, Horst Seehofer said that a new aid package for Greece "is not in question," and that he is "not very happy," with the current discussion. Meanwhile, Bavarian Finance Minister Markus Soeder warned that:
“It was completely wrong to announce a third programme [for Greece] now.”
The ECB has offered veiled support to the German government. ECB Executive Board member Jörg Asmussen, who was visiting Athens yesterday, said that the plan remained to assess Greece’s situation once it registers an annual primary budget surplus -- likely at the end of this year.

Meanwhile, Bundesbank President Jens Weidmann commented that, “Nobody here [in Germany] longs for the D-Mark…We are fighting for a stable euro,” playing down fears this could revive talk of a eurozone break up.

Other parties have weighed in as well, with Alternative für Deutschland and Die Linke slamming the prospect of any further bailouts as expected. This incident could potentially help increase their share of the vote, although it may well come at the expense of the junior coalition partner, the FDP, which has been fairly quiet throughout this episode – that of course could make creating a governing coalition a bit trickier.

Despite the CDU's attempts then, this issue seems here to stay, although it is unlikely to have a significant bearing on the outcome of the election.

That said, it doesn't paint a rosy picture for the German approach to the eurozone crisis after the election. Those expecting huge change are likely to be dissapointed. Another bailout simply suggests more of the same. Meanwhile, all parties seem short of any real policies for how to change the current approach and/or find a real solution to the eurozone's economic woes.

Wednesday, August 21, 2013

Germany finally admits to a third Greek bailout, but what form might it take?

It seems the German government has finally publicly accepted what everyone already knew – that Greece will need some kind of further financial assistance after its second bailout programme expires at the end of 2014. German Finance Minister Wolfgang Schäuble told a CDU election rally yesterday:
"There will have to be another [bailout] programme in Greece," in order to help the country "get over the hill" of debt repayments it faces.
Despite attempts from both the German Chancellor Angela Merkel and German finance ministry spokesmen to row back from the comments and suggest they are not, in fact, a change in stance, the remarks seem to have stuck.

What form might the third bailout package take?
  • According to the IMF, Greece's total funding gap up to the end of 2015 is around €11.1 billion (5.8% of GDP) – so this can be taken as a lower bound of the funding needed. Privatisation receipts (which have notoriously fallen short) are expected to reach €7.7 billion over the next three years. Further shortfalls here could push up funding needs.
  • A further extension of maturities and reduction in interest rates on the official sector loans, as suggested by EU Economic and Monetary Affairs Commissioner Olli Rehn also seems likely. However, interest on loans from the EFSF - the eurozone's temporary bailout fund - are already at cost and payments have been deferred for ten years. The IMF is also unlikely to reduce its interest rate as this would amount to a form of debt restructuring, which the IMF refuses to engage in due to being the most senior creditor. This leaves only the eurozone's bilateral loans from the first Greek bailout, the interest on which has already been reduced to around 1.5% (well below most eurozone states' long-term borrowing costs). Therefore, scope for further reduction is limited, and the benefit it could provide would amount, at most, to a couple of billion spread over a long period, as we have previously noted.
  • Another widely touted proposal is to use the leftover funds originally allocated for Greek bank recapitalisation. So far, according to the IMF, Greek banks have received €40.9 billion out of an allocated €50 billion. Although it seems the EFSF expects this to increase to around €48.2 billion. It is likely some additional buffer will be needed, given the pace of increase in bad loans in Greece, meaning the amount available is likely to be between €2bn and €4bn max.
  • A final idea, reported by Süddeutsche Zeitung, is that EU structural funds could be able to provide some of this funding. It’s not clear exactly how this would happen and, as we’ve noted before, we're sceptical of the idea that there is lots of excess money floating around to be easily reallocated in the EU's structural fund programme. Given that the new EU budget headlines for 2014-2020 are set, it's not clear how much more money can be squeezed out for Greece. One option would be to adjust the 'co-financing rate' (the amount the Greek government contributes to each project to gain funding) but this has already been adjusted and provided little boost to the take up of funds, which remains well below target.
Lots of questions to be answered then about the size and format of what may be the trickiest Greek bailout to date, given the tough political constraints and the on-going (very tenuous) premise of debt sustainability. An important consideration, as Schäuble suggested, will be to get Greece over its funding hump in the next couple of years (data from Greek debt bulletins):

