Economic Recovery Watch 17 June 2010


Published on

  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Economic Recovery Watch 17 June 2010

  2. 2. Centre For European Studies ECONOMIC RECOVERY WATCH ‘Watchtower’ 16 or 27, and the Return of Core Europe Foreword by CES Head of ResearchA zombie is a creature that appears in books and popular culture typically as a reanimated dead or amindless human being. Stories of zombies originated in the African Caribbean spiritual belief system of Voodoo..... - Wikipedia, June 2010The Euro Crisis has led to all kinds of unhealthy side effects, as we already know. Among them weresome unsavoury reflexes from the past, such as references to national clichés in the ugly spat betweenthe media and some politicians in Greece and Germany. And in recent weeks, another creature, buriedmore recently, has returned to the limelight, barely disguised as an allegedly unavoidable institutionalstrengthening of the Eurozone of currently 16, as opposed to the whole EU of 27.Let’s face it: A Eurogroup with a powerful secretariat, possibly even a High Representative for macro-economic coordination, possibly even supervising the European Central Bank, would be a new versionof that zombie from the agonising 10 years of debate and ratification of EU reform between 2000 and2010: Core Europe – a group of countries that move ahead in several areas, with the apparent optionfor others to join later. And if such a group develops decision-making and administrative institutions, itcould be the beginning of the end of the Union of 27.This is what lies behind the Franco-German compromise of Monday in Berlin, and the joint positionduring Thursday’s EU summit in Brussels: Economic governance – yes; a central economic governmentwith institutions – no. Despite the fact that even German Chancellor Merkel now speaks of aWirtschaftsregierung (a semantic nod to the longstanding French demand for a gouvernementéconomique), most EU Member States want to avoid the creation of a new authority that woulddirectly interfere with macro-economic decision making in national capitals, notwithstanding, ofcourse, tighter controls of budgetary discipline.This is for the simple reason that it would not only stand diametrically opposed to the principles ofsubsidiarity, best practice and, in the end, European competitiveness. But most of all because it wouldmean the return of the idea of a two tier Union with all its implications of a largely West Europeanclub which – at a decisive moment - excludes important Northern and Central European countries. Itsinstitutions would automatically represent a Southern and Western continental philosophy onfinancial, economic and social policies, not taking into account the more pragmatic, dynamic andausterity-oriented economics of the North and East. If the EU is to regain competitiveness and avoidfuture crises such as the one we are in, it will have to do so with a maximum possible involvement ofall 27 Member States. And Core Europe should rest happily in its grave, just as Voodoo should remainin the Caribbean.
  3. 3. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.EU Member StatesAustriaAustrians’ spending power rose strongly in ’crisis year 2009,’ as new figures have shown. ResearchersKMU Forschung Austria announced people’s purchasing power jumped by 4.6 per cent year on year,adding that Austrians had around 135 billion euros of disposable income. KMU Forschung Austriahowever stressed that there was just a 4.1 per cent year on year rise considering the 0.5 per centincrease of inflation. As a further good news, People’s Party (ÖVP) Economy Minister ReinholdMitterlehner claimed Austria was ’positioned to achieve sustainable growth’ as the OECD predicted abright future was ahead for the country’s economy. The body said it expected Austria’s economy togrow by 1.4 per cent year on year in 2010, while its most recent forecast claimed the country’seconomy could expect a year on year growth of just 0.9 per cent. In related news, the ÖVP remainssplit on the question of Austria going it alone on a tax on financial transactions. Federal EconomyChamber (WKO) President Christoph Leitl and ÖVP finance spokesman Günter Stummvoll supportdoing so, but party whip Karlheinz Kopf and State Secretary for Finance Reinhold Lopatka havereservations. ÖVP Economy Minister Reinhold Mitterlehner has said a go-it-alone approach should be‘a last resort.’ He claims that such a tax would not work without the participation of core EU countriesand that a unilateral approach would ‘not be ideal for Austria as a business location. ’The SocialDemocrats (SPÖ) remain hopeful of ÖVP support for such a tax. A European-wide tax of 0.1 per centon financial transactions would bring in 270 billion euros annually, according to ATTAC statements.L’Association pour la Taxation des Transactions pour lAide aux Citoyens (ATTAC) is an organizationthat promotes a tax on foreign-exchange transactions.BelgiumBelgium started the search for a coalition government on 14 June after Flemish separatists won aparliamentary election, causing some unease on financial markets over the countrys long-termfuture and its growing debt. Concerns about calls by the victorious New Flemish Alliance (N-VA) to splitBelgium along linguistic lines, and the risk that long coalition talks could delay spending cuts, nudgedup the premium that investors ask to hold Belgian government bonds. Jacques De Pover, an economistat Dexia, said there was no cause for immediate concern but added: ‘If in September we see that agovernment isnt being formed, if we see the crisis is prolonged, then we could see a market reactionat that time.’ Soon after the elections, Belgium’s central bank came out with official figuresconfirming that Belgiums ratio of debt to gross domestic product ratio would once again rise above100 per cent this year as a result of the financial crisis and the bailout of the countrys banks, havingdipped to as low as 84.2 per cent in 2007 from a high of 133.6 per cent in 1993. The central bank alsoraised its forecasts for economic growth and inflation this year, but said debt-to-GDP would top 100per cent. The economy will grow by 1.3 per cent this year, slightly more than previously forecast, andby 1.7 per cent in 2011 after contracting by 3.0 percent in 2009, Central bank governor Guy Quadensaid.
