Upside down Europe

With politics heating up in the frigid Swedish winter we can’t help but get the sense that Europe is turning itself on its head a bit…

North becoming South?

• We warned yesterday that the Swedish government was on the brink of collapse. So it has proved. The Swedish Prime Minister Stefan Löfven today announced snap elections for the 22 March 2015 after the Swedish Parliament refused to back the government’s budget and instead voted for the opposition’s budget. This was largely down to the Sweden Democrats who are playing king-makers in the current parliament. Such political turmoil is alien to the usually placid Swedish political scene and rings more of happenings in struggling Eurozone countries unable to agree on an austerity budget in the midst of a severe economic crisis.

• Similarly, at the start of the year, the Danish coalition government was weakened by the departure of the Socialist People’s Party (SF) – which was not happy about the sale of part of state energy firm Dong to Goldman Sachs. However, the party said it would continue to support the government from the opposition benches. The move forced Prime Minister Helle Thorning-Schmidt into the seventh cabinet reshuffle since she took office in October 2011. The next general election is due in September 2015, and we wouldn’t be surprised to see the Danish People’s Party become the effective powerbroker – similar to the SD in Sweden – especially after they became the largest party at the European elections earlier this year.

• We have also noted numerous times (see here and here) that the Finnish economy is struggling and posting some of the worst growth figures in the EU. While it is stabilising now it is finding it hard to source new drivers of economic growth following the decline of Nokia, the tech sector more broadly and the paper industry. The long term economic malaise is surprising in a country which continuously ranks high in measures of competitiveness (4th globally according to the World Economic Forum) and ease of doing business (9th globally according to the World Bank).

South becoming North?

• In the third quarter of this year two of the strongest growing economies in the Eurozone were Spain and Greece. While countries such as Germany, the Netherlands and Belgium barely pulling themselves into positive growth territory the two periphery stalwarts posted some strong figures.

• Throughout this year we’ve also seen numerous periphery countries getting close to record low borrowing costs, including Ireland, Italy, Spain and Portugal.

• Discussion over the US-EU free trade deal TTIP have exposed some unusual fault lines. With countries such as Portugal and Italy pushing strongly for the deal to be struck and talking in very free trade terms, Germany and France have been raising concerns and taking a more protectionist stance.

Although thinking about it, we still have a looming economic and political crisis in Greece, economic malaise in Portugal and Italy and the rise of numerous populist parties. Maybe rather than the North and the South switching, the whole of Europe is just becoming more Southern…

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. 

Catalonia's symbolic independence referendum: What it means and why it would be wrong to ignore it

UPDATE (1:00pm) - As promised, here's an update on the results of Catalonia's symbolic independence referendum now that all votes have been counted.

Turnout: 2,305,290 people (around 37% of those eligible to vote)
Votes in favour of independence: 1,861,753 (80.76%)

 *****

ORIGINAL BLOG POST (9:55am)

Catalonia's symbolic independence referendum eventually went ahead yesterday. With 88.4% of votes counted, the Catalan government puts turnout at over two million people. Nearly 1.7 million of them (80.7%) voted in favour of Catalonia's independence from Spain. We will update the blog with the final results as soon as they come in.

This infographic from El País compares yesterday's turnout (far right column) with the 2012 Catalan regional elections and the 2006 (binding) referendum on the amended Statute of Autonomy of Catalonia:

In other words, less than a third (32.8%) of those eligible to vote cast their ballot yesterday. However, this is still quite impressive considering that Catalan voters knew yesterday's vote was purely symbolic. Furthermore, the percentage is calculated on a broader electoral base - since young Catalans aged 16 were allowed to vote in yesterday's referendum, unlike in regional elections where the voting age is 18.

On the other hand, the outcome of yesterday's vote is probably not a great indication of where the majority of Catalans stand on independence. Due to the non-binding nature of the referendum, there is likely to be a significant amount of self-selection bias. Many Catalans who felt strongly about independence thought it was worth queuing at polling stations to cast a non-binding vote and show defiance of the Spanish government, while many of those who would vote against independence in a real referendum, or were undecided, stayed home since they knew the result would have no legal validity. 

This certainly helped push up the pro-independence vote to nearly 81%. As a reference, the four pro-independence parties currently holding seats in the Catalan parliament won a total 2,093,709 votes in the 2012 regional elections. 

Recent opinion polls clearly show that the split is much more even than that. For example, a Metroscopia poll published by El País two weeks ago found that 44% of Catalans would vote for independence in a referendum and 42% would vote against. Interestingly, when offered a third option involving "new and bulletproof exclusive competences" for Catalonia, 46% of respondents said they would choose this option, while 29% would vote for independence and 17% would opt for the status quo.

So where does yesterday's vote leave the debate on Catalan independence?  

Pep Guardiola was one of over 2m Catalans who cast their vote

As we argued in our previous blog posts (see here, here and here), the situation in Catalonia has got to a point where the status quo is looking increasingly untenable. The issue has so far been handled quite poorly by both the Spanish and the Catalan governments, who have failed to engage in any meaningful negotiations.

Unsurprisingly, Spanish Prime Minister Mariano Rajoy has talked down the significance of yesterday's vote and stressed that, if anything, it makes future talks between him and Catalan President Artur Mas more difficult. However, Rajoy's unwillingness to engage in any real discussions with Mas so far makes this position look somewhat strange.

Furthermore, this approach sort of misses the point. The Spanish government continues to use a legal argument (the Spanish Constitution forbids regions from organising binding referenda without the authorisation of Madrid) to address a political problem. In this regard, the fact that the next Spanish general election is due next year is clearly an incentive for Rajoy to show even more inflexibility vis-à-vis Catalan demands.

That said, Madrid and Barcelona can't just keep talking past each other indefinitely. Constitutional reform giving Catalonia (and, why not, other Spanish regions) more powers to set and collect taxes, for instance, would probably go a long way to address Catalan voters' concerns that the wealthy region is paying too much towards the national coffers and getting too little out of it - although it would be simplistic to boil the Catalan question down to money only.

