Economic Recovery Watch 12 October 2009


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Economic Recovery Watch 12 October 2009

  2. 2. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks. “Watchtower” Bridging the Gap – Economics and the Future of Europe’s Centre Right Foreword by CES Head of Research All across the EPP, the German election of Sept 27 was received with enthusiasm. Angela Merkel,after all, is now getting the coalition with the liberal FDP that she always wanted, instead of theunloved and cumbersome Grand Coalition with the Social Democrats. The stratagem she used toachieve this victory, however, was interesting and merits further analysis: With the onset of thefinancial and economic crisis in September 2008, the CDU moved further towards the political centreof German politics, with bailouts not only of banks, stimulus, deficits, and even minimum wages incertain sectors of the economy. That made her hugely popular with the general public, and gained theCDU a good deal of votes from swing voters who otherwise might have opted for the SocialDemocrats. But this move, in turn, caused considerable frustration among the CDU’s own“Wirtschaftsflügel” (business wing) composed of the self-employed upper middle class, other highearners and owners of small and medium businesses. And that resulted in an unprecedenteddefection of over 1 million classical CDU voters to the FDP which had a record result at 15 per cent–compared to the CDU/CSU’s 34 per cent, the lowest share of the vote since 1949. In a way, it mayseem ironic that in the middle of the worst crisis since the Depression, and in Germany which hasnever been all that keen on unfettered capitalism, the most economically liberal party scores the bestelection result in its history. But Chancellor Merkel’s manoeuvre worked: This division of labour, according to pollsters, got theblack-yellow coalition the 1 or 2 percentage points that were needed for a parliamentary majority. Butthere is a price to be paid: anyone who thinks that a successful coalition over the next 4 years willenable the CDU and CSU to recover their lost votes soon, may be in for a surprise. That is because thiscoalition will quickly develop its own internal dynamics – in fact, in the 2 weeks since the election, ithas already begun to do so. In the jostling before and during coalition negotiations, parties are quicklydeveloping the roles they will play over the next 4 years. Whenever the FDP talks of lowering taxesnow, reforming the labour market (i.e. making it easier to fire end therefore also to hire) and cuttingsocial welfare benefits, the CDU and CSU balk or dither. Whether they want it or not, they are pushingthemselves into the role of the structural conservative. And not without reason: That may be the onlyway to keep the now devastated SPD from winning the very important Länder election in North RhineWestphalia in May 2010 on a ticket of social protest, on the backdrop of the predicted rise inunemployment ahead of us. A victory of the united Left (possibly SPD, Greens and Linkspartei) there
  3. 3. Centre For European Studies ECONOMIC RECOVERY WATCHwould cost the new government its majority in the Bundesrat, the Second Chamber of Parliament, andwould meanan ominous psychological breakthrough of a newly resurgent, more left-wing SPD. TheFDP, on the other hand, will have a vested interest in not giving up its position as the advocateof economic freedom and fast growth. Hence, the roles are already written for the coalition stage inBerlin. But what are the deeper consequences of all this for the Centre Right, in Germany and the wholeof Europe? – German Christian Democracy has always managed to combine economic liberalism withChristian social teachings, under the unifying banner of the Social Market Economy. In fact, that wasone of the reasons for its lasting success as the leading “Volkspartei” (catch-all people’s party) inpostwar Germany. To give up this advantage, and leave many centre right economic liberals toanother party, would in the long run put into question the character of the CDU/CSU as Volksparteien.The same is true on the European level as well. There is no easy way out of this dilemma. But it isobvious that, sooner or later, Christian Democrats and Conservatives in Germany and elsewhere maywant to focus less on defending the status quo in business and welfare, and be bolder in reforminglabour markets and the structures of our economies. Ultimately, we will be measured not only by ourreaction to the onsetting crisis in 2008 and 2009 (which worked well) but by our ability to bring Europeback to a fast and sustainable recovery (which is by no means assured yet).