  4. 4. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.BulgariaBulgaria’s GDP lowered to the level of 3.6 per cent on an annual basis in the first quarter of 2010. It isa 2.3 per cent drop in comparison to the previous quarters. It is one of the most significant falls in GDPamong the EU Member States. Moreover, due to the increase in spending for social payments anddecrease in revenue, the country’s budget deficit reached 1.67 billion BGN at the end of March 2010and grew by 270 million BGN in that month alone. The government pledged to maintain a tight fiscalpolicy and a deficit level below 3 per cent by the end of the year. In related news, the EuropeanCommission will investigate the possibility of Bulgaria’s faulty statistics methodology or manipulationof country’s macro-economic data. The EU was alarmed by significant revisions in the country’s budgetperspective and a change from balance budget to a deficit of 3.7 per cent in 2010. The EC decisioncame as no surprise for the Bulgarian Ministry of Finance and Prime Minister Boyko Borisov blamesthe previous Socialist-led administration for this situation. Brussels’ concerns over Bulgaria’s statisticalperformance caused the country’s credit default swap (CDS) spreads to widen to the highest level inthe last 11 months – 376.5 points. Although this level is lower than the one from the peak of theglobal economic crisis, it is a clear sign that the country is generally considered to be risky.CyprusOn 15 June, the European Commission concluded on the existence of excessive deficits in Cyprus,Denmark and Finland and recommended deadlines to the Council for their correction. In particular,Cyprus should reduce the 2010 deficit to below 6.0 per cent of GDP and ensure an annual structuraladjustment of 1.75 per cent of GDP over the period 2010-2012. In a press release, the Commissionnotes that, according to data submitted by the Cypriot authorities in April 2010, the generalgovernment deficit in Cyprus reached 6.1 per cent of GDP in 2009, while the government debt isexpected to reach 62 per cent of GDP in 2010, thus breaching the 60 per cent reference value of theStability and Growth Pact. The next day the Cypriot government approved a series of bills, whichfinalise the fiscal consolidation package. The finalised package provides for the reduction in thenumber of state employees and containment of operational expenditures, social solidarity andcohesion, the targeting of social benefits and increasing public revenues. Referring to the reduction ofthe public sector personnel, Stavrakis said Cyprus for the first time in its history has set the target ofreducing the number of state employees by 1,000 persons. Moreover, the Cypriot economy isexpected to contract by 0.5 per cent in 2010 but rebound in 2011 with growth of 1.3 per cent.In its semi-annual report, the Central Bank said its latest forecasts were in line with an expected drop-off in domestic demand, and a slowdown in construction and tourism this year.CzechcRepublicThe three parties that are negotiating the formation of a Czech centre-right coalition government, canbe expected to agree on lowering the public finance deficit, simplifying the tax system, introducingpension reform and reforming the welfare system, according to experts CTK has surveyed. A problemmay arise around the Public Affairs (VV) party´s proposal to raise taxes, which the Civic Democrats(ODS) and TOP 09 are opposed to. The VV proposes to raise corporate tax to 20 per cent from the
  5. 5. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.current 19, and to introduce a higher income tax on higher tax brackets. Neither the ODS nor TOP 09plan such steps. Petr Necas, Civic Democrat (ODS) leader and possible future Czech prime minister,wants to discuss the Czech pension reform also with the rival Social Democrats and to launch thereform in 2012. Commentator Julie Hrstkova discusses which of the outgoing Finance Minister’sfinancial package is worth implementing and what the government should rather refrain from doing.Undoubtedly positive are Minister’s Janota pragmatic draft measures reducing state expenditures andraising the revenues. The raising of the prices of cigarettes and alcohol is prepared as well, along withthe pro-environment tax, Hrstkova writes. However, measures such as the raising of the income taxfor the rich, the selected raising of insurance contributions and a reduction of tax deductionopportunities for the self-employed are but sheer populism. Quite illogical is Janota´s proposal toabolish the state subsidies to employers who employ disabled people. As a result of the abolition, thedisabled could become unemployed, which would cost the state much more, Hrstkova points out.DenmarkAfter the latest public expenditure figures for 2009 were published by Statistics Denmark, SteenBocian, the chief economist at Danske Bank, says that public sector costs are unsustainable. In astatement made to national broadcaster DR, Bocian said the growth in public consumption was aboutone percentage point higher than it appeared in the national audit, which he added, was a verysignificant difference. According to Statistics Denmark, the national deficit was 47 billion kroner lastyear - which was expected. However, public spending reached an unprecedented 496 billion kroner in2009. Bocian added that the growth in public spending underlined the need for economic reforms.Moreover, higher unemployment will be a necessary result of the government’s restructuring plan.The national bank’s latest quarterly report on the economy backs up the government’s plan to cut 24billion kroner from the budget over the next three years, saying a stronger economy is more importantthan short-term job losses. According to the bank’s quarterly report, the government’s plan to cutpublic expenditure will result in a 0.2 per cent dip in GDP and an increase in unemployment by a totalof 5,000 people in 2011, followed by a further 6,000 job losses in 2012.EstoniaAccording to a statement prepared for the Brussels summit, Bloomberg reports that EU leaders willput Estonia on track to become the 17th euro nation on 1 January 2011 thanks to ‘the convergence ithas achieved, based on sound economic and financial policies.’ Estonia gained wider support to adoptthe euro in 2011 when a European Parliament committee endorsed the step, highlighting Europe’spush to restore confidence in the single currency amid the debt crisis. The draft statement made noreference to a non-binding ECB opinion that Estonia risks higher inflation. Instead, the statementwelcomes its fulfillment of all the convergence criteria. The rate at which Estonia’s kroon will beconverted to the euro will be set by finance ministers on 13 July. Standard & Poor’s raised its long-term foreign and local currency sovereign credit ratings on Estonia to A, the sixth-highest investmentgrade from A-. Last but not least, Estonia joined the OECD and will become a full member after theaccession treaty is ratified by the Estonian Parliament.