The final point to note is the continuing German aversion to further debt relief for Greece, something the IMF and nearly all private observers accept is necessary. Within Germany, this seems to be a result of the government 'learning its lesson' from the first Greek debt restructuring, which patently failed. However, the German government seems to be learning the wrong lesson for the wrong reasons – it was not that restructuring was a bad idea in itself, but simply that all such a large amount of debt was held by Greek banks that the ensuing recapitalisation and bailout negated any benefit.

The German government clearly remains loathe to discuss any such details, meaning a clear plan is unlikely to emerge until the end of the year. In the meantime, we can’t help but wonder how the Greek public will react to the prospect of another bailout with another set of conditions attached. Could the big unknown outside the eurozone begin to look attractive once again? Maybe, or maybe not - but it may well start to factor into their thinking at some point.

Tuesday, August 20, 2013

Can an April Fool's day story trigger a European Commission investigation?

Nothing escapes the European Commission's severe oversight. Not even April Fool's day stories. It emerged over the weekend that the Commission's Directorate General for Competition had sent the Belgian government a request for information about, among other things, plans to build a second runway at Charleroi airport.

Fairly standard procedure, except for one small detail. The plans for the new runway had been 'revealed' by Belgian news site PagTour in its April Fool's day story this year. The funniest aspect is that, after a plausible start, the original article went on to offer a number of rather weird details, hinting at its true nature, such as:
  • A secret 'Committee for Airports' of the Wallonia Region, whose members only drink water from the Belgian city of Spa;
  • Jean-Jacques Cloquet, the CEO of Charleroi airport, being spotted during a meeting with "one of the major experts of Belgian aviation" in a "restaurant specialised in all kinds of fish [remember that in French an April Fool's day prank is called poisson d'avril, literally April's fish]";
  • The plan for the new runway being hidden in a secret strongbox by Edmée De Groeve, the former President of the airport. 
But apparently none of these were wacky enough to stop the European Commission requesting information about the 'planned' new runway to the Belgian government, in a letter to which the PagTour article was attached as a reference.

Equally extraordinarily, before being passed on to Charleroi airport, the Commission's letter (which Belgian daily L'Echo has published here) had reportedly gone through the Belgian central government and the Walloon regional government. Both failed to realise that the request for information on the second runway was based on an April Fool's day story.

We can't help but wonder what the Commission's next investigation will be. Perhaps they could examine the Royal Mail's use of owls (as reported by the Daily Mail on 1 April 2013). Surely some violation of animal welfare laws there...

Monday, August 19, 2013

What the Egyptian crisis tells us about the (in)effectiveness of EU aid

As the crisis in Egypt continues to intensify by the day, European Council President Herman Van Rompuy and Commission President José Manuel Barroso warned in a joint statement yesterday that the EU would "urgently review in the coming days its relations with Egypt" - including the new aid package worth around €5 billion that was pledged to Cairo last year.

EU member states' ambassadors are holding talks today, followed by a meeting of EU foreign ministers on Wednesday. For the moment, though, Egypt's new military-backed government does not seem very impressed by threats coming from Brussels. As Foreign Minister Nabil Fahmy put it,
"I want to determine what is useful and what is not and what aid is being used to pressure Egypt and whether this aid has good intentions and credibility. We are not looking to replace one friend with another but we will look out to the world and continue to establish relations with other countries so we have options."
There is plenty of political posturing in Mr Fahmy's words, but this kind of reaction inevitably raises questions over how the EU has handled its relations with Northern African countries over the past few years, particularly via the European Neighbourhood Policy (ENP). 

In a report we published in May 2011, we stressed how, in the name of 'stability', the EU had consistently increased funding allocations for countries like Egypt and Tunisia, despite the European Commission itself noting limited progress on human rights and democratic reform over the years. In particular, we argued that the Commission's reliance on so-called 'budget support' - whereby EU aid money is given directly to neighbouring countries' governments and then directed towards specific projects by the latter - was clearly problematic, given the lack of transparency on how these funds were used.