  4. 4. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.EU Member StatesBelgiumThe government in Belgium is set to demand at least a symbolic amount of 500 million euros from itsrescued banks in a bid to claw back money handed out at the peak of the financial crisis, ministersannounced on 9 October. Banks in the country have already started a painful process of reform inorder to overcome the losses caused by their troubled assets. ING, for instance, is in advanced talkswith HSBC to divest its assets in Asia. The bank based in London is in the front-run to acquire separateAsian divisions of the troubled Dutch-Belgian bank. This operation will provide a breath of freshliquidity to ING that exactly last year was forced to seek government support due to concerns over thequality of US mortgage-backed securities that it held. On the other hand, the car manufacturingindustry in Belgium risks to suffer OPEL’s change of property. Magna International already announceda plan to cut some 10.500 employees throughout Europe. The Belgian government is seriouslyconcerned that the OPEL factory near Antwerp might particularly be affected by this decision.BulgariaBulgaria is increasingly unlikely to seek an emergency loan from the International Monetary Fund andmay seek to launch a Eurobond early next year to meet its external financing needs. Bulgarias tourismsector is going to register a decline of 20-25 per cent in its revenue in 2009 compared to the 2008levels. The global economic crisis has forced Bulgaria’s tourism companies to reduce their prices by10-30 per cent. At the same time, Bulgaria’s domestic trade shrank by 19,1 per cent in August 2009compared to its levels in the same month of 2008 and the industrial output declined by nearly 16 percent compared to its levels in August 2008. Moreover, Bulgarias Minister of Regional Development,Rosen Plevneliev, announced that 10 per cent of the building firms in the country are likely to gobankrupt in the next few months. Unemployment is rising and forecast to surge later this year. InSeptember 2009, the unemployment rate reached 8 per cent, which is the highest unemployment ratesince April 2007, and is set to exceed 10 per cent by the end of this year. But thanks to the real estateand steel industry booms propelled by foreign capital, the economy has avoided the double-digiteconomic contractions seen in Latvia, Lithuania and Estonia. Still, GDP in the second quartercontracted 4.9 per cent, sharply reversing last years 7 per cent expansion. But Bulgarias 2010 draftbudget envisages a small deficit at the end of next year, or about 0,7 per cent of the GDP. A balancedbudget will guarantee the unblocking of the rest of the European Union funds.Czech RepublicOn 29 September, the Czech government approved the draft budget for 2010 with a deficit of some163 billion crowns, which is 5.2 per cent of GDP, after the Chamber of Deputies passed thegovernment-sponsored package of anti-crisis austerity measures aimed at cutting the projectedrecord-high 230-billion-crown. The package does not contain the originally proposed lowering offamily benefits, benefits for the disabled and a new tax rate for people with higher incomes. The
  5. 5. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.package raises, among others, taxes on cigarettes, alcohol and petrol as well as VAT on all goods andservices and doubles the real estate tax. On the other hand, it cuts salaries in the public sector by 4 percent, among other things. Czech Finance Minister Eduard Janota will in spring submit anotherausterity package for 2011 and following years, including cuts in mandatory welfare expenditures andthe state contribution to home-building savings. However, according to the daily Hospodarske Noviny,the Czech state budget deficit for 2010 will be at least 10 billion crowns higher than projected in thegovernment draft since the Finance Ministry calculated it on the basis of old data. The final vote onthe bill could take place in the period from 9 December.DenmarkHigh solvency requirements from the Danish Financial Supervisory Authority are threatening thefuture of crisis-rocked Copenhagen-based bank, Amagerbanken. This troubled financial institution hasbeen given 27 days to raise enough money to continue its operations. The authority believes the bankneeds considerably more money to keep it operating, and the requirement means that Amagerbankenmay not get access to funds in the government’s Bank Package II. If Amagerbanken, which hassuffered heavy losses on the real estate market, cannot provide the necessary capital quickly enough,the bank may be forced to close. Amagerbanken has long been awaiting a decision on its applicationfor a share of funds from the bank package. It recently announced it would attempt to issue stocks tosecure a capital injection of around 600 million kroner by the end of the year. Other bad news brings anew analysis from the Association of Danish Industry which shows that green energy producers areplanning further lay-offs this autumn. Pharmaceutical company Lundbeck has also announced it willfire a tenth of its workforce in Denmark as part of a restructuring plan.EstoniaThe Tallinn city government has invited the worst hit low-income wage-earners to submit applicationsfor wood and potato rations to help them survive the winter. According to municipal officials, initially200 families will be given two cubic meters of wood and around 2,000 families will receive 40kilograms of potatoes. Those who earn less than the minimum wage in Estonia, which is about 4,350kroons (278 euros) per month, will be allowed to apply for the program.FinlandThe percentage of people seeing the climate change as a very big problem has declined since 2008,according to a poll commissioned by Helsingin Sanomat and conducted by Suomen Gallup.Experts see the recession as the first reason for the decline in a readiness to make sacrifices. Otherbad news is that the steep slide in demand for the flights of national carrier Finnair continued inSeptember. The airline reported that passenger demand was down from September 2008 by almost14 per cent, and the passengers carried in the first three quarters of 2009 fell by 8.9 per cent on theprevious year. The numbers are grim, but no longer quite as bleak as in the early part of the year.