Incidentally, constitutional reform is being openly backed by the new Spanish Socialist leader Pedro Sánchez, the Matteo Renzi of Spain. Going forward, as we already argued no less than two years ago, a reform of the Spanish Constitution envisaging further devolution of powers may well impose itself as the most sensible solution for everyone.

The Podemos Express: What lies behind the extraordinary rise of Spain's new protest party?

The extraordinary rise of Podemos, Spain's eight-month-old protest party, continues. A new Metroscopia poll for El País, released on Sunday, showed that the party would win a Spanish general election, if held today, with 27.7% of votes. The Socialist Party would finish second on 26.2%, followed by Spanish Prime Minister Mariano Rajoy's Partido Popular on 20.2% – less than half the 44.6% the party won in the November 2011 general election.

This is unbelievable stuff, but what lies behind the instant success of Podemos? 

As with all protest parties, there are a number of inter-related, mutually re-reinforcing causes: 

New media: Can establish and multiply protest movements in a heart beat. Italy's Five Star Movement is a well-know example. Podemos, too, has fed off this.

Corruption scandals: There have been a series of pretty big ones in Spain over the past two years (see this blog post we wrote last year, for instance). That said, though, Spanish politics have struggled with flaky politicians for some time, so this in itself doesn't answer the 'Why now?' question. 

Loss of trust in mainstream parties: This is the same story as virtually everywhere in Europe. In the Metroscopia poll we mentioned above, 42% of respondents said they were inclined to vote for Podemos because of "a feeling of disappointment and disillusionment with the other parties". 

"They're all the same": Related to the above, and especially during the post-crisis years, many Spanish voters don't see much difference between Partido Popular and the Socialist Party. Again, though, Spain has been a two-party, 'centripetal' system for quite some time, so why is it that voters turn against mainstream politicians now? 

EU-mandated austerity: This is a big part of the story, which reinforces the above point. Partido Popular and the Socialist Party are broadly seen by the Spanish electorate as implementing the same set of austerity policies. Remember, the first substantial austerity package during the Eurozone crisis in Spain was passed by the Socialist government of José Luis Rodríguez Zapatero in May 2010. 

Podemos: a 'shadow eurosceptic' party

Podemos certainly doesn't describe itself as 'eurosceptic', and it's not 'eurosceptic' in the northern European sense. Both the party and the Spanish public as a whole remain committed to the Euro. According to the European Commission's latest Eurobarometer survey, 56% of Spaniards think the Euro is "a good thing" for their country – up from 53% last year – compared to 34% who think it is "a bad thing".   

But just as with SYRIZA in Greece, a big part of the Podemos package is predicated on opposition to policies which are, in one way or another, driven by Spain's Eurozone membership – most importantly fiscal consolidation and internal devaluation.

In other words, Podemos could be described as a 'shadow eurosceptic' party.

Podemos leader Pablo Iglesias did say in a recent interview:

"The [Spanish] Socialists should acknowledge that they got it wrong with [the] Maastricht [Treaty]. They got it wrong by letting Spain be turned into a colony of northern European countries."  

Per implication, this means envisaging a Euro without the Maastricht criteria. Similarly, some of the main policy proposals of Podemos seem to be outright incompatible with Eurozone membership. For example, the party's flagship proposal is a "basic income for each and every citizen, for the mere fact of being citizens". According to the party's own estimates, the measure would cost the Spanish government €145 billion – roughly 14.5% of Spanish GDP. That would bust every EU budget rule on the books. 

Other proposals, such as more "democratic and parliamentary control" over the ECB, won't happen as long as Germany is around. 

Therefore, to a certain extent, Podemos offers voters a 'false choice': Euro membership with far-left spending policies. Interestingly, the firebrand anti-austerity talk of Podemos is already having a knock-on effect. Under the leadership of Pedro Sánchez, the Socialist Party has also stepped up its anti-austerity rhetoric. We will see if this will have an impact on upcoming opinion polls.

In our 2012 report looking at internal devaluation in the Eurozone periphery, we noted: 

"The history of the Baltic states – and to some extent Ireland – shows that large scale internal devaluation is fully possible in certain circumstances. But, against a backdrop of plummeting real GDP, internal devaluation also produces a politically explosive combination of falling wages and rising unemployment – all leading to a reversal in living standards. This is the Eurozone's great curse: do what's economically necessary but risk massive political and social fallout."

The rise of Podemos shows just how real that risk still is.

No Podemos parar: Spain's six-month-old protest party comes second in new opinion poll

On this blog, we have been tracking Podemos, Spain's six-month-old anti-establishment party, since its very first success in the European Parliament elections in May - when the party came from nowhere to secure five MEPs (see here and here).

The rise of Podemos has continued since. According to a new poll released by Tele Cinco yesterday, the party led by Pablo Iglesias would finish second in a general election with 24.1% of votes - behind Prime Minister Mariano Rajoy's Partido Popular (on 28.3%) but ahead of the Socialist Party (on 23.7%).

Podemos was only officially registered as a political party in March and is already polling as Spain's second most popular party. This is absolutely extraordinary in itself, but this second graph is even more interesting:

Essentially, this poll suggests we may be looking at the following two post-election scenarios:

• A strongly anti-austerity left-wing coalition including the Socialist Party, Podemos and the United Left (53% of votes in total in this specific poll).

• An unusual 'grand coalition' between the centre-right Partido Popular and the Socialist Party, an option which we discussed here.

The new Socialist leader Pedro Sánchez has so far ruled out joining forces with either Partido Popular or Podemos, but the next Spanish general election is still a year away - so things may well change. Opinion polls can certainly be wrong, but as we noted in our previous blog posts, the steady rise of Podemos should not necessarily come as a surprise. There was a gap in the market, so to say. Spain, the country that had given birth to the indignados movement, had no real anti-establishment party.