The European Court of Auditors recently made a similar criticism in a tough report on EU aid to Egypt, where it suggested that the European Commission had been "too flexible" in assessing whether the Egyptian authorities were actually meeting the conditions for granting 'budget support'. The Court noted that,
"The Commission and EEAS [the EU's diplomatic service headed by Baroness Catherine Ashton] have not been able to manage EU support to improve governance in Egypt effectively. This was partly due to the difficult conditions they have faced in Egypt but also to shortcomings in the way the Commission and EEAS have managed their cooperation with Egypt."
The recent events in Egypt add one further element of concern. Despite its generous funding (Egypt was initially allocated approximately €1 billion for the period 2007-13, around 60% of which via 'budget support'), the EU seems to have failed to gain any significant leverage on the Egyptian establishment. Calls to stop the violence have been ignored - and the threat to stop the disbursement of aid has so far been openly snubbed.

This is of course a complex political situation and the circumstances are difficult, but given that the ENP is a very political aid instrument (seen by the EU as a tool to exercise its 'soft power'), it is getting increasingly difficult to see what value it has added in the case of Egypt.

Wednesday, August 14, 2013

German growth leads the eurozone out of recession but can it really lead the eurozone out of its crisis?

As has been widely covered today, the eurozone exited recession in the second quarter of this year, growing by 0.3% (over expectations of 0.2%).

We posted our thoughts on this expected ‘turnaround’ in the eurozone a couple of weeks ago, so we won’t rehash them. Needless to say the figures are a positive but there is still plenty of negative data around (unemployment, bank lending to real economy, consumer confidence), so European leaders should refrain from getting overexcited.

The key point for us remains this issue of divergence. It’s worth noting that Germany and France played a significant role in pulling the eurozone average growth up. There also seems to be a prevailing logic that German growth can play a big role in pulling the eurozone out of its crisis. As we have noted before we’re fairly sceptical of this idea for a couple of reasons.

There are two mechanisms through which German growth could in theory help boost struggling eurozone countries:
  • Firstly by boosting German demand for imports from these countries significantly.
  • Secondly by moving Germany away from its export model (possibly through decreased competiveness) allow these countries to fill that gap and export more.
1. Boosting imports
(Data up to end of 2012, however imports from eurozone countries have continued to decline in 2013)

As we have discussed before, and as the graph above shows (click to enlarge), German imports from peripheral eurozone countries have decreased substantially with only Italy featuring as one of Germany’s top ten trading partners. Furthermore, imports from other EU countries have declined to 56% of total imports – with the eurozone accounting for approximately 38% of this and peripheral eurozone states a small part of this. 

Therefore, even if GDP and consumption are growing quickly in Germany it’s not entirely clear that this would have a significant knock on effect on the countries that need it most.  The Netherlands, France and Italy are the most likely to see some boost. The IMF itself noted recently that using fiscal policy to boost Germany GDP would provide limited help for the eurozone. It ultimately also depends where Germany’s economic growth comes from, if driven by its own exports or government spending the impact would be even further limited.

2. Providing space for the periphery to boost exports

The theory here is that Germany ‘reflates’ allow wages and unit labour costs to grow and focuses its economy more on domestic consumption and investment rather than exports. This allows for the other eurozone economies to step in and export more, not least because they look relatively more competitive.

However, as the graphs above show (via UBS, click to enlarge), in many cases the struggling peripheral countries do not export the same goods as Germany (transport equipment, electrical equipment, chemicals), although there is some overlap on food and financial services. In any case, it’s far from clear that the struggling peripheral countries would be able to step into any breach left by Germany (particularly with heavy competition from emerging markets). Furthermore, many German exports used component parts from elsewhere in the EU, so decreasing them could actually have negative knock-on impact in certain sectors.