  6. 6. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.FranceChristine Lagarde, French Finance Minister, is pushing forward a governmental drive to attractinvestment from Islamic countries, in a bid to turn Paris into the European capital of Islamic financeand help France tackle the credit crisis. Also France’s globally renowned luxury goods industry looksforward to new paths to overcome the economic crisis that hammered sales in the past threesemesters. The industry is repositioning itself on accessories, drastically cutting the production of mostaffected products such as design evening dresses and haute-couture. In the second quarter of thisyear, sales at the leather goods and saddlery division at Hermes (HRMS.PA) rose by 21 per cent on alike-for-like basis to 228 million euros ($336 million), accounting for more than half of total revenue.GermanyGerman Chancellor Angela Merkel and her Christian Democrats (CDU/CSU) won a second term on 27September 2009 elections, in coalition with the centrist and economically liberal Free Democrats.Some further economic reforms like labour market modernisation and tax cuts may be expected, but itis by no means clear when and to what extent. Germanys economy may be growing again, but it alsosaw a sharper contraction than many other countries, and economic growth does not immediatelytranslate into more jobs or higher tax revenues. The state of Germanys public finances is dire.Already CDU politicians are warning their liberal partners-to-be that tax cuts are unaffordable rightnow. Government spending is the other tough issue. Unemployment has been kept artificially low,with 1.4 million workers put on "Kurzarbeit" - where they work shorter hours while the governmentmakes up some of the lost salary. The European Commission is on a collision course with the newlyelected German government over its rescue plan for the carmaker Opel. Neelie Kroes, the EuropeanCommissioner for Competition, has urged the government to submit details of its rescue plan as soonas possible so that she can assess whether the plan complies with EU state aid rules. She said thatGerman plans to provide loan guarantees to General Motors Co.’s Opel unit must respect EU rules thatoutlaw making aid conditional on protecting jobs. In fact, the forced sale of Opel to Magna is backedby 4.5 billion euros of German taxpayers’ money, to sell 55 per cent of the European arm of GeneralMotors to a consortium consisting of Magna, an Austro-Canadian auto-parts firm, and Sberbank,Russia’s largest retail bank.GreeceThe new Socialist PASOK government may be willing to hand out some money to thousands of low-income individuals and cut taxes for those earning up to 30,000 euros per year but should also beprepared to provide the EU with a list of new measures to bring in a lot more tax revenues to plug thebig budget gap. An increase in indirect taxes in the form of a higher special consumption tax ongasoline and/or value-added tax (VAT) rates should be among them.
  7. 7. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.HungaryHungarys main centre-right opposition party FIDESZ-MPSZ will push for the earliest possible adoptionof the euro if it is voted back to power in the next years general elections. The 2008 crisis has shownthat the country is defenseless, and countries already inside the euro zone are much more protectedfrom the currency and exchange rate risks. Hungary has no official euro adoption target date andPrime Minister Gordon Bajnai said setting an EMU goal would be the task of the next government.Bajnai said maintaining fiscal discipline would ensure Hungarys economy will be able to grow wellabove 3 per cent after 2011. The cabinet expects GDP to contract by 6.7 per cent this year and by 0.9per cent in 2010. He added an extension of the existing IMF/EU loan until October 2010 will providesecurity. Hungarys Parliament is scheduled to vote on the 2010 budget on 30 November. Themeasures planned for next year include further spending cuts to keep the budget deficit under 3.8 percent of GDP.IrelandFinancial stocks all made gains on the Irish LSEQ on 9 October, shaking off any uncertainty posed bythe Green Party’s vote on the National Asset Management Agency (Nama). José Almunia, theEuropean Commissioner for Economic and Monetary Affairs, said on 9 October that he wants to seeprogress in setting up the National Asset Management Agency (Nama) passed as soon as possible.Nama was an instrument designed to address the problems across the Irish banks affected by thecrisis, and to organise an orderly restructuring and consolidation of the banking sector here in Ireland.Mr Almunia sees the implementation of Nama as a crucial step in Ireland’s economic strategy anddeclared that he wanted the