Now that Podemos has entered stage and is consistently polling well, traditional parties may be forced to engage with its arguments. At the same time, we would expect Podemos to come under greater scrutiny and pressure as Spaniards begin to contemplate its role as an opposition party or even as a member of a governing coalition.

One thing Spain's mainstream political forces should keep in mind is that, as Italy's Five Star Movement showed last year, simply ignoring a protest party and hoping it will go away can often backfire.

Catalan government calls off independence referendum, but it's not the end of the story

UPDATE (10:55am): 

Catalan President Artur Mas has just been speaking to the press. His remarks were broadly in line with the blog analysis we published earlier (see below).

Two key points from the presser:

• The planned independence referendum will not take place on 9 November. However, somewhat confusingly, Mas said "there will be polling stations and ballot papers" available to hold a "preliminary" vote on the same day. In other words, a purely symbolic, informal referendum (as opposed to the formal, non-binding one previously planned). It remains to be seen how this offer will go down with Catalan voters.

• As we expected, the Catalan leader said he is "at the disposal of the other [Catalan] parties" to call early regional elections. However, he suggested that these elections could only be credible as a proxy for a "definitive" referendum if all the pro-independence parties were to run "as a joint list and on a single programme". Therefore, Mas is clearly using the prospect of early elections to put pressure on the Spanish government, while at the same time trying to hedge his CiU party against the risk of being outflanked by the strongly pro-independence ERC (as we explained below) and taking a beating. 

Meanwhile, Spanish Prime Minister Mariano Rajoy has hailed the cancellation of the Catalan referendum as "excellent news" and reiterated that he's open to dialogue with the Catalan government.

ORIGINAL POST (9:15am):  

The Catalan government has called off the non-binding independence referendum planned for 9 November. It was really just a matter of time. Catalan President Artur Mas had repeatedly stressed that he wanted the consulta to be legal, so that the outcome of the independence vote could be recognised as valid in Spain and beyond. However, the Catalan law used by Mas to call the independence referendum has been temporarily suspended by the Spanish Constitutional Court after the Spanish government lodged a legal challenge against it. Hence, going ahead with the referendum would have meant breaching the law - something the Catalan leader wants to avoid.

Clearly, though, this is not the end of the story. Mas will reportedly set out an alternative 'participative process' (proceso participativo) in a press conference this morning - but his new proposal is unlikely to be welcomed by the other pro-independence parties.

As we noted in previous blog posts, the 'Catalan question' seems to have got to a point where the option of going back to business as usual is not on the table anymore. The decision to call off the 9 November referendum may have opened a window of opportunity for the Spanish and the Catalan governments to engage in real talks.

Spanish Prime Minister Mariano Rajoy may be tempted to shut the door and just ignore Catalan demands, especially after Mas has backed down. However, the Catalan leader still has an ace up his sleeve: he can put further pressure on Madrid by threatening to step down and call early regional elections. A snap vote in Catalonia would very likely see a victory for the hardcore pro-independence Catalan Republican Left (ERC).

The party leader, Oriol Junqueras, said of the decision to cancel the independence referendum yesterday:

"We will have to build up a parliamentary majority to issue a declaration of independence and begin the constituent process of the Catalan Republic".

With a Spanish general election due in November 2015, Rajoy would probably want to avoid having to deal with an ERC-led Catalan government and would therefore be more willing to listen. On the other hand, Mas would be taking a huge gamble himself by threatening to call early elections. The Catalan leader fought the 2012 electoral campaign on the pledge of an independence referendum that he has failed to deliver. Hence, his moderate nationalist Convergence and Union (CiU) party would face the risk of harsh punishment by disappointed pro-independence voters.

One thing is certain: the time of political posturing on either side is coming to an end. The sooner the Spanish and the Catalan government agree to sit at the negotiating table, the better.

Between The Rock and a hard place: Spain threatens to shut UK out of EU crime databases

The WSJ reports today that Spain is using its dispute with the UK over Gibraltar to hold up/block the UK's re-entry into a number of EU crime and policing laws. 

To recap, the UK has already decided to exercise its block opt-out of over 130 EU crime and policing laws and, at the time, it was announced that the Government would like to opt back into around 35 of them - but it can only do this after exercising the opt-out. The opt-out takes effect on the 1 December, so time is running out if the UK wants a seamless transition.

For the record, we have long urged the UK Government to use this opportunity to negotiate bi-lateral or intergovernmental cooperation outside the auspices of the ECJ, which these 'opt-ins' would fall under for the first time (i.e. they increase the power of the EU institutions over the 35 laws). Any fundamental rethink has seemingly been shelved for now (partly due to the constraints of Coalition) but Justice Minister Chris Grayling and Theresa May have indicated this will be part of a Tory renegotiation.

For the vast bulk of these 35 laws, including the controversial European Arrest Warrant (EAW), the European Commission is responsible for admitting the UK back into these arrangements and, in July, the UK reached agreement with the European Commission on re-entry. However, there are handful which require unanimous agreement from other national governments before the UK can re-enter. These mainly cover data-sharing arrangements related to the Schengen agreement, which are used to share data on wanted criminals, terrorists, etc, which the UK wants access to.

What does this mean? Well it's all getting extremely tight for time - the Government has promised a vote in Parliament on the 35 opt-ins, which is unlikely to be plain sailing by any means with many Conservative MPs opposed both in principle and on the detail of some these laws, the EAW in particular. The UK could conceivably opt back in to just those laws the Commission has agreed to, while negotiations on the remainder continue (Spain reportedly thinks the UK should opt back into a few more EU laws as part of the package). However, this would mean the UK had no access to security databases at a time when the threat of terrorism is high and, less importantly, only draw out a parliamentary process that is already likely to be uncomfortable for the Government.