  6. 6. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.FinlandOn 16 June the share price of the world’s largest company, Nokia, plummeted by roughly 9 per cent.The factors negatively impacting the company’s business include the competitive environment,particularly at the high end of the market, and shifts in product mix towards somewhat lower grossmargin products. Nokia also announced that in addition to the weak sales of high-end smartphones,the recent depreciation of the euro has affected Nokias cost, operating expenses, and global pricingtactics. On a more positive note, the number of new entrepreneurs applying for grants for businessstart-ups from the Employment and Economic Development Office has been higher than a year ago,despite the financial situation remaining unstable. The Ministry of Employment and the Economyreports that over the first three months of the current year, more than 3,000 decisions were made toprovide grants for business start-ups. Compared with last year, the figure shows an increase of some150 start-ups. According to figures released by Statistics Finland, the value of new orders inmanufacturing was up by 22.1 per cent in April compared with the situation one year previously. Inthe period from January to April of this year, the increase on 2009 was 12.6 per cent. The mostpowerful growth was registered in orders for the manufacture of paper. On the other hand, StatisticsFinland reported that overall output continued to decline in the first three months of this year. Thismeans that GDP went down for a second consecutive quarter, which means that technically, Finland isstill in an economic recession.FranceAccording to l’Institut national de la statistique et des études économiques (INSEE), the officialstatistics body of the French government, unemployment in France remains high but stable in thefirst quarter of 2010. Statistics reveal that unemployment is hovering at 9.5 per cent in metropolitanFrance or 9.9 per cent if overseas territories are included. In the 15-24 age group, unemployment hasdropped to 23 per cent from 24.2 per cent in the last quarter of 2009. For methodological reasons,INSEE does not publish monthly unemployment statistics; however Eurostat, the EuropeanCommission’s statistics service placed France’s April unemployment at 10.1 per cent in April 2010,overseas territories included. The French government is also doing its part to reduce its expenditure.French Prime Minister François Fillion stated earlier in May that his government intended to reducepublic spending by 10 per cent between 2011 and 2013. In addition, he intends to freeze all spendingincluding pensions. All this is being done in attempt to ensure that France’s sovereign debt ratingremains at AAA. Finally, rating company Standard and Poors has downgraded the debt rating ofpublicly-owned railway company SNCF, from AAA to AA+. This downgrade was a result of fears tocompany’s bottom line brought on by liberalisation of the European rail transport industry. This fearwas compounded by the European Commission’s suspicion that the company’s ability to take onnearly unlimited debt due to its legal status could constitute a form of illegal state aid.GermanyLike many of its European neighbours, Germany has recently passed an austerity package to help thecountry weather the current economic storm. On 7 June 2010, German Chancellor Angela Merkelreceived approval to implement an austerity package that would, amongst other measures, reducethe deficit by 80 billion euros by 2014, reduce the budget deficit from its projected 5 per cent this year
  7. 7. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.and place 15,000 public sector jobs on the chopping block. Further cuts include a reduction in thenumber of police officers and soldiers and postponement of the reconstruction of the BerlinerStadtschloß. As Germany is the single largest contributor to the Greek debt bailout, these austeritymeasures have caused controversy. In publicly-traded securities, German stocks have recently dippedin value on news that exports declined in April. According to the Federal Statistics Office, exportsdecreased by 5.9 per cent from a month earlier, which saw an increase in exports of over 10 per cent.In addition, imports decreased by 7.3 per cent over the month. Stocks in utility companies fell slightlyon the news that nuclear energy would be taxed by the German government, notably the profitsearned from nuclear reactors that continued to operate past scheduled shut-down dates. Finally,shared in Deutsche Lufthansa AG were down on the news that the recently passed austerity measuresinclude a new tax on air travel. Lufthansa is seen as being in a particularly disadvantageous financialsituation because stiff European competition precludes raising ticket prices to make up shortfalls inrevenue.GreeceThe first effects of the austerity measures imposed by the Socialist government in accordance with theEU-IMF-ECB security mechanism were felt in Greece during the months of May and June. Theeconomy was visibly affected by the curbing of public and private spending, as it shrank by 2.5 percent in the first quarter of 2010. GDP is forecast to drop by 4 per cent altogether at the end of theyear. At the same time, shares on the Athens Stock Exchange are at their lowest level in 12 years,mostly affected by negative rumours and speculation concerning Greece’s ability to abide by public-deficit reduction measures and stay in the Eurozone. But even greater concern was caused by thesteep rise of inflation, which, at 5.4 per cent annual increase in May, recorded its highest rate in 13years. That increase was mostly due to rising higher costs of alcohol and tobacco consumption andhigher costs of transportation. These higher costs in turn reflect higher VAT and consumption taxes.The Ministry of Finance announced that the budget deficit shrank by 38.8 per cent on a yearly basis inMay versus a 35.1 per cent targeted decrease. But tax revenues were lower than expected, thusmaking it more difficult for the government to reach its public deficit goal of 8.1 per cent at the end of2010. More than that, international observers are still nurturing significant doubts as to whether theGreek government has the political will to implement all of the needed reforms. The disagreementbetween the Labour Minister and the international inspectors over the new social security bill in Maywas an example of this. A survey of global investors by Bloomberg published on 9 June showed that73 per cent of them still thought that a Greek debt default was likely and 40 per cent of them thoughtit likely that Greece would abandon the euro. On June 14, Moody’s downgraded Greece’s creditrating to junk status and estimated the possibility of a Greek default at 7 per cent. Nevertheless theGreek government tried to downplay the significance of this development. Experts from the IMF, theECB and the Commission were in Greece to evaluate the implementation record of the government,ahead of the approval of the next installment of 9 billion euros from the rescue package which is dueon the end of June. Amid revelations by a Sunday newspaper that the IMF had warned the previousConservative government already in spring of 2009 about the country’s dire state of public finances,speculation as to government reshuffle or early elections in fall soared, thus adding a high degree ofpolitical uncertainty to the already volatile landscape of the Greek economy.