Another point worth keeping in mind is that a rapidly growing Germany would put added strain on the one-size-fits-all policy of the ECB. With the ECB now forecasting that interest rates will stay low for some time, if Germany continues along this growth path it may not be too long before the Bundesbank becomes concerned about the monetary policy being too lax.

It almost goes without saying that strong German growth is a good thing for the eurozone generally (breeds confidence and helps encourage investment) and strong economic growth should be the target for all countries. However, as the points above demonstrate, this does not mean it will be enough to drag the eurozone out of its crisis (i.e. it may be necessary but it is far from sufficient) and is certainly no panacea. The key issues to address remain the structural flaws in the eurozone and the lack of competitiveness within many of the peripheral economies.

Boom! Merkel opens up for the return of powers from Brussels

Well, here’s an essential development for those of us who think reform in the EU – including “less Europe” - is fully possible. 

Speaking on an interview to Deutschlandfunk radio and Phoenix TV yesterday, German Chancellor Angela Merkel said decentralisation of powers from Brussels should be discussed once the German election is out of the way. Merkel said:
“I believe that in Europe at the moment we have to take care to coordinate our competitiveness more closely, and for that we don’t have to do everything in Brussels.
‘More Europe’ can not only mean transferring competences from national states to Europe, but you can also have ‘more Europe’ by coordinating national political actions more intensively and rigorously with others. So we discuss if we need even more competences for Europe.
However, we can also consider whether we can give something back. The Dutch are currently discussing this. And we will also have this discussion after the Bundestag elections. Or we can give more competences to the Commission in order to set agreements on specific issues with national states.”
We shouldn't get overly excited – it’s only one statement – but this is the first time, to our knowledge, that Merkel has explicitly opened for the return of powers from Brussels.  This will clearly be welcomed in Whitehall.

Merkel’s comments come at an interesting time. Just this morning it emerged that the eurozone has finally emerged from recession. Is this when Merkel turns away from an inward ‘crisis containment’ policy, towards a reform agenda? This agenda would be  designed, in part, to keep the UK inside the tent (which Berlin wants for a number of reasons), and in part, to kick-start desperately needed reform for the EU to become more competitive.

What's often lost on observers of this scene is that the two go together. As people in Berlin will tell you, Merkel is convinced that Cameron is one of the few EU leaders who understands the ‘global race’. He is seen an ally in ending Europe’s dependence on cheap cash (which is why the UK government simply has to stop lecturing the Germans on the need for turning the eurozone into a debt union).

As we've argued before,  the eurozone is unlikely to take the quantum leap towards more integration, after the German elections (as some still think).  However, a window of opportunity will open up for the UK and other reform-minded governments to come up some credible and concrete proposals for change. Berlin will no doubt be listening.

Also, the October European Council is likely to be a rare occasion when EU leaders won't focus all their energy on solving the eurozone crisis – instead they can now turn to wider question of how to make the EU as a whole to work for growth and competitiveness.

Cameron has a massive opportunity here.

To temper stuff a bit. Merkel hasn't turned into a Tory MP - she chooses her words on Europe carefully. Also, the comments did not make a splash in the German press at all. None of the major newspapers reported them – they were all rather more concerned about the on-going NSA scandal, and Merkel comments on that instead.

However, it would be a typical ‘Merkel coup’ to slowly, step-by-step, start rolling out a reform agenda in the EU, which – in a German way, wrapped in pro-EU rhetoric – would also involve less Europe.

This is getting interesting. 

Tuesday, August 13, 2013

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.

Greece appeals to Russia over natural gas prices

As we reported in today’s press summary, there were some interesting reports circulating in the Greek press this morning about Greek Prime Minister Antonis Samaras sending a letter to Russian President Vladimir Putin to request assistance with cost of Greek gas – namely the gas which Greece imports via Gazprom.