In all likelihood a last-minute deal will be done, not least because other member states have all signed up to the agreement with the UK and are just as frustrated that Spain is using an unrelated bilateral dispute to potentially disrupt important EU cooperation on terrorism. Still, it looks like Spain is going to make this as uncomfortable as possible for the UK, and Conservative ministers will be under huge domestic pressure not to give into Spain's demands.

Catalan President calls non-binding independence vote: legal battle with Madrid looms

The signature of Catalan President Mas on today's decree

The die is cast in Barcelona. Catalan President Artur Mas has just signed the decree calling an independence vote on 9 November.

The Spanish government will hold an emergency cabinet meeting on Monday, once Prime Minister Mariano Rajoy is back from his state visit to China, to officially announce that it will lodge a legal challenge at the Spanish Constitutional Court.

The immediate effect of the move will be that the decree signed by Mas today will be suspended until the Constitutional Court issues its ruling. However, Catalonia's pro-independence parties are expected to keep campaigning while waiting for the verdict.

It is important to bear in mind that, based on a separate Catalan law that came into effect this morning, the legal status of the 9 November vote is 'non-referendum consultation' (consulta no referendaria). This means the vote would not be binding.

The Catalan government believes this should provide a sufficient safeguard against legal challenges from Madrid, but is clearly also taking a gamble: even if non-binding, the outcome of an independence vote would be politically very difficult to ignore.

A legal battle is most certainly ahead, and we will keep monitoring the situation very closely. If you want more background on Catalonia, you can read our previous blog posts (see here and here).

Scotland votes, Catalonia waits: Will there soon be another independence referendum in Europe?

FC Barcelona supporters waving Scottish flags at Camp Nou

The world is watching Scotland today, and the Catalans will watch closer than most.

Spanish news sites are featuring pictures of FC Barcelona supporters waving Scottish flags during their team's Champions League game yesterday, and it is widely reported that delegations from the Catalan (and Basque) nationalist parties have travelled to Scotland to follow the latest developments on the ground.

This is because the debate around Catalonia's independence referendum is approaching its own moment of truth:

• Catalonia's ruling parties agreed long ago that the independence referendum (carefully described as la consulta, the consultation) would take place on 9 November. However, the Catalan government has yet to officially call such a referendum. 

• The Spanish government maintains the referendum is unconstitutional (and as we explained here, the Spanish Constitution is actually on Prime Minister Mariano Rajoy's side).

• The Catalan government will tomorrow try to get around the legal obstacles by asking the Catalan parliament to adopt a new law on 'non-referendum consultations' (consultas no referendarias). Catalan President Artur Mas is then expected to convene one of these consultations for 9 November. However, the legal status of the result of such a consultation is unclear at the moment.     

• Reports in the Spanish press suggest the Spanish government has everything ready to launch a legal challenge against la consulta at the Spanish Constitutional Court, as soon as it is officially announced.

• If the Spanish Constitutional Court were to strike down the referendum (which is what Rajoy expects), the 'Plan B' of Artur Mas would be to resign and call early regional elections - and then present the election results as a referendum on Catalonia's future. Recent polls suggest the strongly pro-independence Catalan Republican Left (Esquerra Republicana de Catalunya, ERC) would come out as the largest party, albeit short of an absolute majority. For Rajoy, having to deal with ERC instead of Mas would be like jumping out of the frying pan and into the fire.

Are the Scottish and the Catalan cases similar?

There are similarities between Catalonia and Scotland. Both are proud regions with long histories of independence movements, and both have also been embedded in decentralised systems. Also with respect to the consequences of leaving there are similarities, not least the prospect of joining the EU and the difficulties that could potentially arise.

However, there are at least two fundamental differences:

• The Spanish government has never considered accepting the outcome of an independence referendum in Catalonia. On the contrary, it is determined to use all the legal instruments at its disposal to stop the referendum taking place. Spanish Foreign Minister José Manuel García-Margallo has not even ruled out making use of Article 155 of the Spanish Constitution - which gives the central government the power to "adopt the necessary measures" to force a regional government to comply with its constitutional obligations. In practice, despite the planned date for the referendum being less than two months away, the Catalans still don't know whether - and in what form - it will actually happen.

• Constitutional reform and greater devolution of powers to Spanish regions as an alternative to independence has so far not been discussed properly, mainly because the Spanish and Catalan governments have never really engaged in negotiations. 

Will there be a 'contagion effect'?

Pro-independence Catalans would no doubt get a boost in case of a 'Yes' victory in the Scottish referendum, whilst, naturally, Madrid would love to see the 'No' camp win. Irrespective of the outcome in Scotland, the status quo doesn't seem to be an option anymore for Catalonia. Just think of the 500,000 to 1.8 million people, depending on the estimates, who took to the streets last week to celebrate La Diada, Catalonia's National Day.

Sooner rather than later, the Spanish and Catalan governments will need to give up posturing and start talking to each other. At that point, reforming the Spanish Constitution to give regions greater power to set and collect taxes may well appear as a valid alternative. The Scottish episode, whichever way the referendum goes, may ultimately serve to accelerate further devolution in Spain.

ECB preview - Dovish Draghi to double down on easing?

The European Central Bank (ECB) holds its monthly meeting in Frankfurt today - the day after ECB President Mario Draghi's 67th birthday.

As usual, Open Europe's Head of Economic Research Raoul Ruparel has published a preview on his Forbes blog, explaining what we may expect from today's meeting.

Here goes:

Following ECB President Mario Draghi’s dovish speech at Jackson Hole last month this week’s ECB meeting has taken on new importance. This has been further enhanced by the recent Eurozone inflation data which put annual CPI at 0.3% in August. The headline figure hides some of the story with core inflation actually rising to 0.9% (from 0.8%) but the ECB’s previous inflation forecasts have begun to look increasingly out of line with reality.

