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.

Will the real Jean-Claude Juncker please stand up?

This week, Jean-Claude Juncker conducted his tour of political groups in the European Parliament in a bid to get their support for him to succeed Barroso. On this occasion, German social democrat MEP Udo Bullmann stressed:

"Mr. Juncker will have to present concrete ideas over how he will address the massive investment gap, the creeping de-industrialisation of Europe and the social distortions. We will not be won over with empty phrases or with recycled ideas. There is too much at stake for people to do that."

We're not sure how confident Mr. Bullman can be, given that Juncker gave a masterful display of how to be all things to all men and women, finding the right things to say to placate everyone from conservatives to communists. Here is an overview of some of the highlights.

Juncker is not a federalist after all...

Juncker: Why do you call me a federalist? I am not a federalist. I do not believe in the United Staes of Europe.
— ECR Group (@ecrgroup) July 8, 2014

European people don't exist as nations do, EU doesn't tap into an identity, @JunckerEU critiques spitzenkandidaten idea further
— Bruno Waterfield (@BrunoBrussels) July 9, 2014

... but favours at the same time shifting more powers to Brussels:

"I am partisan of own resources to end eternal battle between Member States at every negotiation of financial framework." #ALDEasksJuncker
— ALDE Group (@ALDEgroup) July 8, 2014

#ALDEasksJuncker Juncker will push CCCTB (common tax base).
— Sophie in 't Veld (@SophieintVeld) July 8, 2014

#JunckerTest @JunckerEU the Commission must be open to using Article 7 if a member state breaches EU fundamental rights
— Greens in the EP (@GreensEP) July 9, 2014

He is is in favour of "budgetary rigour"... 

Juncker: I am not saying I am a proponent or opponent of austerity, but I do like budgetary rigour. You can't spend what you don't have.
— ECR Group (@ecrgroup) July 8, 2014

...but not "excessive austerity"       

.@JunckerEU : "for budgetary rigour, against excessive austerity" when does "excessive" start?
— Ska Keller (@SkaKeller) July 9, 2014

He promises the Socialists the Economic and Monetary affairs portfolio...

Juncker: stability pact will not become a flexibility pact, but it will be used with flexibility. A socialist commissioner will be in charge
— Valentina Pop (@valentinapop) July 8, 2014

...but then says it is still up for negotiation (according to ALDE)

"On the composition of the Commission, we note his statement during our hearing that no portfolio has as yet been attributed to any particular Commissioner or political family, not least the portfolio of economic and monetary affairs – in contrast to what has been reported as having been said to the S&D Group."

His manifesto argued for reducing energy dependency and ensuring affordability...

"We need to diversify our energy sources, and reduce the energy dependency of several of our Member States... we need to strengthen the share of renewable energies on our continent... It is, at the same time, an industrial policy imperative if we still want to have affordable energy at our disposal in the medium term."

...while opposing a "rush" towards "new technologies": 

#Juncker tells Greens he's wary of fracking because "I tend to be cautious even if that's old-fashioned. I don't rush into new technologies"
— David Charter (@DavidCharter) July 9, 2014

Juncker comes out against shale gas at Greens hearing. 'From a personal point of view I'm not in favour of promoting fracking'
— Dave Keating (@DaveKeating) July 9, 2014

He also endorsed EU enlargement to the Western Balkans while coming out against "any specific enlargements" within the next few years.

While his desire to build bridges is commendable, on many key issues he ended up either sitting on the fence or espousing outright contradictory positions. Will the real Jean-Claude Juncker please stand up?

Anti-system MEPs surge in the European Parliament: how will EU leaders respond?

Open Europe has today responded to the preliminary 2014 European Parliament elections results. Please note that these figures are based on a combination of final results and some projections so could still be subject to change. However, we do not consider any substantial swings likely.

Here are the key points:

• Share of anti-EU and anti-establishment vote is slightly higher than expected with such parties collectively on course to win 229 out of 751 seats in the new European Parliament (30.5%), up from 164 out of 766 seats in the current parliament (21.4%).
• European Parliament politics are set to become more unpredictable though the anti-EU and anti-establishment block remains incoherent and the two main groups will continue to dominate.
• The share of MEPs dedicated to free market policies drops, from 32% to 28.1%.
• Compared to 2009, overall turnout stayed flat despite more powers for MEPs in the Lisbon Treaty and the EU becoming a high-profile issue in the wake of the Eurozone crisis.
• Several anti-incumbent parties in the EP for the first time, ranging from Feminist Initiative in Sweden to Spain’s new leftist movement Podemos, founded as late as March 2014.