Looking at the data it’s clear why the Greek government is concerned about this:

As the graph shows, in the second half last year, Greek gas prices were the highest in the EU not including taxes and third highest including taxes. This is very problematic for Greece for a few reasons:
  • Obviously in the depth of a deep recession very high energy prices can act as a significant drag on the economy (both on supply as it impacts business and consumption as it eats into the spending power of consumers).
  • Greece is completely reliant on imports for much of its energy supply, particularly gas and oil. This makes it vulnerable to future price shocks and gives it little control. Incidentally it also makes its current account adjustment (moving to a surplus) more difficult since it has an almost permanent deficit from energy imports.
  • Surprisingly, Greece has so far managed to keep fairly low electricity prices. This is positive for consumers but problematic for the producers facing very low margins. Usually, this might be an easy problem to balance out, however, with the government looking privatise the sector it makes investment look much less appealing. Partly in response to this, the government has allowed prices to be pushed up further squeezing the standard of living.
Even though the request may be understandable then, it treads on unsteady ground for the EU. 

As we noted during the Cypriot crisis, Russian influence in the region (particularly in relation to energy) is a very dicey issue, which brings out conflicting goals in various EU member states.

Natural Gas Europe reported last week that negotiations between Gazprom and Greece have been on-going for some time but are at somewhat of an impasse with the former offering price reductions of around 10% and the latter requesting up to 20%.

Any favour on gas prices from Gazprom (via Putin) is unlikely to come for free. The EU (and the US for that matter) will likely be mindful of ceding further influence over an EU member to Russia, especially one in as strategically important position as Greece. Gazprom has also widely been mooted as the likely buyer of DEPA, the Greek gas monopoly which is being privatised, although it did refrain from bidding earlier this year. Still the prospect for increasing Russian presence in Greece and the Greek energy market is clear, while hope of Greece tapping into 'vast' reserves under the Mediterranean are still a pipe dream to a large extent.

All that said, its clearly early days and we shouldn't get ahead of ourselves. But we’re certain other EU leaders will be watching this one closely.

Friday, August 09, 2013

German election update: Would the SPD rather stay in opposition than become Merkel's "lackeys" again?

Given that August is traditionally been a slow news month, we thought we'd revive an old Open Europe tradition - German poll Fridays (we know you're excited!). Its worth remembering we are only 6 weeks away from elections in Germany which will to a large extent determine developments in the eurozone and in the push for EU reform. So where are we at? Well the polls have been remarkably stable for the past few months with minimal fluctuations:

Source: Forsa (other polls display a similar trend)
While the result above would deliver a small majority for Angela Merkel's current conservative/liberal coalition, a couple of percentage points could deprive them of that. However, an alternative coalition of SDP/Greens would also be unlikely to have sufficient seats to govern, and a potential Rot-Rot-Grün (SPD-Greens-Linke) coalition has been ruled out by both sides as unappealing and unworkable.

Here's another consideration: what if the CDU/CSU/FDP coalition wins but ends up with a very narrow majority, meaning the government may not be able to pass contentious eurozone related legislation without support from the opposition due to rebels in its own ranks?

Both these factors increase the likelihood of another CDU/CSU and SPD 'grand coalition', like under Merkel's first Chancellorship between 2005 and 2009.  Although that government - in which the SPD's current Chancellor Peer Steinbrück served as Finance Minister - is credited with successfully navigating through the initial economic crisis, the SDP's poll ratings have never recovered, while Merkel's CDU has gone from strength to strength.

As a result, Steinbrück has ruled out another grand coalition, claiming that:
"The SPD's inclination to enter into a Grand Coalition is pretty much zero. Why should we once again be Merkel’s lackeys?"
Of course the fact that Steinbrück himself would not serve under Merkel again does not preclude a grand coalition with someone else from the party serving as Merkel's deputy. However, antipathy to this idea is widespread throughout the SPD, due to fears it would be unable to implement many of its policies and sink even lower in the polls (although ironically the party has also accused Merkel of stealing all its best policies for the CDU).

This is hardly a story of unrequited love - the CDU/CSU are also not keen on the idea, believing that such a coalition would be unstable as the SPD would be waiting for the appropriate time to bring down the government with the votes of the other left-wing parties before calling new elections, with Merkel unlikely to stand a fourth time, and with other credible CDU 'spitzenkandidaten' thin on the ground.