Government to continue to tackle the budget deficit, and for thePaliament to pass a budget to restructure the public finances.ItalyAfter months of increasingly negative predictions, the industry is hopeful that a few shafts of lightshining through the gloom could yet herald a brighter future. In August, Italians were net buyers ofmutual funds for the second month, putting 2.83 billion euros to work, a three-and-a-half year high.Even onshore funds joined in, accounting for half of the flows, largely into long-term savings plans.Experts believe that Italy’s investments in mutual funds helped major companies return to growth,improve market conditions and stabilise the economic outlook.LatviaIn recent weeks, the news from Latvia seemed mildly encouraging, after a year during which thecountry has been kept afloat thanks to an $11.1 billion international bail-out. The decline has slowed:the economy is expected to contract by 17.5 per cent this year, but by only 3 per cent in 2010 and toreturn to growth in 2011. The current account, which showed a yawning deficit of 1.42 billion lats ($3billion) in the first seven months of last year has been transformed to show a 581 million lats surplus inthe same period of 2009. However, now the main problem is next year’s budget deficit. Internationallenders softened the target to a mere 8.5 per cent of GDP, but the government still has to push
  8. 8. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.through spending cuts of 500 million lats to meet this. Prime Minister Valdis Dombrovskis says thatLatvia faces a choice of economic scenarios: bad, and really bad. The bad scenario is slashing spendingto restrain next year’s budget deficit and ensure it receives the next tranche of a 7.5 billion eurosrescue package from the International Monetary Fund and other lenders. The really bad one is failingto make the cuts, so torpedoing the loan. Mr Dombrovskis has called for legislation that could hurtmainly Swedish banks that are severely exposed to Latvia’s mortgage market. The mortgage proposalsremove the biggest obstacle to a devaluation of Latvia’s currency. With three weeks left to agree a2010 budget, the risk of devaluation seems bigger than ever.ThefNetherlandsOn 6 October the European Commission warned the Netherlands for breaching the stability pacttogether with eight other Member States. EUROSTAT, the European Union statistics agency, reviseddown its measure of eurozone gross domestic product for the second quarter to a 0.2 per centcontraction from the first three months of the year and a 4.8 per cent contraction from the secondquarter of 2008. The next day the Dutch Foreign Ministry announced that the negotiations withIceland to solve the Icesave issue with the government of Iceland are moving forward. Iceland and theNetherlands are now closer to agreeing to loan terms for Iceland to repay the massive losses by Dutchdepositors in the collapsed Icesave Internet bank. This decision is also considered crucial to thepotential accession of the Nordic island in the European Union.PolandThe economic slowdown in Poland looks likely to push public debt even higher next year, but the 2010budget gap should still fall short of 55 per cent of GDP. Finance Minister Jacek Rostowski declared thatthe increased level of the budget deficit in 2010 is one of the delayed effects of the crisis and said thatnext years budget gap target of zł.52.2 billion is “safe” and the government plans to start narrowingthe deficit in 2011. Mr Rostowski also said that Poland is ready to participate in the costs related toincreasing the capital of the IMF. He and his Icelandic counterpart signed an agreement authorising azł.630 million loan to Iceland on 4 October. Also the złotys current level against the euro is“satisfactory,” because it helps support exports according to the Economy Minister Waldemar Pawlak.But the worrisome news for Poland is that a growing number of analysts warn that the unemploymentrate could grow to 14 per cent next year. According to Jakub Borowski, chief economist with Invest-Bank, this year will close with 13 per cent unemployment.PortugalA narrow Socialist win in Portugal may make for an unstable government. The fear of business leadersis that a weak Socialist government will be unable to tackle Portugal’s pressing economic problems.GDP is expected to contract by over 3 per cent this year. The unemployment rate is 9 per cent andrising. In 2010 the public debt and the budget deficit are likely to hit 80 per cent and 7 per cent ofGDP, respectively. The worst outcome would be for Portugal’s Prime Minister Sócrates to go forpopulist measures with the aim of seeking a bigger majority in an early election, says FranciscoSarsfield Cabral, an economic analyst.