However, those expecting a big move are likely to be a bit disappointed. As I pointed out last month, it is almost nonsensical for Draghi to unveil new measures before his previous policies have been implemented. I am thinking specifically of the TLTROs (targeted long term lending operations) the first of which will only be conducted on 18 September. Any big announcement now could undermine the predicted take up of these measures – which clearly remain the ECB’s preferred approach for injecting further liquidity.

That being said, these measures are unlikely to make much difference since the conditions for passing liquidity on to the real economy remain very loose. They are also very unlikely to appease investors and markets which have now come to expect some significant new easing. The two key options which are on the table for this meeting are:

1. A further interest rate cut: Many will validly ask, what is the point in a further cut now? Of course it would have little to no economic impact, however, it would once again signal the dovish bias of the ECB. It would also signal a clear shift in the ECB’s position given that Draghi has previously said rates are unlikely to get any lower than current levels. It becomes another mechanism to express his commitment to further easing. There also remains scope to make the negative deposit rate more negative, although there is a cap on this since, at some point, it will be cheaper for banks to simply hold cash than deposits with the ECB.
    
2. Purchases of private sector assets – specifically Asset Backed Securities (ABS): The ECB has long telegraphed such action and it is the next obvious tool at its disposal. Whether or not it will be announced this month or in the coming months is a bit of a toss-up. It seems the ECB is not quite ready to implement it yet and has made a big song and dance about the need to adjust regulations and definitions of ABS, which are yet to fully take place. Whenever it is announced, implementation is likely to be later this year to allow the negative deposit rate and TLTROs to have time to work. I remain sceptical on the effectiveness of this policy, which I have analysed in detail on the Open Europe blog. Ultimately, the market for the transparent ABS related to SME loans remains very small in Europe and focused in the core countries rather than the periphery (where this money really needs to flow to). For example, in Q1 2014, of the €18.5bn in ABS issued, only €1.6bn used SME loans as collateral. The ECB maintains that it can and will help create the market in this area, yet with this measure having been forecast for some time, you would expect there to have been some market response already.

As with many of Draghi’s press conferences, all of this will be weaved into a dovish speech including a few key trigger words for markets – few other central bankers are as adept in their communication. As for full blow Quantitative Easing on sovereign debt, this remains someway off in my mind and hurdles remain high. Its use will ultimately be tied into developments in the fiscal and political sphere, as hinted at in Draghi’s speech (more detail on this coming in a future post). The ECB will be loath to unveil QE, which it fears can only buy time, without further commitment to reforms, a clearer fiscal approach and developments on the structure of the Eurozone which such changes will entail.

Headlines are all for AfD and UKIP, but the biggest shocker for traditional parties may come from Spain...

The surge of anti-EU, anti-euro and protest parties across Europe continues. Germany's anti-euro Alternative für Deutschland (AfD) is making headlines after winning 9.7% of votes in yesterday's regional elections in Saxony and securing its first ever seats in one of the country's regional parliaments.

In the UK, a Survation poll for the Mail on Sunday found that, following the defection of Douglas Carswell from the Conservatives to UKIP last week, UKIP is set to win the ensuing Clacton by-election with 64% of the vote - which would grant Nigel Farage's party its first elected MP.

However, the biggest shocker for mainstream parties seems to be coming from Spain. According to a new Sigma Dos poll for El Mundo, the anti-establishment (but not anti-EU) party Podemos would finish third in a general election with 21.2% of votes - only 1.1% less than the opposition Socialist Party. Being neck-and-neck with one of Spain's two traditional parties is an absolutely extraordinary result for Podemos, given that it was founded in March. The poll puts Spanish Prime Minister Mariano Rajoy's centre-right Partido Popular in the lead on 30.1% - a 14.5% fall from the 44.6% the party scored at the November 2011 general election (click on the picture to enlarge).

 
If you didn't read it at the time, here is a portrait of Podemos and its leader, Pablo Iglesias, that we published in the aftermath of the European Parliament elections in May - when Podemos came from nowhere to win five seats in Strasbourg. We noted:

Call it left-wing, anti-establishment, anti-austerity (but clearly not anti-EU), the rise of Podemos is significant because - similar to what the Five-Star Movement has done in Italy - it can give Spaniards a channel through which they can voice their dissatisfaction with the political establishment (and the current eurozone economic policies), something which has been lacking at the peak of the eurozone crisis.

Indeed, looking at the latest polls, Podemos seems to be following exactly the same trajectory as Beppe Grillo's Five-Star Movement in terms of rocketing (potential) electoral support. And exactly as in Italy, the rise of a strong anti-establishment party may well force the centre-right Partido Popular and the Socialists to consider an unusual (and uncomfortable) 'grand coalition' if none of the two big traditional parties wins a majority in the next general election - due in November 2015.

While the speed of the rise of Podemos is certainly surprising, there has undoubtedly been a huge gap in the market for a protest party in Spain over the past few years - as we noted on this blog at the end of May. Despite sky-high unemployment, a struggling economy, a few political scandals and regional discontent, no party or movement had so far managed to shake the solid support for the two mainstream parties. But since Podemos entered stage, things seems to have changed. With a Catalan independence referendum potentially coming up in November and thoughts turning towards next year's general election, these are certainly interesting times in Spanish politics.

Will EU foreign ministers agree on what to do with Russia?

(l-r) The foreign ministers of Italy, Spain and France

EU foreign ministers will meet tomorrow to discuss what to do with Russia in light of last week's MH17 plane crash, where almost 300 people lost their lives. The option of moving to tougher 'Stage 3' economic sanctions will be on the table. While the UK, France and Germany have all warned Moscow that it will face further sanctions if it fails to secure the crash site and guarantee a thorough and independent investigation, all eyes are on Italy and Spain - usually among the most dovish member states when it comes to EU-Russia relations.

After a couple of cautious statements over the weekend, a spokesman for the Italian Foreign Ministry is today quoted as saying,

"If Russia doesn't cooperate with the investigation [into the crash], we are very much ready to support the sanctions."