Either way, if the polls remain stable over the next few weeks and are an accurate reflection of the final results, we could be in for some interesting coalition talks.

As usual, we recommend you follow us on Twitter @OpenEurope, @pswidlicki, @NinaDSchick and @matsJpersson for all the updates from Berlin over the coming weeks.

What would leaving the EU mean for the UK's services sector?

Our Director Mats Persson writes on his Telegraph blog,
The UK’s services sector accounts for around 75 per cent of the country’s GDP. Britain’s 0.6 per cent growth in the second quarter of this year was largely thanks to this sector, which grew at its fastest rate in over two years.

Whether we like it or not, the UK will remain a services-based economy for a very long time. So it goes without saying that as David Cameron looks to negotiate a new settlement with Europe, getting a good deal for the UK’s services sector should feature highly.

By far the most common argument from Better Off Outers is: “We sell more to them than they sell to us”, implying that the UK’s trade deficit would give London leverage to secure a favourable Free Trade Agreement in place of EU membership. It’s a persuasive argument. It is also simplistic. As the graph below shows (click to enlarge), the UK’s trade deficit with the EU is the result of a large goods deficit, while it is a net exporter of services.

This is critical for several reasons.

First, UK services firms clearly use their comparative advantage to do business in Europe, boosting UK growth.

Secondly, if you buy into the “trade deficit” argument, it follows that while Germany and others would have an interest in maintaining open markets for selling manufactured goods in the UK, this logic does not apply for services, where they are net importers from the UK.

Therefore, the UK would be vulnerable to tit-for-tat trade games in its key economic sector. Perhaps Germany would be so keen to continue selling tariff-free cars that it would happily offer market access for UK services firms as part of a new deal. However, it’s far easier to remove tariffs for goods than it is to eliminate the myriad of barriers that exist to market access in services. Despite 40 years of negotiations, the Swiss still have patchy EU market access for services, while the EU and US have spent decades trying but failing to agree reciprocal market access for certain types of funds.

Critically, there’s only one off-the-peg model offering full market access for services outside the EU – the Norwegian model (EEA) – which for a range of other reasons would be a bad deal for the UK. The other potential models – the Swiss, Turkish and WTO options – would restrict access for the UK services industry absent separate agreements for specific sectors. This also spells problems for the City of London, currently used by a range of firms as an entry point to the single market, often via a so-called passport (involving a firm being allowed to sell its services across the EU as long as it’s authorised to do so in one member state).

Again, given that the City is also a gateway to global markets for European firms, a deal might be struck. However, since “Anglo-Saxon” bankers and fund managers aren't exactly universally loved on the continent, it’s also easy to see France et al blocking passport-style provisions for UK financial firms in perpetuity.

So, there’s a strong argument for the UK to remain a full member, not only of the single market in goods, but also in services. Now, this cost-benefit analysis could of course change. For example, if the many non-trade costs of EU membership aren't reduced through fundamental reform; if the single market in services – which is under-developed – continues to be held up by protectionist interests; if the EU prevents the UK from taking advantage of growth opportunities from around the world; if Brussels continues to be more interested in restricting financial services activity rather than facilitating trade – then the case for fully remaining in the single market could weaken significantly.

Which is why another round of serious liberalisation of the EU services market is long overdue. Over to you, Berlin.

Tuesday, August 06, 2013

Lib Dems set to officially endorse in/out referendum and Treaty change to secure single market safeguards

The Lib Dem Autumn Conference Agenda is unlikely to set many pulses racing but motion F35 caught our attention, as it concerns the party's EU policy. Assuming the motion put forward by the party's federal policy committee is approved by party delegates, as seems likely, it will become official party policy and will probably be included in the party's 2015 manifesto. This could prove significant in the event of another hung parliament and subsequent coalition talks with either the Tories or Labour.