  8. 8. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.HungaryHungarys prime minister proposed a new fiscal plan, including an overhaul of the tax system and cutsto the public sector, to reassure jittery markets that it can handle its debt. In a speech to parliament,Viktor Orban said the 29-point plan will introduce a six-year tax for financial institutions and reducered tape for investors. He also suggested it would cut public sector wages and eliminate benefits suchas free cars and cell phones. Orban presented the plan after a three-day Cabinet meeting and is beingclosely watched internationally after some officials recently suggested the countrys economicsituation is similar to that of Greece. The comments shocked global markets and dragged down boththe euro and the Hungarian forint on Friday and Monday. Hungary has since tried to backpedal, withEconomy Minister Gyorgy Matolcsy saying that his government would strive to meet the 2010 budgetdeficit target of 3.8 per cent of GDP set by the previous administration. Orban pledged to create onemillion new jobs over the next decade and said the ‘time has come to replace the countrys oldeconomic system with a new one.’ International Monetary Fund chief Dominique Strauss-Kahn hassaid he sees ‘no reason to be concerned’ about the current situation in the Central European state. Infact, International Monetary Fund completed its fifth review in Hungary and made $1.1 billionavailable.IrelandAccording to the Standard & Poor’s latest report, the country’s increasing debt is said to have beencaused by reckless borrowing by Irish banks. Therefore, the origins of Irish economic problems aredifferent than those faced by southern Europe. High labour costs are also a significant problem forIreland – it had been increasing faster than in any other Eurozone country between 2000 and 2007when inflation and a series of national agreements pushed up wages. Costs increased byapproximately 27 per cent in that period. At the same time it fell by 0.3 per cent in Germany and roseby 17 per cent average across the Eurozone. Ireland’s properties market does poorly already and theestate agents foresee that even more distressed properties will come to the market in the secondquarter of 2010 than in any other country. In the first quarter of 2010 the largest increase in distressedlistings was noted in the US and Ireland. In such countries as India, Hong Kong, Australia or China thisnumber is dropping.ItalyEconomic recovery in Italy is very much a mixed picture. Istat, the official statistics agency of theItalian government has released figures showing that real wages in Italy are on the rise. In the firstquarter of 2010, wages were 3.6 per cent higher than they were in same quarter last year, and 0.7 percent higher than in the last quarter of 2009. Despite increasing wages and productivity,unemployment has increased slightly. The number of unemployed Italians was at 8.9 per cent in April,up from 8.8 per cent in March. Though on the increase, it is quite favourable when compared to theaverages for the G7 (9.7 per cent) and the Eurozone (10.1 per cent). According to Unicredit, the Italiangovernment must do more to shore its financial position. Though Italy has been largely unaffected bythe sovereign debt crisis, the Italian government must speed up its structural and spending reforms.Despite its high public debt, Italy has yet to go the way of Greece and Portugal. However, special
  9. 9. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.attention must be paid because Italy is the largest EU Member State in such a precarious financialsituation. This is on the heels of recently released figures that show that Italian GDP grew at a slowerpace than originally forecast. Fourth quarter growth was at 0.4 per cent, lower than the estimated 0.5per cent. Though the figures for the first quarter of 2010 have yet to be released, there is widespreadbelief that Italian exports increased due to the devalued euro. Furthermore, the international marketshave been allayed by the actions of the Berlusconi government which introduced an austerity packageaimed at lowering budget deficits to below 3 per cent by 2010.LatviaThe government on 3 June unanimously supported the need to strengthen the country’s fiscaldiscipline standards by approving mid-term budget conditions, tightly restricting an increase to thenational debt and the possibility for budget amendments. The International Monetary Fund (IMF) andthe European Commission have not changed their position, and continue to support Latvia’s choseneconomic programme based on preserving the current valuation of the national currency and workingon gaining entry to the Eurozone. On a different note, Latvia’s most political parties will be financedfrom the state budget from 2012. Each party which wins at least 2 per cent of votes in theparliamentary elections will receive 0.5 lats (0.71 euros) for each supporter every year until the nextelections. Political party dependence on powerful oligarch’s money is one of the biggest of Latvia’sproblems. The only income parties can receive, according to the legislation, are donations from amember or any supporter. Meanwhile, parties need to finance election campaigns, to cover officerent, to arrange party congresses, to support their youth organisations, etc. If the measure wasimplemented this year, the state would spend 427,500 lats to support the parties. The exact amountfor the next four years will be calculated after the parliamentary elections in October.LithuaniaLithuania needs to cut its budget by about 4.5 billion litai ($1.63 billion) in the next two years toachieve a deficit of 3 per cent of gross domestic product, Lithuanian finance minister Ingrida Simonytesaid in Vilnius. On the same subject, IMF said this week that Lithuania needs a fiscal adjustment of 5.5per cent of gross domestic product by the end of 2012. The economic decline slowed to an annual 2.9percent in the first quarter from 12.1 percent in the final three months on 2009. Lithuania’s annualindustrial production rose the most in 19 months in April, driven by recovering export demand,according to a Bloomberg report. An industrial rebound after 16 months of decline is boostingoptimism about an economic recovery. Lithuania relies on export-led growth to offset a weakness indomestic demand after wage cuts and rising unemployment. Lithuania’s unemployment rate rose inthe first quarter to the highest in at least 12 years as the economy struggled to recover from arecession. The jobless rate jumped to 18.1 per cent from 15.6 per cent in the final three months of2009. The rate was 11.9 percent in the same period last year.