  9. 9. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.SlovakiaThe Slovak ministers approved the state budget for 2010 which forecasts a deficit of 5.5 per cent ofGDP. The Finance Minister Počiatek said that despite the higher deficit, the proposed budget will stillmean a boost for fiscal austerity, which in 2012 should result in an annual deficit under 3 per cent ofGDP. Ivan Štefanec from the major opposition party, the Slovak Democratic and Christian Union, doesnot really trust the government’s promise to push down the public finance deficit to that level.Economists and market watchers are also reserved when estimating the prospects of this budgetbeing met. Mr Počiatek thinks that the Slovak economy is emerging from the crisis. The central bankis, however, a little bit more pessimistic. Due to the significant decline in the performance ofSlovakia’s economy during the first half of 2009 it needed to significantly revise its forecastdownward, noting that the world economic crisis reduced orders for many domestic companies andcaused that thousands of Slovaks lost their jobs. But according to the central bank (NBS), the economyhas now bottomed out and it might start to gradually show growth next year. NBS upwardly revised itsprediction for 2010, expecting that foreign demand would recover and continue to be the major driverof the Slovak economy.SloveniaSlovenia recorded the second highest GDP growth rate (+0.7 per cent) in Q2 among EU memberstates, according to Eurostat. Slovakia was first with 2.2 per cent growth, while Poland (+0.5 per cent)came third among EU countries for which seasonally adjusted GDP data are available. Other goodnews is that by subsidising the shorter working time and forced leave programmes, the governmentmanaged to keep 20,000 jobs. Development Minister Mitja Gaspari has recently presented plans forstructural reform in the coming two years, saying a number of adjustments will be needed to enable asmoother bridging of the crisis and to improve the long-term functioning of the economy.SpainAs Spain’s budget deficit soars and economic recovery remains elusive, the Socialist Prime Minister,José Luis Zapatero, has made clear that he plans to raise taxes to restore public finances. He said the2010 budget would aim to raise overall taxes by 1.5 per cent of GDP, which should earn thegovernment about 15 billion euros. Mr Zapatero did not spell out how he would do this, leaving thematter to negotiations with parties whose support he needs to get the budget passed. Mr Zapatero isperforming a u-turn. In previous years he cut the top rate of income tax, slashed company tax andbrought in a populist 400 euros annual rebate for all Spanish taxpayers. But that was when Spain wasbooming. The latest data show that GDP is shrinking by 4.2 per cent annually. Spain also has Europe’sworst unemployment - 18 per cent. Furthermore, the Madrid research group RR de Acuña & Asociadossaid the collapse of Spains building industry will cause the economy to contract for the next threeyears, with a peak to trough loss of over 11 per cent of GDP. The grim forecast is starkly at odds withclaims by Premier José Luis Zapatero, who still says Spains recession will be milder than elsewhere inEurope. The group said Spains unemployment will peak at around 25 per cent, comparable to theworst chapter of the Great Depression. Spains parliament has rushed through a law guaranteeing 420euros a month for long-term unemployed, but this will not prevent a social crisis if the slump drags on.
  10. 10. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.SwedenThe engineering company Metso Corporation is to cut 400 jobs in its facilities in Sweden and Finland.Both shop-floor workers and managerial employees will be laid off. The company has announced thatthe aim of the move is to reduce the firm’s annual costs by more than 20 million euros. Thesestreamlining measures are not expected to come to fruition in their entirety until 2011. The greatestnumber of jobs will be cut in Sweden, where 288 employees will be laid off from Metso’s Sundsvall,Karlstad, and Hagfors units.xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxUnitedcKingdomFigures released on 8 October confirmed that the UK trade deficit in goods fell to its lowest level since2006 in August. This may represent a positive sign for British exporters that may be able to takeadvantage of the weaker pound in view of an upturn in global trade. The deficit narrowed from £6.4billion to £6.2 billion, compared with more than £8 billion a year earlier. However the official data onmanufacturing output still show evident signs of recession. These figures seem to contrast thepositive outlook presented by the last review of the housing market that returned to narrow butsteady growth in the last trimester.WORLDWIDEChinaTwo weeks after the US government signed an order to impose a duty of 35 per cent on Chinese tyreimports, the US Department of Commerce is reviewing the possibility of increasing duties on theimport of steel pipes from China. This move is considered extremely risky by analysts considering thesore reaction provoked in China by the previous decision. The Chinese Ministry of Commerceimmediately responded to the US investigation declaring that the imposition of further duties on steelpipes from China lacks factual basis and constitutes a clear protectionist measure to shield Americanproducers affected by the crisis.IndiaSpeaking here on the last day of campaigning for the Maharashtra assembly elections, ManmohanSingh said a good October-February agriculture output would put India’s macro-economic inflationscenario out of risk. The investments in irrigation already put in place by the government wouldprovide long-term stability to the Sub-Continent. However, on 5 October a report issued by the WorldBank warned about chronic shortage of skills in its construction industry over the next decade whichcould jeopardise the government’s ability to sustain its 9 per cent growth target.