Belated compared to other big EU countries, but this is the most strongly worded statement coming from Rome to date. One could expect Italy to take a tougher stance this time around, not least because the main objection raised by Eastern European member states to the appointment of Italian Foreign Minister Federica Mogherini as the new EU foreign policy chief is precisely the fact that Italy is regarded as too soft on Russia.

Meanwhile, speaking to the press this morning, Spanish Foreign Minister José Manuel García-Margallo took a milder position. He refused to condemn Russia for the crash, and suggested waiting for the outcome of the investigation by the International Civil Aviation Organisation (ICAO) before considering any further steps.

On top of this, despite presenting a united front, Germany, France and the UK might not yet be on exactly the same page - not least because France continues to look unwilling to put its sale of Mistral ships to Russia on the table, and Germany's prime concern seems to be to preserve cohesion within the EU, rather than driving tougher sanctions. The big EU member states are therefore still not all on the same wavelength - although the fact that Italy might be hardening its stance is an interesting development.

Once again then, it is far from granted that EU foreign ministers will be able to agree on tougher sanctions on Russia tomorrow. However, it is looking the most likely it has been for some time.

Why Cameron needs to make a swift decision on the UK's next EU Commissioner

In a recent briefing, we stressed that David Cameron needs to pick a 'heavy-hitter' as UK's next European Commissioner if he wants to secure a key portfolio for the UK. Our point is reinforced by a quick look at the candidates being (more or less officially) lined up by other EU member states.

If the UK drags its feet on 'declaring' its candidate, and then sends someone not considered up for the job, we suspect its chances will pretty much have evaporated.

FRANCE - Former Finance Minister Pierre Moscovici is regarded as the frontrunner. The possible alternative could be Élisabeth Guigou, who has served as French Europe Minister, Justice Minister and Employment Minister.

GERMANY - Günther Oettinger looks very likely to stay on as German Commissioner. A former Minister-President of Baden-Württemberg, he has gained influence within Angela Merkel's CDU party during his five years as EU Energy Commissioner.
 
ITALY - Foreign Minister Federica Mogherini is widely tipped to become the new Italian Commissioner. She is currently regarded as the frontrunner to replace Lady Ashton as EU foreign policy chief. 

FINLAND - Former Prime Minister Jyrki Katainen will be the new Finnish Commissioner. He has already replaced Olli Rehn, who had to take up his seat in the European Parliament. Importantly, Katainen stepped down as Finnish Prime Minister precisely because he had set his eyes on a job in Brussels.

SPAIN - Former Agriculture Minister Miguel Arias Cañete is the favourite to become the new Spanish Commissioner. He resigned in April after being picked by Spanish Prime Minister Mariano Rajoy as Partido Popular's top candidate in the European Parliament elections.

POLAND - Various names have been suggested. Foreign Minister Radosław Sikorski remains the frontrunner (despite the recent wiretapping scandal). Former Finance Minister Jacek Rostowski and former EU Budget Commissioner Janusz Lewandowski - recently elected as an MEP - are also in the race.

NETHERLANDS - The frontrunner is Finance Minister and Eurogroup Chairman Jeroen Dijsselbloem, who is one of the two big contenders for the key post of Economic and Monetary Affairs Commissioner along with France's Pierre Moscovici.

ESTONIA - Former Prime Minister Andrus Ansip, leader of the liberal Estonian Reform Party, will be the new Estonian Commissioner, according to what Jean-Claude Juncker just said during his hearing with MEPs from the ALDE group.

What is somewhat different with this lot is that it includes a range of acting or former senior ministers still very much operating on the political centre stage in their respective countries. With some exceptions, the time when countries sent to Brussels whoever the sitting government tried to 'get rid of' seems pretty much over.

Cameron better get a move on.

Flexibility and sloppy translations: Could the discussion on EU fiscal rules still endanger Juncker's election?

The Bundesbank attacks Renzi: "He tells us what to do". This is today's front page headline of Italian daily La Repubblica. According to Italian media, Bundesbank President Jens Weidmann yesterday had a go at Italian Prime Minister Matteo Renzi for telling everyone else in Europe what they have to do.

Well, that's not quite what Weidmann said. The full speech is available here. And the exact quote is:

Italian Prime Minister Matteo Renzi, for instance, likens the EU to 'an old, boring aunt, who tells us what we should do.'

In other words, Weidmann was simply quoting Renzi. Quite different from what has been reported by Italian papers, although Weidmann did say in his speech that structural reforms "should be implemented, not only announced" - a Bundesbank Leitmotiv.

A case of 'lost in translation'. Still, Renzi hit back less than an hour ago during his joint press conference with outgoing European Commission President José Manuel Barroso in Rome:

#Renzi: The task of the Bundesbank is not to take part in the Italian political debate.
— Vincenzo Scarpetta (@LondonerVince) July 4, 2014

Sloppy translations aside, this episode highlights that there are some unresolved issues when it comes to what different eurozone countries mean by the 'flexibility' of EU fiscal rules. This may well spice up the European Parliament vote on the appointment of Jean-Claude Juncker as European Commission President, scheduled for 15 July.

A couple of Italian MEPs from Renzi's Democratic Party have said they want "clarity" from Juncker before supporting him. Similarly, the leader of French Socialist MEPs Pervenche Bérès told French daily Le Monde:

We are in a difficult equation. We criticise the [economic] policies of the right. But if we reject this candidacy, we will have no influence on the re-orientation of the policies that Juncker must pursue.

It is too early to tell how this story will end. Juncker is due to meet the centre-left S&D group on Tuesday precisely to discuss the priorities of the new European Commission. We will probably have a clearer idea after that. Indeed, one would assume that, if Renzi or François Hollande told their MEPs to vote for Juncker, MEPs would follow their leaders' instruction. Furthermore, the German and Italian governments are both playing down tensions.

That said, looking at the vote on Juncker in the European Parliament, the three groups expected to back him (EPP, S&D and ALDE) have 479 MEPs in total. The UK Labour Party already said it would vote against Juncker. If French, Italian and maybe Spanish centre-left MEPs did the same, along with the 12 Hungarian centre-right MEPs from Prime Minister Viktor Orbán's Fidesz party (who sit in the EPP group), support for Juncker would suddenly shrink to 389 MEPs.

The required majority is 376, so we would be looking at a much tighter vote. And it's going to be a secret ballot, which adds to the uncertainty. Time for Juncker to get worried? Maybe not yet, but he has already got a quite difficult job on his hands in pleasing everyone when it comes to using the 'flexibility' in the EU's Stability and Growth Pact to its full extent.

France comes under fire in latest European Commission economic assessment

The European Commission has just released its latest round of country-specific recommendations (the Commission’s advice on how the country can boost economic growth and maintain stable public finances).

As with the broader economic state of the eurozone, the recommendations are a bit of a mixed bag. There are some positive assessments of the peripheral countries, but also warning over continuing problems with high debt levels and high unemployment.

We would argue that there is also still too much complacency on the former and not enough urgency on the latter points. Below, we've picked out some of the more interesting points for the big four countries.

FRANCE
The European Commission’s assessment of the French economy is quite damning, given the context of a supposed economic recovery. The Commission says that the “level of detail of the fiscal consolidation measures is insufficient” to ensure France meets its targets and that the economic forecasts used for 2015 are “slightly optimistic” and the planned savings are “very ambitious”.

The Commission also takes aim at areas of the economy which the Socialist government will not be too pleased with, specifically arguing that “sizeable short-term savings cannot be achieved without” curbing health and pension costs through reforms of both sectors. The report also hits out at French labour costs, warning that they reduce “firms’ profitability”, and its ranking in surveys of business environment which has “deteriorated” not least due to regulation which hampers growth of small business in France, the significant number of protected professions and the high overall tax burden.

Therefore, the European Commission calls for action on all these areas. Ultimately, the report does a decent job of highlighting the on-going flaws in the French economy and the lack of strategy displayed by the French government. While it has taken tentative steps towards reform in some areas others fly under the radar while the government does not yet seem to have fully bought into the reforms it has laid out for the coming years.

GERMANY
The recommendations for Germany feel very familiar with early comments regarding its current account surplus. Specifically the report calls on Germany to:

“Improve conditions that further support domestic demand, inter alia by reducing high taxes and social security contributions, especially for low-wage earners.”

However, there is not an extensive discussion and the report focuses on other areas which include some interesting recommendations such as “more ambitious measures to further stimulate competition in the services sector” (something we have long advocated) and “more efficient public investment in infrastructure, education and research”.

ITALY
The European Commission seems to have doubts over Italy’s latest budget forecasts labelling them "slightly optimistic.” “The achievement of the budgetary targets is not fully supported by sufficiently detailed measures, in particular as of 2015”, the Commission continues. This will certainly revive the domestic debate between Italian Prime Minister Matteo Renzi and his critics, who argue that there is not enough money to cover for the tax cuts for workers and businesses recently announced by the Italian government.

On labour market reform it notes, “Globally, the Italian labour market continues to be marked by segmentation and low participation…Therefore, the limited steps taken so far need to be extended.” Here, the recommendation is to “assess the need for additional action” by the end of the year. Another long-running issue in Italy is services liberalisation. According to the Commission, “There are still a number of bottlenecks to competition (reserved areas of activity, concession/authorisation schemes, etc.) in professional services, insurance, fuel distribution, retail and postal services” – and these need to be removed.

Interestingly, the European Commission also notes that “one of the key levers to improve the implementation performance [of Italy]…lies in enhanced coordination and a more efficient allocation of competences among the various levels of government”. This reform is already on Renzi’s radar. Still, we’re not sure how well this specific ‘suggestion’ will go down in Italy, given that it touches on a politically sensitive issue – the distribution of powers between the central government and the regions, which is laid out in the Italian constitution

SPAIN
The European Commission finds Spain’s budgetary forecasts “broadly plausible for 2014 and subject to downside risks in 2015”. However, “for 2016-2017, the GDP growth rate in the [Spanish government’s] programme seem somewhat optimistic.” Similar to Italy, the European Commission’s recommendation to Spain is to “reinforce the budgetary strategy as of 2014, in particular by fully specifying the underlying measures for the year 2015 and beyond.” 

Although the European Commission acknowledges that Spain’s labour market reforms have gone some way in ensuring greater flexibility, limiting job losses and reducing the number of dismissals challenged in court, “Segmentation remains an important challenge for the Spanish labour market, the number of contract types remain high and the gap between severance costs for fixed-term and indefinite contracts remains among the highest in the EU even after the reform.” Furthermore, “the inadequate labour-market relevance of education and training and the high proportion of unemployed without formal qualifications contribute to the high youth unemployment rate, as well as to long term unemployment.” Therefore, the European Commission recommends that the Spanish government “enhance the effectiveness and targeting of active labour market policies, including hiring subsidies” and “reinforce the coordination between labour market and education and training policies.”

Some variance from country to county but a couple of clear themes can be found here. Much more work needs to be done on labour market reform and improving the business climate. On top of this the forecasts continue to be optimistic. Plenty of work to be done on many fronts then. 

Heads begin to roll in aftermath of European election shock

As might be expected after some shocking showings in the European Parliament (EP) elections, the heads have begun to roll – and rightly so, some would say.

The most high profile resignation so far is that of the Spanish opposition Socialist leader Alfredo Pérez Rubalcaba (pictured) who stepped down yesterday after his party’s vote share dropped to 23% from 39% in the previous EP election. His decision is not exactly a surprise as many have been scratching their heads over the opposition’s lack of penetration despite numerous opportunities including (but not limited to) the Spanish economic malaise, austerity and Partido Popular’s top level corruption scandal. Where the party goes from here remains to be seen but with the rise of regional (particularly Catalan) parties and the new Podemos movement (see our profile here) the party needs to reassert itself as the primary opposition.

Similarly, a poor showing by the Romanian opposition party saw its leader Crin Antonescu resign along with all the party’s executive bureau. Interestingly, the party has also voted to switch from the liberal ALDE grouping in the EP to the centre-right EPP.

Meanwhile, in Ireland, Labour leader Eamon Gilmore jumped before he was pushed after his party secured barely 7% of the vote – likely paying the price for being the junior coalition partner during a difficult period of government (similar to Lib Dems in the UK or PASOK in Greece). This paves the way for a cabinet reshuffle, but again his replacement is also still unclear.

Other scalps include Igor Lukšič, President of the Slovenian Social Democrats, who has bitten the bullet and stepped down, as well as the leader of the Hungarian Socialists, Tibor Szanyi, who offered his resignation (subsequently accepted) after his party was comfortably beaten by the neo-fascist Jobbik.

There could still be more to follow as the dust settles. But more importantly than those who have lost their heads is for those that just clung on to theirs to get the message and begin pushing for some serious reform across Europe and offering a clear alternative to those who still do not.

Meet Podemos, the great newcomer of the European elections

The European Parliament elections have dealt a blow to Spain's traditional two-party system. Together, Prime Minister Mariano Rajoy's Partido Popular (PP) and the opposition Socialist Party (PSOE) won 49% of votes. In 2009, their combined score was 80.9%. No wonder Socialist leader Alfredo Pérez Rubalcaba has decided to step down following his party's poor showing.

But the big story coming out of Spanish ballot boxes is the success of Podemos (We Can), a new left-wing, anti-austerity movement that came from nowhere to become Spain's fourth largest party and win five seats in the new European Parliament.

And 'nowhere' really means 'nowhere' in this case. Podemos was officially registered as a political party in March 2014 - which makes its performance extraordinary. Its leader, 35-year-old Pablo Iglesias (see picture), is a Political Science professor but also a bit of a TV star in Spain. Interestingly, his parents called him Pablo so their son could bear the same name as Pablo Iglesias, the founder of the Spanish Socialist Party.

Factoids apart, we have been flicking through Podemos's European elections manifesto. The following bits give a good feel for what Podemos stands for in a number of policy areas:

• "Citizens' audit of public and private debt to find out what parts of it can be considered as illegitimate...and declare that those won't be paid back."

• "Creation of democratic and parliamentary control mechanisms for the European Central Bank...Creation of a European public credit rating agency."

• "Regain public control over strategic sectors of the economy: telecommunications, energy, food, transport, health, pharmaceutical and education."

• "Budgetary support for and increased development of public R&D centres, in order to favour the return of Spanish researchers and scientists from abroad."

• "Right to a basic income for each and every citizen, for the mere fact of being citizens" - which sounds a lot like the 'citizenship wage' advocated by the Five-Star Movement in Italy.

• "A moratorium on mortgage arrears for the first houses of families with difficulties in paying their loans back."

• "Increase the EU's social budget, and establish a levy on capital movements within its boundaries" - which basically means saying adiós to free movement of capital. Podemos also calls for a "bigger levy" on movements of capital from the EU to third countries.

• "Establishment of trade agreements among small producers in Southern European countries. Development of specific cooperation mechanisms among Southern European countries." On the other hand, Podemos wants to "abandon" negotiations over the EU-US free trade agreement (TTIP), and calls for a "substantial revision" of the existing EU-Latin America free trade deals.

• "A derogation from the Lisbon Treaty so that public services are exempted from the competition principle." 

• "Stop the use of Memoranda of Understanding" - which set out the conditions attached to EU-IMF bailout loans to struggling eurozone countries.

Call it left-wing, anti-establishment, anti-austerity (but clearly not anti-EU), the rise of Podemos is significant because - similar to what the Five-Star Movement has done in Italy - it can give Spaniards a channel through which they can voice their dissatisfaction with the political establishment (and the current eurozone economic policies), something which has been lacking at the peak of the eurozone crisis.

In an interview with today's El Mundo, Pablo Iglesias has refused to reveal whether he and his movement will stand in next year's Spanish general election. For now, though, it seems Beppe Grillo may just have found someone to work with in the new European Parliament.

Spanish banks' bad loans look set to weigh on the economy for some time

The Bank of Spain released its latest data on the level of bad loans held by Spanish banks today. For the first time since January 2013, the value of bad loans has dropped - falling from €195.2bn in Feb to €192.8bn in March. However, it has stayed roughly constant as a percentage of total loans (13.4%).

Symbolically, even a small drop in the headline value of bad loans may be seen as important, especially given that previous declines were down to the transfer of assets to the Spanish bad bank (SAREB), rather than any change in circumstances of the loans. If this is discounted, the value of bad loans has simply continued to rise.

That said, as the graph highlights, these loans remain at very high levels and well above the loss provisions held by banks. This continues to tell us that:

• Spanish banks will continue to deleverage for some time to come. This puts a dampener on any hopes that they will show any rapid increase in willingness to lend and take on more risk to help fuel any form of Spanish recovery. This thereby increases the risk that any recovery will be ‘creditless’, and therefore more likely to be limited and temporary.

• This data is quite timely, as it also highlights the obstacles which the ECB is going up against in these countries when it comes to encouraging banks to begin lending again, particularly to small and medium-sized enterprises (SMEs). With their balance sheets still weighed down by these loans, it seems likely that banks will continue to be reticent to take on significant new lending, even if the ECB does offer them cheaper long-term loans.

• Given that many of these loans still relate to the real estate and construction sector, they will continue to weigh on prices in these markets. This suggests prices could fall further (although this will vary significantly based on location and regional markets), while the political hot topic of evictions could return to the fore again in the future.

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.