  10. 10. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.NetherlandsCaretaker finance minister Jan Kees de Jager has said that the new cabinet emerging after the generalelections will have little influence on the budget. He stated that even if VVD leader Mark Ruttemanages to put a new coalition government together before 1 July, it will still only be able to have avery limited effect on spending plans for next year. Speaking after the weekly cabinet meeting, DeJager said the preparations for next years budget are already under way, ahead of their formalpresentation on the third Tuesday in September. Rutte wants a speedy cabinet formation processbecause of the need for tough economic measures. Last year, the outgoing cabinet agreed to delaytaking decisions on economic reform until this September. But those plans too were abandoned afterthe cabinet collapsed in February. The Dutch budget deficit has risen to 6.6 per cent, slightly higherthan forecast, according to the finance ministrys spring statement. Just before the elections, anumber of prominent Christian Democrat economists have criticised party leader Jan PeterBalkenende for stating that the CDA will refuse to be part of a coalition government which wants tomake changes to mortgage tax relief. The Liberal party VVD is also opposed to changes to the systembut has not made it a crucial issue in the formation of a new government. Labour leader Job Cohen hascalled on the CDA and two Liberal parties VVD and D66 to support the pension age increase dealreached between unions and employers. It emerged earlier on Thursday the two groups are nearingcompletion of an agreement backing an increase in the state pension age from 65 to 66 in 2020.PolandPoland is no longer attractive for foreign investors. Ernst & Young’s report says that more often theytend to locate their money in the Central European markets. The number of jobs created thanks to theforeign investments decreased by 50 per cent in 2009 – from 15,500 in 2008 to 7,500 thousand in2009. Industry was most affected by this trend. The Polish share in establishing new industry jobsdecreased from 12 to 6 per cent. The service sector does much better as the number of newly createdjobs decreased from 6 to 5 per cent. Last year Poland was second in the ranking of creating new jobs.Currently, the country is in fifth position behind Great Britain, France, Russia and Turkey. Additionally,the number of new investment projects decreased by more than 30 per cent. Poland’s competitorsfrom Central Europe are in a much better position, such as in Slovakia where the number of projectsincreased by 44 per cent. Experts think that the Polish government is doing little to convince foreigninvestors that Poland is an attractive place to do business in. On another note, Polish pensions will notbe decreased but can be frozen if the ratio of the public debt towards GDP reaches 55 per cent.According to the law, it would mean that there will be no annual increase in pensions. Last year thatincrease was the highest in Europe and reached 4.62 per cent. The 2009 public debt reached 50 percent of the country’s GDP.PortugalOn 2 June, Olli Rehn, European Commissioner for Economic and Monetary Affairs, applauded theausterity plans in Portugal. Rehn said that the cuts went in the right direction and that the firstassessment is that the new targets for Portugal and Spain are indeed appropriate for the currentsituation and they are as well a substantial improvement compared to the original path of adjustment.
  11. 11. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.This approbation from Brussels was followed up by the passage of austerity legislation on 9 June.Though the ability of the socialist Socrates government to pass the bill was in doubt when theausterity plans were first announced in May, the bill did make it through the Portuguese parliamentwith the support of the centre-right Social Democrats. The aim of the austerity plan is to reduce theballooning budget deficit to 4.6 per cent of GDP by 2011 from a high of 7.3 per cent in 2009. Despitethe fears that Portugal would be following in the steps of Greece, Portugal’s sovereign debt rating hasremained firm. Standard and Poor’s dropped Portugal’s debt rating to A- in early May 2010 with anegative outlook. Though it may be too early to say, the recent passage of austerity measures couldspell and end to spiralling debt ratings.RomaniaRomanias government has survived a vote of no confidence on 15 June by just eight votes. Manylawmakers from the ruling Democrat Liberal party PDL said they voted for the motion because theypersonally do not accept pensions and salaries being cut. But having survived by a slim majority thegovernment will now press ahead with its austerity plans, including cutting pensions by 15 per centand public sector salaries by 25 per cent. Prior to this, International Monetary Fund (IMF) ManagingDirector Dominique Strauss-Kahn has said that the IMF told Romanian authorities to hike taxes,especially on the rich, instead of cutting public sector salaries and pensions. The Romanian presidenthas hit back at these allegations, saying that it was the IMF that proposed the hike in VAT from 19 percent to 24 per cent, the hike in tax on profit from 16 per cent to 20 per cent and the cut in publicsector salaries by 20 per cent. Basescu also warned that if cuts in public sector spending were nottaken now, Romania would be forced to take a new loan in March 2011 of 27-30 billion Euros. Basescuadded that the measures proposed by the IMF mission were rejected because the hike in VAT wouldhave triggered a hike of inflation, up to 10 per cent, which is double the inflation target now of 4.5 percent. In related news, the European Bank for Reconstruction and Development (EBRD) expects zeroeconomic growth for Romania in 2010, down from the previous forecast of 1.3 per cent. For 2011,EBRD estimates Romania will have 3 per cent economic growth. The EBRD said the internal demandwill be limited after the austerity measures envisaged by the government in order to cut budgetexpenses.SlovakiaSlovakia’s central bank, the National Bank of Slovakia (NBS), has expressed increased optimism aboutthe country’s prospects for economic recovery this year. In its medium-term prognosis presented on15 June, the NBS predicted growth of 3.7 per cent in 2010, up from the 3.2 per cent forecast threemonths ago. According to the NBS, the economy should strengthen thanks to improvements in foreigndemand. Slovakias GDP, hit by the global economic crisis and falls in foreign demand, shrank by 4.7per cent in 2009. As regards the labour market, the central bank expects the unfavourable situation topersist this year, with the employment rate predicted to fall by 1.9 per cent. According to Slovakia’sStatistics Office, the volume of new industrial orders in Slovakia increased by 35.9 per cent in Apriland the dominant industrial branches in particular were new orders in metal production andprocessing. On a political note, the final results of the parliamentary elections show that Smer, social