  11. 11. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.JapanThe Japanese government is expected to outline a scheme to support SMEs. It seeks a reprieve ondebt repayments of up to three years, as part of a State programme to help businesses bear theimpact of the global economic crisis. The scheme in discussion is directed to make extension ofprincipal and interest payments easier for borrowers to ask to their bank. The support is specificallydesigned for small business a maximum of three years and individuals with mortgages who have losttheir jobs.RussiaOn 6 October Mike Moore, a former New Zealand prime minister who was director general of theWorld Trade Organization from 1999 to 2002, pointed out the risks of leaving Russia out of the WTO.Russia’s economy is the largest still outside the WTO, as well as the only member of the G20 not in theworld trade body. Mr. Moore emphasised the benefit of including Russia for both trade partners andthe country itself in terms of trade output and stability of foreign direct investments. On the otherhand he also acknowledged that Russia must prove to be ready, especially concerning the strongpublic interventionism in the country’s economy. Russia’s Prime Minister Vladimir Putin demonstratedhis pro-active attitude when pronouncing an “ultimatum” to Renault to demand more investments inthe car manufacturer Avtovaz, in which it has a 25 per cent stake, subtly threatening the Frenchmanufacturer of seeing its quota in the company reduced.UniteddStatesWorld trade, which fell more sharply during this financial crisis than at any time since the GreatDepression, shows signs of recovery, showing that the global economy is healing. Although the volumeof trade remains well below pre-crisis peak levels, imports and exports appear to have touchedbottom in the second quarter. Trade volumes had fallen even further than global growth andrepresented an important indicator to assess the degree of protectionism provoked by the crisis. USstocks seem to be recovering better than expected and full recovery might be achievable sooner thanpredicted. Nonetheless, the benchmark has almost 500 points to go before it recovers to its October2007 high, making battered investors whole again. Investors grew more confident that the doomsdayscenario of the nationalization of large banks and a prolonged global recession have been avoided. Butwith consumers hurting and unemployment high, one should expect the second leg of the healingjourney to take much longer, experts say.
  12. 12. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.INSTITUTIONSInformal European Council: On 17 September at the Informal European Council, EU leadersdefined their position for the G20 summit in Pittsburgh with a list of 28 concrete demands. Agreeddemands included to continue coordinated policy measures to develop sustainable growth andprevent a repetition of the financial crisis. Agreement to now formulate exit strategies phasing outstimulus measures was coupled with the demand to implement them only when economic recoverywould be secured. In addition, leaders voiced their support for strengthening the InternationalMonetary Fund and other international financial institutions.G-20 Finance Ministers Meeting: While the focus of the Washington and London G-20 Summitswere on preventing economic catastrophe, the Pittsburgh Summit from 24-25 September pledged tosustain a strong policy response until "strong, sustainable, and balanced economic growth” wassecured. Leaders committed themselves to a new cooperative process of shared policy objectives tocoordinate their national policy frameworks with the assistance of the International Monetary Fund(IMF). The first agreement to emerge from the summit was Chinas increased share of the voting quotaon the IMFs executive board. One other agreement was reached on the Financial Stability Board,which will in future have a broader mandate in coordinating and monitoring financial regulations andwill send out early-warning alerts on risk-taking. The G20 agreed to reform insolvency procedures forlarge banks, including a provision for "living wills", which will require large banks to say exactly howthey will be wound down in the event of insolvency. The US signed up to a commitment to adopt aninternational framework on capital requirements at banks by 2011, an agreement the EU has beenseeking since the 1990s. The EU, which was represented at the summit by the UK, France, Germany,Spain, Netherlands, Sweden, as the current holder of the EU presidency, and the EuropeanCommission, went to Pittsburgh with, among others, proposals on financial transactions tax and bonuscaps. A financial transactions tax, also known as a Tobin tax, did not make it into the summits finalcommuniqué. Leaders instead agreed that the IMF should compile a report on how banks can raisemoney for budgets. European Commission President José Manuel Barroso seemed broadly satisfiedwith the Summit, adding however that he did not hide his concern "at the slow rate of progress" onregulating finance.European Commission (EC): The ECs legislative proposals, known as financial supervisionpackage, establish the first EU wide system of supervision. Through the creation of a EuropeanSystemic Risk Board (ESRB) and through a European System of Financial Supervisors (ESFS), theCommission addresses the weaknesses and shortcomings of the current supervisory structure inEurope both at macro- and micro-prudential supervision levels. At the same time, the EuropeanCommission is seeking to set a date for exit strategies by 2011 provided its latest forecast shows areturn to positive growth. However, Eurogroup chair Jean-Claude Juncker said that discussions due totake place in December would clarify the details and timing of exit strategies. Finally, the European