The motion contains a number of detailed and specific points covering everything from the single market to the CAP and the EU budget, but two points are particularly significant:
"Guaranteeing full voice in the regulation and application of the four freedoms – of goods, capital, labour and services – of the single market for both euro and non-euro states in the next EU treaty." 
"Requiring that when the EU Act triggers a referendum for the first time, there should be an ‘In or Out’ referendum in which citizens across the UK can have their say on the new Treaty settlement and our relationship with the EU as a whole."
So we have a commitment to push for single market safeguards in any future Treaty negotiations, which is in itself a recognition that the EU is developing in such a way that necessitates different degrees of integration, and that the UK has to assert its interests in order to prevent the eurozone from writing the rules for the whole bloc (the double majority agreement on banking supervision could serve as a model here). For a party that until relatively recently supported the UK joining the euro this is a significant shift.

The referendum commitment is less of a surprise as Clegg and others have been hinting that an in/out referendum would be a matter of when, not if. The big difference between the two coalition parties when it comes to the referendum is therefore one of timing, with the Lib Dems rejecting the Tories' promise of a referendum by 2017 as arbitrary. However, the chance of there being an EU Treaty change transferring more powers from the UK during the lifetime of the next Parliament is very slim. There might be Treaty change but likely for Eurozone-specific measures (which still can have an impact on the UK by changing political dynamics in Europe but which would not trigger the EU Act).

On the face of it though, this would leave Labour as the only major party not explicitly committed to an in/out referendum at some point (although some would argue that the Lib Dems have promised a referendum before and not delivered).

Finally, it is also welcome to see the party explicitly call for "measures to enable national parliaments to contribute more directly to the development of EU policy and legislation", even if the policy document stops short of the 'red card' option outlined by Open Europe and endorsed recently by William Hague.

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...

Friday, August 02, 2013

IMF takes a more critical line on Greece

The IMF  released its latest review of the Greek bailout on Wednesday. As might be expected it was a bit more critical than the version released by the European Commission and ECB a couple of days ago.

As also might be expected the press has focused on the fact that the report reveals an €11bn funding gap for Greece between 2014 and 2016 (higher than that suggested by the eurozone). The report also calls for the eurozone to consider further debt relief for Greece. Neither of these revelations is brand new, with both having been included in the leaked version of the Troika report a few weeks ago.

There are a couple of other interesting points in the 207 page report, including some concrete forecasts on the shares of Greek debt.

These amounts are pretty much as we predicted back in March 2012, where we forecast that by 2015 around 76% of Greek debt could be held by the IMF and eurozone (NB – it’s not clear how the ECB and national central banks holdings of debt [circa €40bn] are classified in the IMF figures. If they fall under private sector here, then the holdings by official creditors may well be higher in reality).

In any case, these amounts drive home that the real question facing Greece and the eurozone (after the German elections) is whether to write down these ‘official creditors’ or not – known as ‘official sector involvement’ (OSI). There will likely be a push to extend the loans further and cut their interest rates but, as the funding gap highlights, there are immediate liquidity and solvency questions facing Greece.

Other interesting points in the report include:
  • The IMF warning of further social unrest: “The risk of political instability remains acute, especially in light of high unemployment and on-going social hardship. Further ambitious fiscal adjustment is needed for public sector debt to decline steadily, which exacerbates the possibility of social stress and political resistance.”
  • Arrears clearance seems to be behind schedule with only €1.4bn of the targeted €4.5bn being paid off. However, Kathimerini reports that this has now been increased to €4bn according to Greek government data.
  • Greece only just manages to quality for IMF assistance, with the IMF saying, “The program continues to satisfy the substantive criteria for exceptional access but with little to no margin.” The explanation involves a few stretches on the debt sustainability front, with the fund arguing, “The risk of international systemic spill overs in case of a permanent interruption of the program remains high and justifies exceptional access.” This raises an interesting question of whether, with the OMT and talk of a eurozone turnaround, the spill over effects are still significant enough to justify such IMF action?
  • The comments by Paulo Nogueira Batista, the Latin American representative on the IMF board, who slammed the overly optimistic assumptions in the debt sustainability analysis and suggested the programme was flawed. He has since backtracked from his comments, while the Brazilian government has issued its support for the bailout programme. Nevertheless, the outburst is a timely reminder of the on-going disputes behind the scenes in the IMF, between the US/Europe and the emerging market countries.