  12. 12. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.democratic party, was the most popular party with 34.8 per cent of the vote. However, the overallelection result has given hope to the centre-right parties that they will be able to form the nextgovernment as Fico’s party will not be able to rely on the support of Movement for a DemocraticSlovakia (HZDS), whose support fell below 5 per cent, meaning it will not be represented in the newparliament. On 15 June, Slovak Democratic and Christian Union (SDKÚ), Freedom and Solidarity (SaS),Christian Democratic Movement (KDH) and Most-Híd Béla Bugár signed a declaration on political co-operation that should result in them forming a new government in the days ahead. They jointlydeclared that as future coalition that they want to address the problems stemming from the globalcrisis and the consequences of irresponsible policies introduced by Robert Ficos government.SloveniaThe Slovenian government adopted amendments to bankruptcy and debt recovery legislation toaddress the problem of late payments and improve the efficiency of debt recovery proceedings. Thegovernment has also decided to adopt three key labour laws even though social partners failed toreach consensus on key provisions at the latest round of talks hosted by Prime Minister Borut Pahoron 15 June. Prior to this, it adopted a bill that provides the basis for Slovenia to participate in the 80billion euro Eurozone bailout package for Greece. Slovenia is to provide up to 387.8 million euro loanto Greece in the coming three years. The European Commission assessed that Slovenias measures toconsolidate its budget were efficient, in accordance with recommendations and in line with the planenvisaging expenditure savings of around 1.25 per cent of GDP in 2010. According to theInternational Monetary Fund, Slovenia needs to implement far-reaching pension reform and holdback wage growth. Slovenia was officially handed an invitation to join the Organisation for EconomicCooperation and Development (OECD) and is expected to become a member within two months. Asregards Slovenian trade, Slovenia exported 1.45 billion euro worth of goods in April, up 11.9 per centyear-on-year, with imports topping 1.56 billion euro, a 12.2 per cent increase compared to the sameperiod last year, according to provisional data from the Statistics Office.SpainGerman Chancellor Angela Merkel has said Eurozone states, including Spain, are free to call on theblocks rescue fund whenever needed. The German leader refused to comment on whether a Spanishbail-out application was imminent, however. Several leading German newspapers have recentlysuggested that EU and Member State officials are quietly preparing to release funds to Madrid fromthe euro areas 750 billion euro rescue mechanism that was agreed last month. Commission chief JoséManuel Barroso, together with a string of national politicians, strongly denied this was the case onMonday 14 June. Other reports have surfaced that the EU, the IMF and the US treasury are drawing upan emergency liquidity plan for Spain that includes a credit line of up to 250 euro billion, Spanish dailyEl Economista reported on Wednesday (16 June) that the plan was discussed at a special IMF boarddirectors meeting and was aimed at avoiding some of the harsher components of Greeces recent bail-out. The reports follow after a day of protest against Spanish austerity measures drew fewer than4,000 to an evening march in central Madrid on 8 June. Tuesdays one-day work stoppage andmarches across the country were called after the government forced through a plan to shave 15 billion
  13. 13. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.euros off the budget with public sector savings including wage cuts. Two weeks prior to this, Fitch hadcut Spains credit rating by one notch, sending markets lower and capping a horrible week for agovernment struggling to convince investors it can solve its economic woes and avoid a Greek-styledebt crisis. Similar concerns were voiced by the International Monetary Fund which said Spain mustmake far-reaching, comprehensive reforms, including labour market reforms, and that its economicrecovery remains fragileUnitedcKingdomThe UK still has much to fear from the euro crisis both politically and economically as it has not yetcontributed to a 440 euro billion fund set up by the Eurozone countries to support the commoncurrency. Even though the crisis is most serious in Greece where French and German banks have themost at stake, the lack of a UK payment will be reluctantly tolerated by others. The UK will be underpressure to pay especially as Spain is paying its share. Moreover, there is a possibility of establishingfiscal coordination across the EU in order to protect the euro. The UK is generally against suchsolutions but there is a high probability that the 16 Eurozone Member States will go ahead with such aplan regardless of the Brits. It would result in severe political problems within the EU. As regards theUK’s trade, the UK exports fell by 0.6 per cent for the first time in a quarter and outpaced the 0.4 percent decrease in imports. Therefore the country’s trade deficit failed to narrow in April and remainson a record high level. The Bank of England counts on net trade to trigger economic growth. Asdemand in the Eurozone – UK’s largest trading partner - is weak, the country’s trade deficit with thewhole EU increased by 100 million pounds and reached the level of 3.3 billion pounds in April. At thesame time the gap with non-EU states remained at 4 billion pounds.WORLDWIDECanadaThis month Canada became the first G8 country to raise its interest rate. On 1 June 2010, the Bank ofCanada raised its key lending rate by 0.5 per cent, to 0.75 per cent. The current economic situation inCanada is improving at a steady pace, helped by the fact that the Canadian economy was not asseverely affected by the financial crisis as compared with the other members of the G8. Overall, theeconomy grew by 6.1 per cent in the first quarter, propelled by housing and consumer spending.According to the Bank of Canada, this growth was as expected; however, the housing sector isexpected to cool as the year progresses and any growth will be dependent on other sectors of theeconomy. Meanwhile, the Jim Flaherty, the Minister of Finance, is pleased that the global bank taxhas been quashed by a meeting of G20 finance minister. The Canadian government is vehementlyopposed to the tax, proposed by the International Monetary Fund, as the federal finance ministerbelieves that it is unnecessary for the Canadian financial system. During the economic crisis, no