  13. 13. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.Commission launched disciplinary proceedings against nine EU members over their failure to keeptheir budget deficits below the 3 per cent GDP limit set by the eurozone Stability and Growth Pact.European Parliament (EP): MEPs agreed to set up a special committee on the financial andeconomic crisis with 45 members and a 12-month mandate. It will assess the extent and impact of thecrisis on Member States and propose measures to rebuild stable financial markets. The specialcommittees term of office started on 8 October 2009. Its findings will be presented in two reports: amid-term report and a final report containing recommendations on measures to be taken.The committee will hold hearings with experts, social partners and representatives of industry,governments and national parliaments, and will contribute opinions to the legislative work ofParliaments standing committees.European Central Bank (ECB): The ECB will continue giving loans to banks as a way to maintainrecovery in the euro zone and it said that the central banks massive supply of liquidity would bephased out over time but it would be premature to start this year. ECB President Trichet brushed offconcerns that the ECBs liquidity injections would fuel inflation in the 16-nation region. Economists donot expect interest rates in the euro zone to rise before the third quarter of next year, but the ECB hasgiven no clear sign on whether it will mop up liquidity before hiking rates, or the vice-versa.European Investment Banks (EIB): The EIB launched a lending facility for SMEs in the EUseastern neighbours. Until now, the bank has only been able to provide such loans within the EU. TheEIBs decision to expand geographic coverage follows a request made at the EUs Eastern Partnershipsummit held in Prague in May, which invited the EIB, the European Bank for Reconstruction andDevelopment (EBRD) and other international financial institutions to establish a joint small andmedium-sized enterprise facility. Under a mandate provided by the European Parliament and Councilof Ministers, the EIB is able to undertake activities in all countries except Belarus. The mandate makesavailable a total of 3.7 billion euros for lending in the period 2007-13.International Monetary (IMF): The IMF calculates that losses of European banks as a result ofbad loans and toxic assets will increase in the coming months and could reach a total of almost 420billion euros by 2010. European banks are in any case already acting to raise extra capital, many ofthem thanks to the help of national authorities. But others, especially in Italy and France, are lookingfor money from the private sector to repay previous debts or to explicitly shield public support.EPP ViewsThe EPP Group in the European Parliament has welcomed the Leaders statement issued after theG20 Pittsburgh Summit. Commenting on the outcome of the G20 Summit, Joseph Daul, Chairman of
  14. 14. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.the EPP Group, said: "The EU has been active from the very beginning of the financial crisis inconvincing its partners to adopt new rules regarding the supervision of the financial sector. With its500 million consumers and 22 per cent of world production, Europe is the worlds biggest economyand holds as such a strong position in the G20. The Leaders statement proves we can convince ourpartners to go along the road of ambition, to reform and adapt our global financial systems to theneeds of the 21st century to lay the foundation for strong, sustainable and balanced growth." The EPPGroup also welcomed the creation of the Special Committee on the Financial Crisis in the EuropeanParliament through which Parliament will monitor the process of financial reform. The BudgetaryCommittee of the European Parliament discussed and voted on the first reading of the 2010 EUbudget between 28-30 September. László Surján, a Hungarian MEP and EPP Group Rapporteur of the2010 budget in the European Parliament, explained that there are two directions concerning nextyears budget. "The Council, headed by the Swedish Presidency, believes that the budget is justanother burden in this time of crisis. However, the European Parliament is convinced that the 2010budget could be instrumental in tackling the consequences of the financial and economic crisis.Marian-Jean Marinescu, Vice-Chairman of the EPP Group responsible for Budget, Budgetary Control,Regional Policy, Agriculture and Fisheries, has welcomed the outcome of the Committee vote on thedraft budget 2010 with regards to short-term aid for European agriculture including additional fundsof 600 Million euros.OUR COMPETITORS’ VIEWSS&DThe S&D Group in the European Parliament chaired by German social democrat Martin Schulz joinedthe launch of a campaign "Regulate global finance now. On the eve of the G-20 in Pittsburgh,representatives of NGOs, trades unions, academics and progressive politicians joined forces under theumbrella Europeans for Financial Reform (EFFR) to lead a campaign for strong and effective reform inthe banking and financial system. The campaign will put pressure on the Swedish presidency and EUgovernments to push ahead with financial reforms. The Europeans For Financial Reforms pledges are:1) Establish democratic governance over financial markets, 2) Transparency in the whole system, thetouchstone of accountability, 3) Protect workers and jobs from predatory practices, 4) Protect publicfinances and shut down tax havens, 5) Sustainable finance for sustainable jobs, 5)Banks need to servecustomers and support businesses.Commenting on the European Commission proposals for a European system of financial supervision,the S&D Group in the European Parliament warns that it expects serious monitoring of financialmarkets. The S&D group wants the European Parliament closely involved in the work with regularreports in public so that European citizens can see that Europe is serious about tackling wrong-doing inthe financial sector..
  15. 15. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.ALDE/ ADLECommenting on proposals presented by the European Commission for revising the structures formacro and micro financial supervision, Guy Verhofstadt, ALDE group leader called for a bolderapproach in presenting plans for a single financial supervisory authoritylack of political will amongst Member States to move towards a single financial authority. ButVerhofstadt maintains that the lessons of the crisis point precisely to this as a means to address thelack of control and supervision that allowed banks and other financial institutions excessive latitude toinvest far beyond their means. "The Commission has kept its pledge to bring forward its proposals onfinancial supervision at an early stage so the policy debate can get underway. A failure to react wouldhave increased the risk of the disintegration of the single market. However we need to tackle head onthe intransigence of some Member States to contemplate the merits of a single European financialauthority that can apply the same rules, without fear or favour, equally across the European Union,"said Verhofstadt.GUE/ NGLMEP Jürgen Klute, GUE/NGL Coordinator in the Economic and Monetary Affairs Committee commentson the publication of the IMF World Economic Outlook: "Its pleasant that even the IMF admits thatincreased public spending has been able to alleviate the impact of the current economic crisis. Iwelcome the fact that the funds report advises against premature exit from stimulus programs. Inthe meeting of the European Parliaments Committee for Economic and Monetary Affairs (ECON), thePresident of the Eurogroup, Luxembourgs prime minister and former minister of Finance Jean-ClaudeJuncker came for an exchange of views with the MEPs. ECON members from the GUE/NGL groupMiguel Portas and Jürgen Klute acknowledged that, apart from Cypriot President Dimitris Christofias,at least one other head of government does “not accept the currently prevailing, dangerousorthodoxy in economic and labour market policy.” Juncker rejected calls for early exit strategies fromstimulus programs against the economic crises, some of which have already been put in place. "Wewelcome Mr Junckers commitment to fight the repercussions of the crisis", declares Portuguese MEPMiguel Portas, "it is regrettable that many other European heads of state are today preparing theintroduction of austerity policies. These are the exact opposite of what we need in the currentsituation".
  16. 16. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 12/10/2009 To view full articles click on hyperlinks.FROM THE BLOGOSPHERE…Should we blame Eton for the Conservative party’s hostility to EU?: Tony Barber on British Euro-scepticism.Rethinking Capitalism: How Very Enterprising: Steven Pearlstein gives his view of the impact of thefinancial crisis on the masses in a critique of Michael Moore’s last movie.Should and Can the US Fast-Track Russia into the WTO?: Iana Dreyer on ECIPE’s official blog.UPCOMING EVENTSEvent: DG ECFIN 6th Annual Research Conference: Crisis and ReformDate: 15 – 16 October 2009, BrusselsEditor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccAdditional Assistance: Xochil Guillen, Vincenzo ConfortivvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvDesign: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments:
  17. 17. Centre For European Studies ECONOMIC RECOVERY WATCHAnnex Global Financial Stability Report (GFSR), October 2009Key messages Global financial stability has improved, but risks remain elevated. Estimated global losses have improved to $3.4 trillion. However, further deterioration in banks’ loans is to come—over half of their writedowns are still to be recognized. Policymakers face considerable near-term challenges. These include ensuring sufficient credit growth to support economic recovery; devising appropriate exit strategies; and managing the risks arising from heavy public borrowing. <<Source: IMF >>