Wednesday, November 24, 2010

Open Europe press summary: 24 November 2010


Portugal and Spain's borrowing costs surge on contagion fears;
Cowen holds on to power for now
The Telegraph reports that borrowing costs for Portugal and Spain have surged to danger levels over fears that Europe's leaders are losing political control of the Irish crisis and have yet to agree on a plan to tackle the eurozone's debt problems. Yields on 10-year Portuguese bonds jumped to 6.9%, replicating the pattern seen in Greece and Ireland just before they applied for a bailout. Spreads on 10-year Spanish bonds also rose to a post-EMU record of 233 basis points over German Bunds

To add to the worries, Portugal's state deficit increased in the first 10 months of 2010, according to government figures, suggesting that the current austerity measures are not working. The BBC notes that the country's two main unions have called a general strike today, paralysing rail, air and other services, in protest at further government cuts, due to be put to a parliamentary vote on Friday.

As further details of the Irish bailout package are emerging, the Guardian notes that the total package will amount to €85bn, including a contribution from the UK taxpayer of up to £10bn. The Irish Independent reports that up to €50bn of the fund could be used for the banks, with the first tranche of money being drawn in December to shore up AIB and the Bank of Ireland. Open Europe Director Mats Persson appeared on BBC World Service today discussing the eurozone crisis.

The FT notes that Denmark is the third non-eurozone country to pledge bilateral support to Ireland, after the UK and Sweden. Norway said it too would consider any request for help. A YouGov poll for the Sun shows that 49% of Britons think that the UK should not be lending money to Ireland.

The Times notes that Irish PM Brian Cowen last night saw off a call from coalition rebels for his immediate resignation and the government will today announce a four-year plan of savings worth €15 billion, including €3 billion cuts to the social welfare budget. The 2011 budget will follow on 7 December, if the government remains in office. Rating agency Standard & Poor's has downgraded Ireland's long term debt.

The Irish Times reports that the deadlock between Ireland and the EU over corporation tax may be resolved by the imposition of a levy on banks as one of the terms of the bailout. Levies would increase the "tax yield" from the corporate sector while leaving the 12.5% corporation tax rate intact.

German Chancellor Angela Merkel admitted yesterday that the eurozone was "facing an exceptionally serious situation". She rejected criticism that German insistence on bondholder "haircuts" on sovereign debt from 2013 was fuelling the crisis. "I will not let up on this because the primacy of politics over markets must be enforced," she added. Finance Minister Wolfgang Schäuble told parliament, "Our common currency is at risk."

Le Figaro quotes Poul Thomsen, head of the IMF's mission to Greece, saying, "Whether [Greece] will be able to return on timetable to repay the IMF is admittedly an issue." He suggested that, should Greece prove unable to raise enough funding in the markets, the IMF could consider among possible options either a "longer repayment period" for its €30bn emergency loan or a "follow-up loan".

Meanwhile, a confidential document from the German Finance Ministry seen by Der Spiegel outlines the main aspects of Germany's plans to establish a crisis resolution mechanism for the eurozone - to be discussed by EU finance ministers in early December. The article notes that, under the German plans, the conditions for all new bonds in the eurozone would include a debt restructuring clause as of 2013. The proposed facility could reportedly also provide debt-laden eurozone countries with liquidity coming from two different sources. Firstly, there would be revenue from the fines that eurozone countries would pay for repeatedly breaching the Stability and Growth Pact criteria on debt and deficit. Secondly, eurozone countries would contribute to the fund directly - possibly based on their shares in the ECB.

Eurozone comment
On his BBC blog, Robert Peston notes that Ireland's central bank governor, Patrick Honohan "points out that Ireland's official GDP and unit labour cost statistics have consistently overstated the size of the Irish economy and its productivity respectively...Which implies of course that the ability of Ireland to repay its enormous bank and state debts is even worse than the eye-poppingly high ratios of borrowing to GDP would imply".

In the FT, Martin Wolf argues, "The Irish case also shows that the German view of how the eurozone should work is mistaken: fiscal sloppiness is not the main problem and fiscal retrenchment and debt restructuring are not the sole solutions. One cannot learn from history if one does not understand it".

An opinion piece in Handelsblatt by columnist Thorsen Riecke argues, "whether we can save the euro, is questionable. It is however sure that we become gravediggers when we push countries in crisis into a straightjacket". On his Coulisses de Bruxelles blog, Jean Quatremer says that the survival of the euro would not be under threat "even if one or more countries decided to leave the single currency area."

On his blog, John Redwood MP argues, "The euro is imposing exactly the same kind of economic torture on the peripheral countries as the ERM imposed on some members when they tried that". Douglas Carswell MP in the Guardian argues, "We should change course and prepare to offer a dramatically different solution - help Ireland decouple from the euro and allow the country to default on its debts
Don't bail out Ireland, free it".

In an opinion piece in Handelsblatt, German MEP Markus Ferber, leader of the CSU in the European Parliament, argues that "Chancellor Merkel has sacrificed German interests", and that "although letting private creditors pay was a good idea in itself (...) it wasn't thought through...the collaboration with Paris can't be that the French manage to push through all their demands, while the German's just agree. Germany should have insisted more on automatic sanctions for deficit sinners".

In Die Welt editor Dorothea Siems warns that the "Euro-adventure threatens to end terribly" and encourages the Euro group to look for "alternatives." Siems says "Germany must make clear where its breaking point is, because the Euro is not an end in itself.The EU is a lot more than just a Euroland."

ECJ ruling clears disputed 3.7% pay increase for EU officials
AFP reports that a ruling from the European Court of Justice has established that around 46,000 EU officials are entitled to the full 3.7% pay increase proposed by the European Commission for last year. In December 2009, member states had agreed to cap such an increase at 1.85% to take account of the economic and financial crisis. However, according to the ECJ, "the Council has no margin of discretion allowing it to decide upon a salary adjustment different to that proposed by the Commission."

Barroso to announce new proposals on EU tax by June 2011
EUobserver reports that yesterday European Commission President José Manuel Barroso outlined in the European Parliament fresh plans to publish an official proposal on direct funding for the EU before the end of June 2011. "We will use our right of initiative to put forward formal proposals as to own resources before the end of next June [...] These are the clear commitments undertaken to you", Barroso said in his speech. Meanwhile, European Voice quotes Hervé Jouanjean, Director-General of the Commission's budget department, saying that negotiations between member states and MEPs on the 2011 budget could resume on 6 December.

On Conservative Home, Bernard Jenkin MP argues, "The new Government has accepted every transfer of power to the EU as fait accompli - including every aspect of the Lisbon Treaty, on which we promised a referendum.  The Government has decided to pass up a golden opportunity to offer a referendum on the post-Lisbon settlement by making it clear that there will be no referendum on any Treaty to deal with the euro-crisis."

In a bid to persuade UK citizens of the benefits of EU membership, the European Commission has launched a new dedicated website called "The EU: What's in it for me?"

The Italian government risks new sanctions from the European Commission due to its failure to solve problems with waste disposal in Naples. EU funds for the region will remain frozen until a new plan is presented to the European Commission, reports La Repubblica.

L'Echo has calculated that as a result of EU rules on VAT, apartments in Belgium will become up to €20,000 more expensive.

FTD reports that France is considering introducing a "Google tax", in order to create tax revenue from the internet. It could be imposed from 2011 on internet companies based in France.
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