  14. 14. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.Canadian bank required or received any form of financial assistance to maintain liquidity. Finally, theCanadian dollar has maintained its position just under parity with the American dollar (CDN$1 =US$0.9685). The Canadian economy has been buoyed by high commodity prices, notably petroleumproducts and minerals, which have maintained a highly-valued currency.ChinaAccording to analysts, China’s economy is growing faster than expected. Figures released for Mayshow that exports rose 48.5 per cent over May 2009. Statistics also show that imports increased by48.3 per cent. This rapid growth in the trade surplus has increased calls from many camps that theChinese government allows the yuan to appreciate. Beijing pegged the yuan to the American dollar in2008 in response to the economic crisis, and combined with the recent statistics, there have beenaccusations from the American Federal Reserve that the Chinese government is a currencymanipulator. The rapid recovery has also caused a small side-effect: a rise in inflation. Figures showthat consumer price inflation rose to 3.1 per cent in May, slightly above the government’s target of 3.0per cent. Given that factory output in May grew at a slower rate than in April, the government is nowin the tough position of whether or not to raise interest rates to curb inflationary pressure. Despiteinflation, the Conference Board’s Leading Economic Indicator has placed China at the top of the list ineconomic recovery. Even with this good news, the continued debt crisis in Europe is hampering globalrecovery and there is reason to believe that exports from China to Europe could slow China’seconomic recovery in the short term.NewcZealandTo avoid inflation, New Zealand’s central bank raised its interest rate - from record-low 2.5 per cent to2.75 per cent - for the first time in 3 years. Reserve Bank governor Alan Bollard had kept the officialcash rate (OCR) at a record-low 2.5 per cent since April 2009. In his ninth scheduled review ofmonetary policy since then, he said that the economy has entered its second year of recovery withgrowth becoming more broad-based. Bollard rejected calls to keep the interest rate down, as labourunions, manufacturers and farmers argued that the recovery was still too fragile.PhilippinesThe Philippines may reduce budget deficit goals for this year and the economic planning team isaiming at raising the low end of its economic growth for this year to 3.6 (current estimate being 2.6-3.6 per cent). According to Augusto Santos, acting Economic Planning Secretary and a member ofMonetary Board of the Philippine central bank, growth should be sustained thanks to risingconsumption, exports and business-process-outsourcing industry. All in line with President-electBenigno Aquino’s campaign - no higher taxes, no new levies, more jobs, more investments, biggerincomes and general growth. The government predicts that the budget deficit will narrow to 285billion pesos ($6.1 billion) in 2011 from 293 billion pesos this year. The government is still consideringa growth target of 5.9-6.9 per cent. The Philippine central bank’s accommodative policy stance couldlast, due to ‘benign inflation outlook until 2012.’
  15. 15. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.SouthcKoreaSouth Korean Deputy Minister of Finance stated that the country will decrease the limit of capital flowin order to reduce the volatility of the currency market and will not increase interest rates unlessthere is clear evidence of a sustainable recovery of the economy. The measures introduced by thegovernment will be aimed mainly at preventing foreign investors to drop out from the market. Byfavouring policies supporting growth and maintaining stability, South Korea’s policy makers areattempting to avert the impact of the financial crisis. There is a strong probability that the country’scurrency will weaken from the current level of 1.248 to 1.280 per dollar. As Asia’s fourth-largesteconomy, South Korea still expands at a faster rate than expected. Economic growth reached 2.1 percent in the first quarter of 2010 and the May unemployment rate fell to the lowest level since October2008. South Korea’s good economic situation is triggered by exports boosting almost by 42 per cent inMay. Nevertheless, the Bank of Korea will probably keep the benchmark interest rate at a record lowlevel of 2 per cent. Asia’s central banks are calculating the need to avert overheating their economiesby increasing interest rates from the world recession levels and ignore the potential impact ofEuropean debt crisis on the global recovery. While China and Indonesia share South Korea’s viewpoint,Malaysia and India are forecasted to keep increasing the borrowing costs as has been happening forseveral months now.UnitedcStatesThe true cost of the public bailout of Fannie Mae and Freddie Mac has been released. The twomortgage guaranteeing companies have now drawn a total of $145 billion from an unlimited line ofcredit set up by the federal government. Through the various bailouts, both Fannie Mae and FreddieMac are now 80 per cennt owned by American taxpayers. Though the amount is rather high, theincreasing number of mortgage defaults has led some to claim that the bailout of the two companiesmight reach $1 trillion. In other news, the US trade deficit has widened to a 16-month high. Accordingto statistics released by the Commerce Department, the monthly deficit for April stood at $40.3 billion,with exports and imports down 0.7 per cent and 0.4 per cent respectively compared to February.Furthermore, the trade deficit with China increased 14 per cent to $19.3 billion. Despite thesenumbers, imports and exports have steadily increased, but have yet to return to pre-crisis levels.According to the Bureau of Labor Statistics, unemployment is decreasing. Numbers released in earlyJune show that the United States added 431,000 jobs in May, bring down the overall unemploymentrate to 9.7 per cent. Private sector employment changed little and most of the job growth can beattributed to manufacturing and the creation of part-time positions in the service industry. MarkZandi, the chief economist at Moody’s analytics said that while we will see a period of job growth, itis going to take a long time to get back the jobs we lost in the recession. He estimates that it will notbe until 2013 that unemployment in the US will return to pre-crisis levels.