 The rise of anti-EU and protest parties on the left and right will make European politics more unpredictable but, paradoxically, it could also strengthen the resolve of the three mainstream groups to continue to vote for more Europe in the European Parliament, in order to freeze out the anti-EU contingent (click on the pictures to enlarge).

The temptation in Brussels and national capitals will be to view this as the peak of anti-EU sentiment as the eurozone crisis calms down and the economy improves. This would be a huge gamble. The make-up and reasons for the rise of these parties are complex, but it’s clear that the best way to cut off their oxygen is to show that the EU can reform itself and respond to voters. These elections are a clear warning: offer voters a polarised choice between more Europe and no Europe and sooner or later they will choose the latter.

David Cameron now faces a seriously tricky week. He has two main challenges. First, he will try to muster enough allies to block Jean-Claude Juncker, the front-runner for European Commission President, although it’s not looking overly promising. Second, he faces the dilemma of aligning himself with more nationalist parties to secure his party’s standing in the EP, which comes with the risk of alienating his natural allies on the centre-right who will be crucial in his bid to achieve EU reform.

EU leaders will meet tomorrow evening to discuss what to do next and how to negotiate with the new parliament. It might not be pretty.

Would it not be easier if 'Brussels' simply dissolved the people and elected another?

In less than a month's time voters across the EU (that is those who decide to vote) will head to the polls to elect the new European Parliament. Ahead of the elections there has been a lot of speculation about the surge in support for a range of populist anti-EU, anti-austerity, anti-immigrant and anti-establishment parties and what this will mean.

Breaking the parties down into these sub-groups illustrates that the potential 'anti-EU vote' is a complicated phenomenon. In a new briefing published today, we estimate these parties could win as much as 30.9% of the vote in May, up from 24.9% in 2009. This will give them 218 out of 751 seats (29%), up from 164 out of 766 (21.4%) in the current parliament. (You can see our criteria for categorising the parties in the briefing).

These parties, loosely termed by Open Europe as the ‘Malcontents Block’, span the political spectrum and differ substantially from each other, ranging from mainstream governing parties to outright neo-fascists, and will not therefore form a coherent block. The largest increases are among the anti-establishment parties typified by Beppe Grillo's Five Star Movement in Italy and the anti-EU vote is largely driven by the rise of the Front National in France and UKIP in the UK. Having said this, we acknowledge that the European elections are in part used by anti-establishment parties to drive a domestic agenda, sometimes with limited links to "Europe". Still from free movement to the bailouts, European issues are now trickling through to voters' decisions.

Sources: Vote Watch Europe and Open Europe calculations

However, despite the strong performance of these anti-EU parties, the EP will continue to be dominated by parties which favour the status quo or further integration. The vote share of parties identified by Open Europe as being ‘critical reformers’ – parties which believe the EU needs fundamental reform if it is to survive – is set to go from 53 to 39 seats.

The net effect of the anti-EU vote could therefore ironically be to make the EP more integrationist: by crowding out critical reformers, by reinforcing the corporatist tendency of the two main groups who will want to freeze out the anti-EU MEPs, and by binding the EP and Commission closer together.

Source: Vote Watch Europe and Open Europe calculations

Another one to watch out for is voter turnout. If turnout is roughly the same this time around (43%), we estimate that 74.4% of all voters will have voted against the EU, for radical change, or not bothered to vote at all, with only 25.6% of all eligible voters actively turning out to vote in favour of status quo/more integration parties.

This is not to say that all 'non-voters' are anti-EU or anti-status quo - some have tried to put words in our mouth to that effect (somewhat predictably). However, it clearly reinforces the European Parliament's remoteness from voters and the thin democratic mandate that MEPs can rely on to push their agenda in the Parliament. Some may be tempted to see voter apathy as a 'net neutral' - we don't know how these voters would vote after all and they're voting for other things apart from Europe anyway. This is a familiar argument that has been used many times in the past as a pretext for pressing ahead with more integration. However, to conclude that voter apathy in fact means 'endorsement' is naive, intellectually dishonest - and outright dangerous as it'll only create even more fertile ground for an even more hostile response in future.

Source: Vote Watch Europe and Open Europe calculations

Worryingly for the UK and other liberal minded EU governments, the share of MEPs explicitly dedicated to free market policies is also expected to fall from 242 (31.6%) to 206 (27.4%).

Source: Vote Watch Europe and Open Europe calculations

All this means that the EP elections may be bad news for David Cameron. The EP has an effective veto over some of Cameron’s potential flagship reforms (outlined in his recent Sunday Telegraph article), including EU-US free trade talks, services liberalisation and rules on migrants’ access to welfare.

The consequence of giving the European Parliament more and more power under successive EU treaties is that these elections matter. MEPs now have equal status with national governments in the vast majority of EU policy areas from regulating working time to bankers' bonuses. Despite this, turnout has fallen in every European election so far and this time around we could see more anti-EU MEPs elected than ever before.

The usual response from the Brussels bubble to voter apathy is that people don't 'understand' the EU. Perhaps, this time politicians might spend more time trying to understand why the electorate is looking for alternatives to the likes of Schulz, Juncker and Verhofstadt or not bothering to vote at all.

Where are the real fault lines in the EU?

Ipsos Mori has this week published an interesting poll on public attitudes* in ten EU member states. Across the ten countries as a whole relatively few people want to leave the EU outright (18% on average), but the single most popular option is staying in the EU but reducing its powers (34%).

Just over a third want to see either the EU’s powers strengthened further (19%), or even a long-term policy of working towards a single European government (18%) - click to enlarge the charts.

Broken down by country, the British (68%), along with the Swedes and Dutch (69% and 68% respectively) are most in favour of leaving or reducing the EU’s powers:

The research suggests that, on average, two in three (68%) think things across the EU are moving in the wrong direction. People from the Netherlands, Sweden, Belgium and Britain are in line with the average, but those in the Mediterranean countries are the most pessimistic.

France, is the most pessimistic of the countries polled, whch seems to have a lot to do with the state of the country's economy. People in France, Italy and Spain are all particularly negative about the EU’s impact on the economy (74%, 74%, and 68% respectively are critical), and many feel that their economy has been damaged by the demands of austerity (75%, 70%, and 75% respectively).

The UK political debate on Europe may be a few years ahead of many other countries (perhaps with the exception of the Netherlands), but at the level of the individual, there are many people disenchanted with the European project. Many countries are deeply split but, on average, there is clearly an appetitie for the EU to do less. Most interesting though is the striking fault line in the eurozone. Francois Hollande has had precious little influence on EU policy since his election as president, but the question is, how long before the French public's disenchantment is reperesented by its politicians?

If you think the UK is the awkward partner, imagine if French politicians actually started telling Chancellor Merkel what their people think about Europe.

* It should be noted that the poll is not representative of the entire electorate in Belgium, France, Great Britain, Germany, Hungary, Italy, Poland, Spain and Sweden (where 16-64 year olds were interviewed), while the Dutch panel is representative of voters. Why they chose not to poll people over 65 is unclear and in our view is likely to skew the results somewhat (in different directions for different countries).

Are the Irish more optimistic about an austerity cure for Europe than the Germans?

A new Gallup poll for Debating Europe has asked peple all over the EU, except Luxembourg for some reason, about their views on austerity.

Now, of course, 'austerity' is rather a nebulous concept, particularly as different member states have had different experiences, while deficit cutting and structural reform all fall under the same term. Nevertheless, there are some interesting results.

The table above (click to enlarge) shows that across Europe as a whole, 51% said austerity is not working, while 34% said it is working but will take time, and 5% were sure it is already working.

Clearly, there are differences across the member states. No surprises that Greeks (80%) and Cypriots (64%) are the most sceptical about the merits of austerity. Portugal and Spain are also towards the right hand, anti-austerity side of the scale.

But look at Ireland. According to this poll, more Irish respondents (53%) think that austerity is working than Germans (42%), Finns (40%), or Dutch (39%)  - whose governments are considered to be the eurozone's most hawkish.

It is also striking that people from the new member states in central and eastern Europe, albeit outside the eurozone, have the most trust in austerity policies. The Baltics (Latvia, Lithuania and Estonia) in particular were subjected to significant austerity in the aftermath of the financial crisis yet many in these countries still support such an approach.

It is not clear what exlpains Irish optimism about austerity. It is likely to be a mixture of the fact that, so far, the Irish economy has made relatively good progress (although fears about the banks and property market still remain) and a general cultural disposition - as we noted in a paper last year, of all the struggling eurozone countries Ireland has the economic and social setup and history most likely to fit with the austerity approach.

But taken as a whole, this poll highlights the political and social scale of the challenge the eurozone faces with its current policy approach, particularly among the populations of Southern Europe.

Portugal's coalition fights to keep its head above water

UPDATE (17:15) - First reports of an agreement to keep the coalition alive. Stay tuned for more details.

UPDATE (16:40) - Portuguese Prime Minister Pedro Passos Coelho and Foreign Minister Paulo Portas have just come out of another (swift) round of talks.

The outcomes of their third meeting in less than 24 hours are still unclear. Passos Coelho is now heading to the Belém Palace - where Portuguese President Aníbal Cavaco Silva is waiting for him.

UPDATE (14:45) - The second meeting between Portuguese Prime Minister Pedro Passos Coelho and Foreign Minister Paulo Portas is over. It was "very positive" - according to the Prime Minister's office - but inconclusive. Negotiations over a new coalition agreement will therefore continue.

According to the Portuguese media, Portas may backtrack on his resignation. If he did so, he would reportedly be appointed Deputy Prime Minister (the post is now vacant after former Finance Minister Vítor Gaspar quit) and Economy Minister (which in Portugal is a separate portfolio from Finance Minister).

More interestingly, a source quoted by Diário Económico suggests that a revamped coalition agreement would involve discussing "a new compromise with the [EU/IMF/ECB] Troika" - so potentially a relaxation of Portugal's deficit and reform targets.

ORIGINAL BLOG POST (11:25) 

As we noted in yesterday’s flash analysis, tensions in the Portuguese coalition reached critical levels over the past few days. They have eased off somewhat overnight, but there is still plenty of uncertainty around.

Key developments:

• Despite tendering his resignation from his post as Foreign Minister, the leader of junior coalition member CDS-PP, Paulo Portas, now seems to be backtracking somewhat. This is down to both internal pressure from his party, which is clearly not keen to be seen as bringing down the government, and external pressure from markets and eurozone partners over fears of snap elections which would delay the implementation of key reforms in Portugal.

• Portas already met Prime Minister Pedro Passos Coelho, with another meeting due later this morning. The two will also meet Portuguese President Aníbal Cavaco Silva this afternoon.

What are the potential outcomes?

• Portas is reportedly seeking a renegotiation of the coalition agreement. At the moment, it's not entirely clear whether his desire is more power for his party or less focus on austerity - or both. The former seems possible, although his party is significantly smaller (Passos Coelho's Social Democratic party controls 108 seats compared to 24 for CDS-PP). The latter seems less likely. The government has very little scope to adjust its economic policy due to the bailout requirements, while, as we noted yesterday, austerity and structural reforms need to continue with the country already falling behind in terms of implementing its programme.

• It is, of course, still possible that no agreement is reached and the CDS-PP confirms its withdrawal from government. However, the Portuguese media seem to agree that, even in that case, CDS-PP would keep granting parliamentary support to the government (an arrangement the Portuguese call incidência parlamentar).

• No matter the outcome, the divisions within the coalition are clear and present. There are likely to be some tough votes to come, particularly on labour market reform and further budget cuts. Whenever these take place, the spotlight will be on the coalition to see if it holds up under pressure.

We will continue to update this blog throughout the day with developments and news as we get them.

Berlusconi: Let's breach EU deficit rules, no-one would throw us out

With the next meeting of EU leaders only one week away, Silvio Berlusconi has stepped his anti-austerity rhetoric up by a few notches. He said yesterday,

"We need someone from the [Italian] government to go to Brussels and tell those gentlemen, ‘We are in this situation because of your damn austerity policies. We must put things back in their place. From now on, you can forget about the fiscal pact and the deficit limit of 3% of GDP. Do you want to throw us out of the single currency? Go ahead. Do you want to throw us out of the EU? Well, we’d like to remind you that we pay €18bn a year [into the EU budget] and only get €10bn back’. Who would throw us out?"

As usual when Berlusconi is involved, these incendiary remarks form part of a broader communication strategy. Following his party's poor showing in the latest round of mayoral elections, Berlusconi wants to make clear to his electorate that he is still dictating the agenda to Italy's coalition government - and that he means business when it comes to keeping his flagship electoral promises, be it about scrapping a property tax on first homes or putting an end to EU-mandated austerity.

However, this time the explicit invite to ignore EU deficit rules is in clear contradiction with the line taken by Italian Prime Minister Enrico Letta so far: Italy does want an easing of austerity at the EU level, but will keep its deficit below 3% of GDP and respect all its commitments. Therefore, Berlusconi's words risk shaking the coalition government at home, and undermining Italy's credibility vis-à-vis its eurozone partners.

It will be extremely interesting to see if, once in Brussels next week, Mr Letta pretends his coalition partner Berlusconi never said those words or takes Il Cavaliere's advice on board and adopts a tougher anti-austerity stance with German Chancellor Angela Merkel and the other Northern eurozone leaders.  

Berlusconi wants to say 'basta' to EU diktats

Silvio Berlusconi's interviews never go unnoticed. Yesterday evening, he told Italian TV channel T9 that:

"We now have a strong government…also vis-à-vis Europe. We need this government to go to Brussels and say ‘I’ll do it this way’. We can no longer accept certain diktats. It’s for us to decide what needs to be done to put our economy back on its feet." 

Our regular readers know this is not the first time Berlusconi uses this type of rhetoric (see here and here for similar remarks). But his words have a much greater significance now. The electoral campaign is over, and Berlusconi's party holds a number of key ministerial posts in the new Italian government - on which he can pull the plug whenever he likes.

As we noted before, Berlusconi's blackmailing power could lead to Italy taking a tougher anti-austerity stance in Brussels - and this is exactly what Il Cavaliere is trying to achieve. Pressure is now on Italian Prime Minister Enrico Letta, who has so far been a lot milder in his demands for an easing of austerity and has consistently stressed that Italy will stick to its EU commitments.

Letta can't ignore Berlusconi's requests, or the survival of his 'grand coalition' will be at risk. But he will also have to make these requests sound acceptable to German Chancellor Angela Merkel - who faces a general election in three months' time. Not the easiest of tasks.

Any Commission changes to the eurozone crisis policy are largely semantic as the bloc continues to shy away from the tough choices

Building on our blog from yesterday, Open Europe’s Raoul Ruparel has an article in City AM today discussing the Commission’s country specific recommendations. Raoul argues that, despite protestations to the contrary, this is far from a wholesale change in policy but only a small change in the pace of policy implementation. Raoul also brings in an earlier discussion from this blog regarding the nature of the austerity vs. growth debate in Europe – fundamentally the real choice remains between creating a new eurozone architecture or breaking up.

See below for the full piece:

A REVOLT against austerity. A shift to growth. A new policy for the Eurozone. The supposed new approach, symbolised by yesterday’s European Commission economic recommendations for each Eurozone country, has been called many things. But once the rhetoric is stripped away, any changes that remain are largely semantic. The Eurozone remains on the same policy path; at most, it is just progressing along it at a more leisurely pace.

Let me quickly recap yesterday’s recommendations. Spain, France and the Netherlands were all given more time to meet their deficit targets, albeit in exchange for more open-ended commitments to deep structural reform. Don’t forget that this is far from a new precedent; Greece, Portugal and Spain have all received numerous extensions over the past few years.

Meanwhile, Italy exited the proverbial EU economic dog house known as the “Excessive Deficit Procedure”, a move which in normal times would allow it more economic freedom. Unfortunately, these remain far from normal times, and few doubt that those in charge of the purse strings in stronger Eurozone economies will continue to scrutinise every Italian policy move as if it were their own. Countries like Belgium and Slovenia got some leeway, but were also on the receiving end of a textbook scalding for a lack of structural and financial market reform – the type of which most Commission officials could probably dole out from memory by now.

For all the fanfare over the past months and weeks, this “new path” seems very much par for the course. Yes, there is a tweak here and there, but much in the same way a football manager might bring on a defender when his team is getting thrashed – it’s more about saving face than making a sizeable impact on the course of the game.

The first question to ask is, despite this not being the wholesale change it was cracked up to be, will it have any impact on the crisis?

In a word: unlikely. It’s clear that the current policy approach is not working, and in many cases a slowdown in the pace of cuts will be helpful – at least in political and social terms – as it allows a slower pace of wage and jobs cuts. That said, the amount of additional fiscal spending to be allocated to boosting the real economy remains a pittance in comparison to collapsing domestic demand and falling investment in many of the struggling countries. Further, it’s worth noting that, although some spending cuts have been slowed, the flip side of this will be deeper and faster structural reform. In many cases this falls heavily on the labour market. Unfortunately the short-term impact of such reforms, no matter how necessary, is often increased unemployment.

The second and more interesting question is, what more could actually be done on this front?

This brings us, inevitably, to the broader question of austerity versus growth. This has become a key debate during the crisis, but it fails to capture the key question in the Eurozone. It is clear to everyone that Greece, Portugal and Ireland were insolvent, and it was market pressure that pushed them into bailouts. Reducing debt levels is a vital part of their reform, while also serving to counter the significant moral hazard that comes with a bailout. Similar constraints apply in Spain, Italy, Cyprus and Slovenia in terms of expanding spending in the short run.

Therefore, asking to end austerity in much of the Eurozone is akin to asking for greater transfers from the stronger countries – whether direct, through fiscal union, or indirect, through banking union or much higher inflation.

This provides us with a clearer picture of the situation. First, the widely mooted change in Eurozone economic policy actually amounts to little more than a small adjustment, slathered in a thick coating of political rhetoric. Secondly, in reality there was little room for adjustment to this policy. This is mostly because many states have little room for further spending, but also because the decisions lie with national governments and parliaments, not the Commission.

This brings us to the conclusion that, rather than discussing whether or not to change austerity, there should be more focus on solutions that can really solve the crisis. The fundamental choice for the Eurozone remains the same as it always has been: the creation of the necessary architecture to deal with a widespread economic crisis, or face a break-up.

Merkel and Letta shadowbox on 'growth' vs 'austerity'

New Italian PM Enrico Letta paid his first official visit to Germany yesterday, only hours after delivering his inaugural address to the Italian parliament. Much has been made of his strong 'pro-European' yet 'anti austerity' stance - so how would this go down with Die Kanzlerin? Here are some quotes from yesterday's press conference:

On 'growth' versus 'austerity'

Letta: "We have done our bit [on budget consolidation]…Europe has to implement growth policies."

Merkel: "We have to free ourselves from this misconception that growth and budget consolidation are opposed. Solid public finances are a precondition for growth. And growth is not only the state giving money, but it's creating conditions for small and medium enterprises to feel at home, to be able to invest and open up jobs. And for that we need structural reforms, good schools and universities, investments in research."

On national responsibility vs 'European Solidarity'

Letta: "In the past five years of crisis we did not find sufficient solutions because there was not enough Europe. This is my objective - and also that of Germany, because both our countries have a federalist vocation... If we reached these objectives [banking union, a fiscal and economic union and a political union] we could solve our domestic problems much easier."

Merkel: "We want to ensure Europe emerges from this crisis stronger than it went into it. As part of that every country must do its part."

On meeting EU targets

Letta: "How and where we will find the resources is a domestic matter. I don’t owe explanations to anyone. I’m not here to justify domestic choices... We have no intention of telling German citizens what they have to do, and we know German citizens have no intention of telling us what we have to do.”

Merkel: "Every country must complete its own tasks... [Italy] has already made significant progress on this path."

Overall, the tone of the press conference and meeting was fairly amicable and concilliatory. That said, there are clearly a number of potential flashpoints. For all the pro-European rhetoric, for Letta 'more Europe' clearly involves more financial help for Italy, be it via a bank resolution fund or debt-pooling and not more EU scrutiny of national tax and spending decisions which is the German approach - note Merkel specifically referred to the fiscal treaty as an "element of consolidation" and the ESM as "an element of solidarity".

As we've pointed out previously, Italy still faces a number of challenges - finding a way of balancing the books without money from the planned property tax (the cancellation of which was demanded by Berlusconi) and also re-starting the structural reform agenda which stalled under Monti following a promising start. Failure to achieve progress on these fronts will inevitably trigger tension with Germany.

A sign of things to come could be this comment from (German-born) Josefa Idem, Italy's new minister for Sports and Equal Opportunities who told ZDF that she "understands that the people most directly affected by the crisis and who draw a direct link with the austerity measures bear an aversion towards Mrs. Merkel."

Cypriot parliament narrowly approves bailout deal but plenty of hurdles yet to overcome

The Cypriot parliament has officially approved the bailout deal that the government agreed with its eurozone partners and the IMF. (See here for our previous thoughts on the deal).

A rejection of the deal would probably have led to a Cypriot exit from the eurozone. Given such serious consequences it was an incredibly close run vote with 29 in favour versus 27 against (often for such votes politicians shy away from risky decisions).

We’re yet to get the final breakdown of the votes but here are the early predictions (we will update this with final figures when we have them):

The government is likely to breathe a sigh of relief but it should not view this as the end – it is surely only the end of the beginning at best.

As we have noted at length before, the prospects for Cyprus are bleak. Growth is set to crumble over the next few years, while capital controls remain in place, keeping it at the edge of the eurozone (with close to a separate currency since Cypriot euros are clearly no longer worth the same as euros elsewhere). As recently as last Thursday, the controls were extended for 16 days and despite being eased at points, there is no clear plan for how or when they can be removed (strangely the responsibility for the rules seems to have switched from the Central Bank to the Ministry of Finance while the lengths of the extensions have ranged from 3 days to 16 days at random intervals – not effectively a decisive or clear policy approach).

Despite the vote being approved it is also clear that politics in Cyprus remains fractured. 29 MPs feel strongly in favour of the bailout programme and the associated actions, while 27 MPs were effectively willing to see Cyprus leave the euro rather than implementing the bailout deal. Meanwhile, the rift between the Central Bank and the government shows little signs of abating.

Surely, effective reform and governance will be tough in the future, especially as the anti-austerity feeling amongst the general public rises.

For a taste of this just see the quote from Green MP George Perdikis after the vote:

“A 'yes' from Cyprus's parliament is by far the biggest defeat in our 8,000-year history. Its democratically elected representatives have a gun to their head to agree to a deal of enslavement.” 

The Cypriot government has negotiated a large hurdle but the biggest challenges may yet be to come.

Italian PM launches opening salvo against austerity - but where will the cash come from?

The new Italian Prime Minister Enrico Letta announced his first raft of policies in his first speech to the Italian parliament yesterday. The speech was strong on anti-austerity rhetoric but short on details of how his new approach would be funded - illustrating that ever-so-relevant dilemma in the eurozone (and elsewhere): it's easy to criticise austerity, much harder come up with alternatives. Here are the key points:

·    The government will scrap up to €6bn worth of tax rises, although Letta provided no detail about how this funding gap would be filled. Much of this move was motivated by Silvio Berlusconi’s insistence on scrapping a new housing tax which was laid out as a precondition for the formation of the grand coalition

·    Some phrases which will make German Chancellor Angela Merkel wince, such as: “We will die of fiscal rigour alone. Growth policies cannot wait any longer”, “[Europe faces] a crisis of legitimacy” and there is a need for a “United States of Europe”.

·    Letta believes Italy’s welfare system is inadequate and will look to broaden it to provide further help to women, young people and temporary workers.

·    Businesses will also receive tax incentives to hire young workers.

·    Again no details on how such policies will be funded. La Stampa reports that all in, the “Letta Agenda” could cost €20bn. He made no mention of privatisations or the sorely needed reforms to the labour and product markets to make Italy more competitive.

·    Letta did stress that Italy will meet all of its EU commitments and targets.

·    He set himself and the new government an 18 month window in which to achieve the some success in turning around the economy or “face the consequences”.

·    Promised to reform the electoral law and cut MP’s pay.

A very interesting opening salvo from Letta. In fact, not too dissimilar to French President Francois Hollande’s early comments regarding austerity – we can’t help but wonder if his enthusiasm and/or success will wane in a similar way.

One thing that is clear from the speech is the continuing power of Silvio Berlusconi (as we previously noted). La Stampa suggest up to €12bn of the cost of the ‘Letta Agenda’ actually comes from Berlusconi’s demands, while following the speech Angelino Alfano, the new Deputy PM and key Berlusconi ally, said, “I share the words of Enrico Letta’s speech from the first to the last. It is music to our ears.” Meanwhile, Berlusconi also took the opportunity to this morning ramp up his own rhetoric against austerity, calling for the new Italian government to “renegotiate its deficit commitments” with the EU.

All of this sets an interesting tone and background for Letta’s first meeting with Merkel which takes place this afternoon. As we have noted previously and at length, the key question surrounding this whole austerity debate remains, if not through cuts, then who will pay for the party? Germany and the ECB certainly aren't ready to foot the bill indefinitely and while market sentiment is positive now, it likely could not withstand a new spending spree in a country with a debt-to-GDP of 120% already. We suspect Merkel may make just that very point...

Public support for the EU drops by 16% in one month: is popular support for the euro in Greece finally about to wane?

As we've noted in the past, a factor that will determine whether the eurozone can hang together in the long term is the extent to which the public in the South begins to see the euro and EU austerity as synonymous.

For example, despite everything that has taken place in Greece, this has not been the case, with a majority of Greeks consistently in favour of remaining inside the euro. The choice is instead perceived as being between austerity or some form of alternative. This is why we rightly predicted that Greece would remain inside the euro following its hectic dual elections last year (at a point when many analysts were predicting an imminent Grexit).

But is this now starting to change? 

Possibly.

A new Public Issue poll shows that 66% of Greeks now have a "negative opinion" about the EU. For a country that has traditionally has been staunchly pro-EU, that's bad enough. But extraordinarily, when the same question was asked only a month ago, 'only' 50% of respondents said that had a negative opinion  about the EU- a massive 16% increase in only a month, possibly owing to the handling of the Cypriot bailout and the renewed Troika push for civil service cuts in Greece. Those with a positive view dropped from 48% to 31% in the same space (see the graph below).

A separate poll by Marc for Alpha TV asked the question, “In case it’s not possible to improve the conditions of the loan agreement, what do you think we should do?” 53.8% answered "remain in the EU and the euro", while 41.3% said they wanted to "leave the EU and return to the drachma" (4.9% don't know). Note that this was a question about leaving the EU, not only the eurozone. Whilst still a majority in favour of sticking around, to our knowledge, there has been no Greek opinion poll to date with such a large share in favour of leaving the euro and the EU.

Incidentally, the Public Issue poll also asked who respondents wanted to see as Prime Minister. Top candidate? “None”. (see graph)

We're not drawing any firm conclusion from this, although if this trend continues it will be significant. Currently a majority of Greeks believe that things "would be worse" outside the euro. It's worth listening to our interview with leading German economist Hans-Werner Sinn, which we published today, on the prospects for Greece in the euro. One thing is clear: this won't be easy.

Yet again the eurozone crisis is butting heads with national democracy

After a lengthy absence Portugal returned to the headlines over the weekend with the Constitutional Court ruling that some of the government austerity measures were unconstitutional. Here are the key details:

• The court found that four out of nine key savings measures included in the government’s latest budget were unconstitutional. These measures focused on cuts to public sector wages and pensions – the court deemed these unconstitutional since they hit public sector workers disproportionately hard. They also ruled against cuts to unemployment and sickness benefits.
• The measures amount to savings of €1.3bn (0.8% of GDP) which will now need to be found elsewhere. If they are not found, then Portugal’s deficit this year could reach 6.4% rather than the 5.5% currently targeted.

What does this mean for Portugal and the eurozone?

• The ruling was the cherry on top of a bad week for the government after a close ally of Prime Minister Pedro Passos Coelho resigned and the government faced a no-confidence vote in the parliament. Fortunately, it has so far survived these problems (new elections would bring huge uncertainty) but its support continues to be eroded.
• The previous political consensus in favour of the bailout and the accompanying austerity has now vanished, the opposition is likely to become increasingly vocal in its anti-austerity approach.
• The Commission has warned that the extension of the bailout loans agreed recently will be under threat if the government does not meet its targets.
• The cuts are likely to be found elsewhere but they may have more of a negative impact on growth, although this remains uncertain. One thing that is clear is that the public sector wage and pensions do need to be adjusted if Portugal is to become competitive and particularly if it is to recover through export led growth as the bailout programme currently targets. The inability to adjust these areas could harm Portugal in the long run.
• That said, this is not the first time this has happened. Last July, the court made a similar ruling on public sector wage cuts. The fact that this has happened again suggests the government may be struggling to find savings elsewhere (why else push on with cuts it knows stand a good risk of being blocked), and doing so may take longer than some expect.
• Legal points aside, experience (particularly in the Baltics) suggests that wage cuts in the private sector often follow or go hand in hand with public sector ones – at the very least, buy-in is needed across the economy and the private sector is unlikely to lead such an adjustment unless prompted to (wages are sticky on the downside). In this sense, although the cuts may have disproportionately hit public sector workers initially it may be necessary part of the internal devaluation approach taken (whether this approach is correct or not is another question).
• And of course, this adds further delays and uncertainty in the eurozone – along with lack of government in Italy and capital controls/bailout in Cyprus.

This is likely to rumble on for a while yet as the Portuguese government searches for savings elsewhere which will meet the requirements of the troika. Yet again, the eurozone crisis is butting heads with national democracy, in this case specifically constitutionality. Plenty more of that to come we expect.

The inbuilt political stand-off in the ECB's bond-buying programme

One of the many sub-stories of the Italian election is how it calls into question the ECB's bond-buying programme - the Outright Monetary Transactions (OMT). Not so much because of the ECB's ability to expand its balance sheet and stand behind Italy and Spain (though there's a clear cost to that). The reason is another one: unpredictable politics.

This is something we highlighted immediately following Mario Draghi's announcement to launch the OMT, in September 2012. We said:

"It will also be virtually impossible for the ECB to impose effective conditionality on debtor countries, meaning that the ECB can only hope that a series of unpredictable political decisions in member states will go in its favour."

To inject such conditionality, the OMT was linked to the European Stability Mechanism - the eurozone's permanent bailout fund - which comes with strict conditions (or at least is supposed to). To tap the OMT, a country has to be on an ESM programme. But, in effect, this made the OMT - despite it being run by an independent central bank - hostage to parliamentary and electoral politics.

As we argued in our analysis on the German Constitutional Court ruling on the ESM - a few days after the OMT announcement in September last year:

"...the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto."

Well, enter the Italian elections (and Beppe). Discussing the election results, we told the Telegraph on Monday that:

“People have forgotten that the OMT cannot be triggered without a vote in the German Bundestag. This is going to be a huge problem, and we may be back to the political stand-off between the North and South of Europe,”

And in our flash analysis yesterday, looking at the Italian election results, we noted:

“A fragmented, anti-austerity Italian parliament could also make it far more difficult for the country to tap the ECB’s OMT. This is because it would need to access the European Stability Mechanism simultaneously, meaning a series of strict conditions – which Berlusconi and others could resist – and approval from several Northern Eurozone parliaments, including from the Bundestag.”

Other analysts are now waking up to this issue as well.

Then again, if it ever came to a point where Italy actually needed to tap the OMT, things might be so bad that politicians on both sides (probably during a panic-stricken weekend) could be scared into accepting whatever ESM-deal that could be struck.

But it all goes to show that in the eurozone, there's no escaping the politics.