  16. 16. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.INSTITUTIONSEuropean Union: All European Union Member States will publish the results of stress tests on theirbanks in the second half of July at the latest to boost investor confidence in the financial sector.European Commission President José Manuel Barroso wants the disclosure of the results of ongoingstress tests on a bank-by-bank basis. He asked the Council for a firm commitment on this.EU Summit: On 17 June, the EU leaders met in Brussels and adopted the following conclusions. Theyagreed that the emphasis must now be on the implementation of the ’Europe 2020’ strategy. The EUleaders reaffirmed their collective determination to ensure fiscal sustainability, including acceleratingplans for fiscal consolidation where warranted. Moreover, they confirmed their commitment toensuring financial stability by addressing the gaps in regulation and supervision of financial markets,both at the level of the EU and at the G20. Finally, they agreed on first orientations as regards theStability and Growth Pact and budgetary surveillance as well as broader macroeconomic surveillance.The Task force on economic governance is supposed to deliver the final report in October 2010. TheVan Rompuy Task Force will look at whether withholding EU funds might be an option for punishingerrant governments, while an earlier Franco-German proposal to suspend countries voting rights hasmet with a cold response from other member states. There have been ongoing concerns amongdiplomats about the practicalities of imposing sanctions, with some fearing that financial penaltieswould exacerbate economic problems. At the insistence of German Chancellor Angela Merkel, Sarkozydropped his earlier suggestion that the EUs economic government should be dealt with only amongthe 16 members of the Eurozone. UK Prime Minister David Cameron secured an opt-out on closereconomic integration. Nicolas Sarkozy and Angela Merkel also won EU support for a tax on financialtransactions, even though the idea has found little traction at global level. In spite of globalskepticism, the German and French leaders pushed for the issue to be put back on the agenda of aG20 summit on 26-27 June in Toronto.European Parliament: The state of Europes economy and how to fight growing unemploymentwere the main topics in the discussion of the leaders of Parliaments four largest blocs on 10 June.They were joined by the President of the European Parliament, NGOs, business leaders and leaders ofcivil society. The uncertainty over the euro, taxes and the state of Europes pensions systems were alsodebated. On 1 June, the European Parliaments Economic and Monetary Affairs Committee debatedthe report on remuneration of directors of listed companies and remuneration policies in thefinancial services sector. It will be voted upon on 22 June and in plenary in July. The report says thatleading managers of financial institutions were encouraged to engage in excessive and imprudent risk-taking, because the size of their pay checks depended on such behaviour. The reports states that everyfinancial institution and listed company should have a remuneration committee which determines theremuneration policy; members of the committee should not hold executive functions, their pay shouldbe fixed, not based on performance of the businesses they supervise; firms should allow shareholders
  17. 17. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on have information on pay packages and have their say; and there should be an appropriate balancebetween fixed and variable compensation, the latter not making more than 50 per cent of the total.European Commission: In its latest Communication, the European Commission put forwardconcrete, broad-based initiatives to strengthen economic policy coordination in the wake of theGreek sovereign debt crisis. The Commission proposes to reinforce decisively the economicgovernance in the European Union. The aim of the Communication is to strengthen the functioning ofthe Stability and Growth Pact and extend surveillance to macro-economic imbalances. It proposes toalign national budget and policy planning through the establishment of a ‘European Semester’ foreconomic policy coordination, so that Member States would benefit from early coordination atEuropean level as they prepare their national budgets and national reform programmes. Finally, theCommission considers it to be a priority to ensure that the European stabilisation mechanismapproved by ECOFIN on 9 May becomes fully operational. Based on this experience, the Commissionintends in the medium-to-long term make a proposal for a permanent crisis resolution mechanism.European Council: The Task force on economic governance, at its first meeting, agreed on the fourmain objectives: strengthening budgetary discipline through the Stability Pact; reducing divergences incompetitiveness between the Member States; ensuring an effective financial crisis mechanism; andimproving economic governance and coordination. At the second meeting of the Task force Presidentof the European Council, Herman Van Rompuy, concluded that on the Stability Pact, they madeprogress on a number of elements. The first is the so-called ‘European semester.’ In the spring,national budgetary plans would be presented to the Commission and EU Member States. They willalso improve the Pact by creating more sanctions earlier on in the process of scrutiny. Sanctions couldalready kick in before the 3 per cent threshold for the annual deficit is exceeded, for instance, ifwarnings have been neglected, or if the level of debt rises too quickly. As regards the level of publicdebt, so far the focus has been almost exclusively on the maximum annual deficit, the 3 per cent ofGDP. Much less attention has been paid to the level of public debt, the 60 per cent. This needs to becorrected. Member States also supported ensuring the independence of national statistical offices fordata provision, free from political influence. On the competitiveness surveillance, the Task forceagreed that macro-economic surveillance should function next to the budget surveillance of the Pact.EPP ViewsIn a measure to fight the crisis and unemployment Barbara Matera, MEP for the European People’sParty and rapporteur for the Globalisation Adjustment Fund, states that the funds decision to approvetwo requests from Spain and one from Ireland is a clear message to European citizens how the EU canhelp tackle the economic downturn. On 10 June , political leaders in the European Parliament stressedthat they strongly supported the Chairman of the Eurogroup, Jean-Claude Juncker to be responsiblefor the oversight of economic governance together with the European Commission and the EuropeanCentral Bank. Several MEPs stressed the need for new financial rules and need to focus on howderivates have the ability to destabilize financial markets.
  18. 18. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 17/06/2010 To view full articles click on hyperlinks.OUR COMPETITORS’ VIEWSS&DAs a member of the Development Committee, Michael Cashman from the S&D heavily criticised theoutcome of the revision of the Cotonou Agreement with the ACP. He stated that ‘development is notjust about fighting poverty, the growth of freedoms and the respect for fundamental rights are anessential part of it.’ He specifically mentioned the issue of readmission of illegal immigrants and thelack of a more sustainable political dialogue as critical points. On another note, the S&D MEPswelcomed the EU finance ministers’ final agreement on a stabilisation fund for the Eurozone but calledfor a permanent Eurozone stabilisation fund. Silvia Costa, S&Ds shadow rapporteur on the EU YouthStrategy, fears that the youth are the ones that will have to pay for the crisis if the EU does notreform its policies.FROM THE BLOGOSPHERE…Does Japan really have a public debt problem? Martin Wolf elaborates on Japan’s unmanageablepublic debt problem.Unemployment Hurts More Than Inflation: David G. Blanchflower argues that inflation is a smallerthreat for today’s world.Why Retail Sales Are Stronger Than the Headlines Suggest: Christina Cheddar Berk forecasts that theweaker spending may have only been temporary.UPCOMING EVENTSEvent: G-20 SummitDate: 26-27 June 2010, TorontoEditor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccAdditional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, Giovanni Mastrobuono,Stian Karlsen vvvvvvvvvvvvvvvvv ,,,,,,,,,,,Design: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments: