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  2. 2. Centre For European Studies ECONOMIC RECOVERY WATCH “Watchtower” Eurocrisis: The Heart of the Matter Foreword by CES Head of Research“Madame Nein”, “Europe’s new Iron Lady” – there was no lack of ominous descriptions of AngelaMerkel in the wake of last week’s European summit, at which she is largely considered to haveunabashedly asserted German interests at the cost of European solidarity. Let’s take a closer look atthe facts.Germany has been more self-confident about articulating its national interests in the EU for some timealready. In principle, this tendency to not always be the “model student” of European integration anymore began at the end of the Kohl era, in the second half of the 1990s: Especially in economic matterslike industrial and regional policy, German politicians and diplomats risked conflicts with their fellow-Europeans in order to push specific national interests. This intensified with Chancellors Schröder andMerkel. Germany’s decent economic growth after 2005 and its relatively good performance in theglobal crisis since 2008 have contributed to an amazing absence of the gloom and angst which hasbeen the norm in postwar Germany for so long.So far, so good. But a few weeks ago, European voices about Germany’s European behavior took on anew tone of urgency: The Euro crisis hit home. It began with an angry spat between German andGreek media and some politicians, in which some Germans played around with the stereotype ofMediterranean laziness, and some Greeks conjured up memories of Germany’s brutal occupation inthe Second World War. Next, French Finance Minister Christine Lagarde openly criticized Germany’sstrength in exports and suggested that other EU countries’ growth perspectives suffered from that.She proposed the German government should stimulate domestic demand at the expense ofmonetary stability. But on the same weekend, the British weekly The Economist ran a title story with a14-page special about “Europe’s Engine”. All in all, the article was positive about Germany’s“Rhineland capitalism” while also claiming this was due to rather “Anglo-Saxon” reforms in the labourmarket and smart corporate restructuring in recent years. And it did criticise that Germany madeinsufficient use of its migrants’ potential.In the run-up to the EU summit on 25 March, that was the background music to which Angela Merkelseemed to clash with the rest of the EU over an emergency plan to save Greece from default – andthus the Eurozone’s coherence and viability. Her three initial demands were to not commit to animmediate and concrete rescue plan for Greece (not denying that this may become necessary onceGreece would be in direct danger of defaulting), to turn to the IMF instead of setting up a EuropeanMonetary Fund, and to toughen the sanction mechanisms of the Stability Pact in order to makedefault crises of individual Eurozone countries less likely in the future. In the end, the Chancellor
  3. 3. Centre For European Studies ECONOMIC RECOVERY WATCHsecured the first two of those points, whereas a rewrite of the Stability Pact (which would requirechanges in the Lisbon Treaty) was excluded, at least for the moment.While most of the other member states invoked EU solidarity as a principle, argued that turning to theIMF was shameful for Europe and damaging to the Euro’s standing, and while some saw a dangerousGerman egoism dawning, the German government argued that its proposals were not only good forGermany, but also good for everyone, and even good for Greece. In fact, more EU members, mostlyfrom the North, were in agreement with this than dared to say openly. Informally, some began talkingof a North-South divide in the EU. In the end, like so often in decisive turns of EU history, a Franco-German compromise was the precondition for a summit consensus.There was also, without doubt, a strong domestic component in Chancellor Merkel’s line: Germanpublic opinion is indeed strongly opposed to bailing out others with German money, as they see it.And in seemingly opposing a majority of member states and getting most of what she wanted, shemay have avoided defeat in pivotal regional elections in North Rhine Westphalia in May. She alsoquoted difficulties with Germany’s Constitutional Court in case of bailout commitments. But shedistanced herself quite clearly from the anti-Greek rhetoric of some of Germany’s media. Not only forthat reason, the talk of a new German egoism is vastly exaggerated.In the end, a split was avoided that would have caused an earthquake in financial markets. But theEuro crisis is far from over – it may still take a fatal turn if Greece and/or other countries actuallydefault. Moreover, the crucial debate about the originally French idea of a gouvernment économique,which these days also has a lot of resonance in the Brussels bureaucracy, has only just begun. Thisterm was included in the first draft of the summit conclusions but in the English version it was“economic governance” – much closer to the idea favoured in Berlin, of a stronger Stability Pact aswell as a closer coordination of fiscal policies and better macroeceonomic cooperation in the Council,both of course outside the competences of the Commission. But can you have a monetary unionwithout fiscal and ultimately even economic union? The nagging question remains, and it will make forpassionate debates in the years to come.And here we come to the heart of the matter. This is more than just a Franco-German disagreement.This is also more than a debate about solidarity. This is about how to organize Europe’s economy inthe 21st century. In the end, it is centralism vs. subsidiarity. Seen from one particular angle, a centraleconomic authority makes the whole more efficient, and may prevent crises like the current one. Butthere is a price to be paid, and many Europeans are rightly afraid that it is much too high.
  4. 4. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.EU Member StatesAustriaIn reaction to the recently announced government plans regarding a “bank solidarity tax”, ViennaInsurance Group (VIG) chairman warned that customers would be the most affected by such a move,as 80 per cent of the money managed by insurance companies belongs to the customers. Meanwhile,the government is at odds over details of planned tax, while bank bosses remain rather tight-lipped,even if a new poll has revealed wide support for the tax. On a related topic, Austrian national bank(OeNB) Governor warned that 2010 would be a third year of economic crisis rather than the first yearof economic recovery. Although predicting that Austria would have economic growth of 1.5 per centthis year, he added that consumer demand would stagnate and unemployment would increase at leastin the first half of 2010. The governor also doubted that the expected tax increases aimed at reducingthe budget deficit would affect the recovery very much, while mentioning that the best stimulus forthe EU’s economy would be depreciation of the “over-valued euro.” In the private banking sector,Austrian media have been speculating for weeks about a Raiffeisenzentralbank (RZB) merger with itssister bank Raiffeisen International (RI). Regarding the real estate sector, Immofinanz managed tokeep its turnover stable in the first three quarters of its 2009/2010 business year, after havingsuffered losses of 1.754 billion euros in the first three quarters of the previous business year.BelgiumBelgium’s recovery from a deep economic recession is likely to be slow and fragile, the InternationalMonetary Fund (IMF) International Monetary Fund said on 15 March; it also warned that the bankingsector in particular needed to be closely watched. In its review of Belgium’s economy, the IMF said itwas important that government liquidity support for banks was withdrawn only gradually to avoid acredit squeeze, which would slow the recovery further. The IMF underscored the need for Belgium tomap out a “credible” medium-term adjustment to put the country’s public finances back on solidground and address problems of an aging population. It supported the government’s plan for abalanced budget by 2015 and welcomed efforts to take additional actions, if needed, to reach thedeficit target for 2011 and beyond. Turning to Belgian banks, the IMF said the banking sector hadstabilised thanks to massive liquidity support by the government, but that banks remain vulnerable topossible spillovers from mature and emerging European markets. In particular, Belgian banks arehighly exposed to France, the US, Britain and the Netherlands. Furthermore, non-performing loanshave increased rapidly from countries like Ireland and Spain, which suffered major recessions.BulgariaIvan Kostov, leader of the Democrats for a Strong Bulgaria party, has strongly opposed proposals toincrease the country’s VAT by 2 per cent for the period of one year. He believes that the results ofsuch an action would be opposite to triggering Bulgaria’s recovery from the crisis. The idea to raiseVAT 22 per cent was supported by the centrist party of the former king Simeon Saxe-Coburg, which
  5. 5. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.was a junior coalition member in the previous government. The party also advocatesa significant decrease in social security (by 3 percentage points). Moreover, it is said that Bulgaria willnot be able to recover from the crisis unless there is a cut of approximately 10 per cent in the stateofficials’ salaries. In the current situation, the country is set not to return to economic growth in 2010.Experts claim that 2011 is the earliest possibility for Bulgaria to join the bloc’s exchange ratemechanism. If this is the case, the country will be able to join the eurozone no sooner than in 2014.Currently, the country’s banking sector is in a fairly good condition, but this could quickly change if thepercentage of “bad loans” increases. There is also a serious threat that the effect of the Greekfinancial crisis will spill over in Bulgaria, as Greek banks hold 28 per cent of the country’s market. TheBulgarian lev is linked to the euro at 1.9558 rates.CyprusMembers of the government of Cyprus have voluntarily accepted the reduction of their earnings by 10per cent, in a gesture aimed at boosting the economy of Cyprus, by trimming state spending. Thedecision was announced by the Cypriot President Demetris Christofias, who gave a press conferenceon the two years of administration. Christofias said that the 10 per cent reduction in annual earningswould be applicable to the President, the cabinet, the Undersecretary to the President, theGovernment Spokesman, the Presidential Commissioner and the President’s Office Director.Christofias noted that the government implemented a series of measures to reduce the repercussionsof the crisis on time, and is ready to take more measures. He said that these measures would amountto 500 million euro and would be targeted at maintaining the growth of the economy and had to domainly with constructions’ and tourism sector. The President said that Cyprus has lost a billion eurodue to the drop in tourist numbers and in consumption. Christofias mentioned that Cyprus’s publicdebt of 55 per cent of GDP and its external debt are among the lowest in the eurozone. In themeantime, a fully revised and upgraded Cyprus Shipping Taxation System, which had been submittedfor official approval in January 2010, was approved by the EuropeanCommission..,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,CzechcRepublicTo fulfill the Czech Social Democrats´ (CSSD) promises ahead of the end-May general election wouldcost 650 billion crowns over the four-year term and result in state bankruptcy, Petr Necas, ODS deputychairman and election leader said. He replaced party chairman Mirek Topolanek as ODS electionleader last week when Topolanek stepped down over the controversial statements he made for thegay magazine LUI about Jews, homosexuals and the church. Daily Hospodarske Noviny also wrote thatthe cost of the CSSD promises would amount to 47 billion crowns. However, the daily paper estimatedthe cost is lower than the ODS. Necas also rejected a post-election grand coalition government withthe CSSD, saying that the CSSD rejects reforms and the need to fight against the state debt. The ODSsays the CSSD´s most costly plans include the return of maternity benefits to last year´s level,guarantees for pensions at the level of 55 percent of net pay, the payment of a one-off sum of 2400crowns (about a quarter of the average pension) to pensioners, changes in social insurance andpayment of health fees in state hospitals. On the other hand, the Czech Civic Democrats (ODS) have
  6. 6. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.pledged to support part-time work, work from home, jobs for school-leavers and elderly people in itspackage of measures against unemployment. The package also promises support to the unemployedwho wish to open a business. The promised measures would create 170,000 new job opportunities inthe private sector without burdening the state budget, the ODS says. Unemployed people who wouldstart business would be allowed to keep their full unemployment allowances. However, anunemployed person would be able to use this measure only once in ten years. It promises an annualsocial insurance relief worth 7,200 crowns to companies for each part-time job they provide to aparent with children and to people aged over 55, school-leavers, disabled people and students. TheODS is considering restricting subsidies to the people who leave a job on their own. The ODS does notplan to increase either taxes or people´s contributions to social insurance. In the upcoming weeks, theODS plans to disclose its proposals for a more just welfare system, for running businesses and fortackling debt.DenmarkAccording to the financial daily Børsen, Danish banks have taken advantage of both the state’s bankpackages and their private customers last year. A total of 88 billion kroner was raised through interestrate income for financial institutions during 2009 – 5.4 billion more than in 2008. Many economiccommentators are now strongly criticising the banks which – at a time when Denmark is in its worstfinancial crisis since World War II – have managed to make significant gains. On the other hand, thepaper also reports that the cost of borrowing is at an all-time low, and actual interest rates are now solow that it is in essence free to obtain a one-year variable mortgage loan. Real interest rates currentlysit at minus 0.5 percent, while payments to mortgage credit institutions are around 0.5 percent – thetwo figures offsetting each other at nil. Børsen also reports that losses for bankrupt financialinstitution EBH Bank and its EBH fund will total around 6 billion kroner. At the same time, theFinancial Supervisory Authority said that the bank had been reported to police for manipulation of itsstock values in the period up to the bank’s collapse in autumn of 2008. A total of around 300 millionkroner was made through the illegal purchase of EBH Bank shares, according to the FSA. Police and thePublic Prosecutor for Serious Economic Crime will now determine whether charges can be upheldagainst EBH Bank and also against Dexia Bank, which allegedly aided EBH executives in the purportedfraud.EstoniaAn IMF team visited Tallinn from 23-29 March to jointly review with the authorities the economicsituation and assess policies, especially in the fiscal area. The mission concluded that the Estonianeconomy is emerging from a severe recession. After a cumulative output decline of almost 20 per centin 2008-09, they project the resumption of modest growth in 2010. According to the IMF, thanks to anextraordinary effort at all levels of government, especially in the last months of the year, the 2009fiscal deficit was contained well below the Maastricht limit. Estonia is moving closer to winningapproval to adopt the euro, undeterred by the Greek debt crisis that is continuing in the region,European Commission President Jose Manuel Barroso said. Barroso also said that Estonia will bejudged on the basis of its own performance and the recent developments in other euro-area memberstates will not influence the commission’s assessment. A commission recommendation is scheduled
  7. 7. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.for May 12, with a final decision by EU government leaders in June. Rebounding from last year’s 14.1per cent slump in economic output, Estonia says it met the euro’s debt, deficit and inflation targets in2009 and will remain within the limits in 2010. Prime Minister Ansip cut the budget by 9 per cent ofgross domestic product last year, leaving the deficit at an estimated 1.7 per cent of GDP, below the 3per cent limit for euro users. Estonia is aiming for a 2.2 percent deficit in 2010. The commissionwarned on 17 March that possible revenue shortfalls put that target in jeopardy. According toStatistics Estonia, in January 2010 exports of goods grew by 11 per cent and imports declined by 3 percent compared to the same month of 2009. The increase in exports was mainly influenced by thesteep growth in the dispatches of oil products and fuel oils. Credit rating agency Fitch was alsopositive about Estonia and put Estonia’s BBB+ rating, three notches above non-investment grade to apositive watch, and raised the rating outlook to stable last month.FinlandThe Governor of the Bank of Finland, Erkki Liikanen, says that the Finnish economy is recovering morequickly than the bank had previously predicted. This year, Finnish GDP is growing 1.6 per cent,according to a survey on prospects for the Finnish economy. The recovery stems from animprovement in the world economy. GDP will not reach the 2008 level even at the end of the forecastperiod, 2012. The central bank expects the employment situation to remain largely unchanged in thecoming years, with an average unemployment rate of 9.1 per cent for the years 2010 to 2012.Although recovery has set in, the state debt is expected to reach EUR 77.7 billion by the end of theyear. The Finnish government plans to restore the tax on sweets and to increase the tax on softdrinks. The idea is now to introduce the tax bill to Parliament in September with the new taxes cominginto force in 2011 at the earliest. In addition to sweets, the proposals call for tax to be levied on icecream as well.FranceOn 25 March, France and Germany agreed on a standby aid plan for Greece, with a French officialsaying the deal opened the way for bilateral loans to be made available under a system mainlyinvolving the eurozone, but also using IMF money. Last month Sarkozy and Merkel had pledged toreinforce their alliance and boost economic governance in the wake of the financial crisis, but soonafter some of French Economy Minister Christine Lagarde’s remarks revealed the gap between thetwo countries over how best to tackle the Greek crisis and other strains in the eurozone. Lagardeurged Germany to expand domestic demand because its large trade surplus threatened thecompetitiveness of other eurozone economies. Regarding plans about European Monetary Fund(EMF), the French Economy Minister has not ruled out this option, but said it could take years to set itup and that it was not a priority. Lagarde also supports an EU plan for closer inspection of creditdefault swaps on sovereign debt, while mentioning that although she had no evidence of manipulationusing these instruments being behind Greece’s problems, she still found the “rapidity of themovements intriguing.” In the field of domestic politics, Prime Minister Francois Fillon has declaredthat the French government remains completely committed to cutting the swollen public deficit, evenafter the severe defeat for the centre-right in regional elections last weekend. Finally, French lenders
  8. 8. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.have said that France’s economic recovery is unlikely to bring a renewed appetite for consumer loansthis year, as rising unemployment and an easing of government support heighten French tendenciesto save rather than spend.GermanySpeaking ahead of the EU summit on 25 March, Chancellor Angela Merkel urged EU leaders to agreethat IMF and bilateral European aid could be used as a “last resort” for Greece if it reached the brinkof insolvency. Merkel said Germany was prepared to sanction a mix of the two measures to bail out acountry if it could no longer fund itself on capital markets. Germany and its European partners havebeen clashing over financial support for Greece, with EC President Barroso asking Merkel to riseabove domestic politics and agree on a financial safety net for Athens, noting the Euro’s stability wasin Germany’s interest, something that the Deutsche Bank Chief Executive had also agreed withpreviously. On a related topic, the head of the think tank Ifo told Reuters that a European MonetaryFund risks skewing the incentives of debt-ridden eurozone countries, thereby endangering the stabilityof the euro. In the lending sector, Germany’s state backed lenders LBBW and Hypo Real Estateremained deep in the red in 2009, hit by heavy loan losses, signaling a long slog before a return tohealth can take place. Credit rating agency Fitch said earlier this month that it expected mainly thestate sector banks and maybe one or two other lands banks to turn to run-off institutions or “badbanks” to restructure their toxic assets. Having learned from cases such as Hypo Estate and others,Germany plans to introduce a levy on bank assets to fund future bailouts and hopes it will raise about1 billion euros per year, as coalition sources declared to Reuters; however, analysts doubt the fund willbe big enough to stabilize the banking sector in a future crisis. Finance Minister Wolfgang Schäublesaid the charge would be a “kind of insurance” but should not affect banks’ performance. The moveraises the chances of the G20 agreeing on levies at a summit in June, but also marks the final nail inthe coffin for a Tobin tax on financial transactions which has been rejected by the US and Canada.GreeceGreece is going to take advantage of last week’s favorable developments at the European Unionleaders’ summit to raise billions of euros in order to fund its sizable borrowing needs this week,although it is likely to pay the punitive interest rates it was trying to avoid. However, its success inborrowing at much better terms in the future clearly depends on its ability to jump-start the economy,and the signs are not good. The aid package is likely to convince potential buyers of Greek bonds thatthe country can count on financial backing and therefore that they will not risk losing their moneyshould the country default, at least in the foreseeable future. But it is not based on concessions and isonly available under certain conditions, putting pressure on the government to meet its deficit targets.As part of the scheme, one third of the funds would be supplied by the Washington-basedInternational Monetary Fund. The fund’s exact role in the scheme has yet to be publicly clarified. Theinvolvement of the IMF has prompted questions as to whether PASOK would be asked to bring inmore public spending cuts and tax hikes. However, Greece to date has not asked for money and manycabinet members are reportedly vehemently opposed to IMF involvement. Prime Minister GeorgePapandreou avoided reference to IMF aid in a 22 March parliamentary debate on the economy. There,
  9. 9. Centre For European Studies ECONOMIC RECOVERY WATCHPapandreou suggested that Greece is not a “beggar” and can weather the crisis under its own steam.Miranda Xafa, a former International IMF board member, said Greece will have to implement eventougher measures, with or without IMF involvement, as the tax hikes and cuts to public sectorremuneration enacted by the government so far will not be enough.HungaryThe International Monetary Fund has completed its fifth review in Hungary, and made $1.1 billionavailable. Hungary has made progress by prudent fiscal policies that have helped strengthen investorconfidence, the IMF said, adding that this could also contribute to a further cut in the key rate fromthe current 5.75 per cent. A Reuters poll conducted between 22 and 25 March showed that themarket has raised its deficit forecast for 2010 for the sixth month in a row. According to the consensusforecast of analysts, the central bank (NBH) will continue its rate cut cycle, with only three of the 27respondents projecting unchanged rates. Industrial production was up 3.4 per cent year-on-year inJanuary and by 5.7 per cent according to working-day adjusted figures, the Central Statistics Officeannounced. The increase from December was 8.8 per cent. The rebound in production was boosted byimproving export sales, which rose an unadjusted 13.4 per cent from a low base.IrelandThe Irish State is to take control of AIB. Brian Lenihan, Irish minister of finance, says that 16 billioneuros of tax revenue will have to be redirected in order to keep the banks afloat. It is an addition tothe 11 billion euros spent to help Anglo Irish Bank and Bank of Ireland in 2009. The bank’s executivesstill do not support the minister’s plan, even if Mr Lenihan is not planning to nationalise AIBcompletely. Lenihan has becomes less patient with them in his statements recently, stating that “ifexecutives cannot live with a government stake of more than 70 per cent, they have the option tomove on”. It is a clear sign of the government’s concern over the amount of time it is taking to tacklethe crisis in the Irish banking sector, the cost of which is expected to be much higher than estimated inSeptember 2009. The real consequences of minister Lenihan’s solution will be known no sooner thanaround 2020.ItalyEven if 2010 is set to be a difficult year for the company, the Italian car manufacturer Fiat is expectedto reach the targets set for it, as sectors of the Italian economy improve and return to normality. Thegroup is set to earn approximately 50 billion euros, and trading profit will amount to 1.1-1.2 billioneuros. However, if any industrial debt rises above the level of 5 billion euros, net profit will beminimal. The company is expected to achieve its best results in the automotive and componentdepartments. In response to the political and trade union attacks on Fiat for its decision to go abroad,the group’s CEO has said that it was made in order to strengthen the company’s position on themarket by expanding its base operations, and not in an effort to go against Italian interests.LatviaLatvia’s trade deficit was the widest in five months in January as the recession damped demand andexports fell. Bloomberg quoted Statistics Latvia saying that the shortfall totaled 76.8 million lats,compared with 69.7 million lats in December. Exports fell 14.7 per cent from the previous month,
  10. 10. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.while households and businesses are purchasing fewer imports as they adjust to shrinking incomesand rising joblessness. The unemployment rate hit 19.7 per cent in final three months of last year.Gross domestic product shrank 16.9 per cent in the fourth quarter, the slowest pace of decline lastyear, as exports and manufacturing begin to recover. Exports increased 4.7 per cent on an annualbasis, the statistics office said.NetherlandsThe Netherlands’ contribution to an eventual EU loan to Greece would be 800 million to 1 billioneuros, the Volkskrant newspaper reported after the deal reached during the latest EU summit. PrimeMinister Jan Peter Balkenende said the agreement was “totally justifiable” and that he would defend itvigorously in parliament, knowing that a majority of Dutch MPs are opposed to giving emergencybilateral loans. In other news coming from Brussels, the EC has told the Netherlands to come up withmeasures to get its budget deficit and national debt back under control. Regarding Dutch reactions toBrussels developments, Central Bank President Nout Wellink has declared that there needs to be anindependent investigation into all the steps taken by EU competition commissioner Neelie Kroesagainst banks which have been bailed out by governments. On a related topic, Central Bank boardmember Lex Hoogduin warned that politicians should leave the current mortgage interest tax breaksystem intact because of the difficult position facing the housing market. If politicians are stilldetermined to press ahead with reform even after the elections in June, Hoogduin suggested that theyshould wait until the housing market is healthier and take a long transition period. Last, but not least,MPs from across the political spectrum have asked caretaker Finance Minister Jan Kees de Jager tocomment on revelations that ING is avoiding paying value added tax by diverting contracts throughSwitzerland.PolandThe National Bank of Poland (NBP) claims that Poland does not need money from the InternationalMonetary Fund. The Ministry of Finance does not agree with this line, as the funds from the IMFwould increase the official currency reserves that reached 62.6 billion euros at the end of February2010. NBP’s Management is convinced that Poland’s situation is good enough for the country to leavethe group of countries supported by the IMF and join those countries that help others overcome theeffects of the global crisis through the IMF. In order to proceed with such a move, agreement betweenthe Polish government and NBP is necessary. However, the Ministry of Finance claims that thesituation of the world economy is far from stable and the IMF’s flexible credit line (FCL) is a stabilisingfactor which makes Poland more credible for foreign investors. Other news is that Polish consumerswill have to pay more for books and food, and residential real estate will be more expensive from 1January 2011. Consequently, an average family of four will have to increase its expenses by 10-15 percent. This increase will be the result of a VAT to 22 per cent, raising the VAT rate for food and housingfrom 3 per cent and 7 per cent respectively – an agreement reached at the time of Poland’s accessionto the EU. The original deadline for this increase was 2007, which was later on postponed to 2011. It ispossible that Poland may apply for a further extension.
  11. 11. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.PortugalFitch ratings cut Portugals sovereign credit rating by one notch to AA- on 24 March, citing budgetaryunderperformance in 2009, and warned that a similar outcome this year and next could cause anotherdowngrade. The change highlighted concerns that the debt troubles that have affected Greece willmove to other of the euro zone’s weaker economies, although the agency did mention thegovernment’s long-term budget austerity plan was broadly credible and it did not expect politicalinstability to upset the passage of the necessary legislation. After the decision, the finance ministryurged the opposition to support the government’s austerity plan to send a clear signal to calm jitteryinvestors about the country’s public finances. Portugal’s largest opposition party PDS has promised toabstain in a vote on a resolution of support for the budget, which would allow the ruling Socialists topass the document in parliament. Fitch’s AA- rating is now comparable with Moody’s Aa2 rating andboth are above S&P’s A+ and, as one bond analyst expert from Credit Agricole in London emphasized,Fitch’s ratings were in the middle of Moody’s and S&P’s, so the downgrading should have minimalmaterial impact. Nevertheless, the move triggered the euro to fall to fresh 10-month lows against thedollar, with European stocks turning negative.RomaniaRatings agency S&P has revised Romanias credit outlook to stable; Romania’s previous outlook wasnegative, and the change comes after government measures to comply with international loanagreements with the IMF and the EC. The news comes amidst several positive results released by theNational Statistics Institute and Eurostat, ranging from a decreasing inflation rate (down to 4.49 percent in February from 5.2 per cent in January), to increases in industrial output (6.8 per cent inJanuary year on year), as well as growing exports (19.8 per cent year in year to 2.3 billion Euros inJanuary). Nevertheless, Romanias GDP dropped in the last three months of 2009 by 6.5 per centcompared to the same period, while a new poll released by GfK shows that sixty per cent ofRomanians say their families’ financial situation was worse in February than a year earlier and nine inten Romanians fear unemployment will rise this year. However, some of the unemployment fearsseem unfounded, as another poll, this time by recruiting company Manpower, shows that one in tenemployers in the country expects to hire new employees in the second quarter.SlovakiaThe year-on-year growth of consumer prices remains at historically low levels. According to data fromthe Slovak Statistics Office, inflation in February was 0.4 per cent on an annual basis, which is the samefigure as in January. Consumer prices did not change in monthly terms. The output of Slovakconstruction companies continues its decline. After consecutive shrinkage throughout all months of2009, except in August when output increased by a mere 0.1 per cent year-on-year, the downwardtrend continued in January 2010 with construction output recorded as 8.1 per cent less than January2009, the Slovak Statistics Office reported. The poor development is ascribed to low demand foralmost all kinds of construction projects, financing limitations and unfavourable weather conditions, aswell as other persisting effects of the financial crisis. Slovakia’s unemployment rate rose to a five-yearhigh of 12.97 per cent in February 2010, the Labour, Social Affairs and Family Centre reported on 19
  12. 12. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.March. The number of beneficiaries eligible for unemployment benefits in Slovakia rose in Februaryafter going down for five consecutive months. However, the good news is that Slovakia might win sixnew foreign investors from the engineering and electrical engineering sectors, the HospodárskeNoviny economic daily wrote on Monday, March 15, with the main one being an Indian firm producingelectric cars which should create around 1,000 jobs in western Slovakia. Furthermore, the Chinesecompany Guangzhou Echom Science & Technology plans to build a new production plant in thewestern Slovak town of Nové Mesto nad Váhom. The investment should cost about 29 million eurosand should create 500 jobs. The new plant is to produce pressed plastic parts for TV sets.SpainBank of Spain Governor Miguel Angel Fernandez Ordonez said before the EU summit he hoped for adeal to resolve Greece’s financing crisis. Ordonez, who is a member of the ECB’s governing council,said he thought the Greek government’s austerity plan was serious and tough, but that the Greekswould need help implementing it. Earlier, Spanish bank BBVA Chairman said that Spain will be one ofthe few economies to shrink in 2010 and its exit from the crisis will be difficult due to anunsustainable public deficit, the explosive growth in public debt and the deterioration of a large partof the financial system. Some economists worry Spain’s poor economic prospects could eventuallylead it to suffer Greek-style financing problems, only on a much larger scale given that the Spanisheconomy is the eurozone’s fourth-largest. Some key factors to watch in the following months includemore banks failing, deficit cuts falling short of meeting their targets, unions blocking labour reforms ora loss of confidence in the government.UnitedvKingdomWith general elections expected on 6 May, many are saying that Alistair Darling’s budget is more of apolitical manifesto than a business plan. The UK budget deficit is currently at 11.8 per cent GDP. Thegovernment’s goal is to reduce it to 50 per cent within 4 years, on condition that GDP growth willincrease by over 3 per cent starting from 2011. Mr Darling has attempted to rescue UK finances andmanage the economic recovery without allowing citizens to be affected by the poor economicsituation. Since the banking sector is seen as responsible for the crisis, Darling has already imposed aone-off tax on banks on discretionary bonuses above £25,000, which should generate an additional £2billion at the end of 2009. The next step, among others, will be the introduction of an annual taxproportionate to the size of a bank’s balance sheet, which will collect £5 billion more. He also intendsto force RBS and Lloyds Banking Group – where the government has significant shares – to raise thebudget for business lending by £94 billion. These and other solutions may pay off politically, but theireconomic impact may not be enough, as the recession will more than likely be followed by a weak anddrawn-out recovery, especially since Britain has suffered from the crisis much more than many otherrich countries all over the world. The UK economy has decreased by 5 per cent in 2009 - the largestfall since the Great Depression. This fall was smaller than in Japan, Germany or Italy, but it lastedlonger than in any other G7 member.
  13. 13. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.WORLDWIDEBrazilPolicy makers at Brazil’s central bank have said that they are ready to raise rates in order to curbinflation pressure in light of data highlighting the strength of the country’s economic rebound. Jobfigures released last week appeared to confirm this rebound, with an increase in unemployment thatwas less than analysts had predicted. The central bank has predicted growth of 5.5 er cent in 2010,even if inflation expectations have been rapidly on the rise.ChinaChina’s increasing influence in the Asian region is silencing Asian governments from applying pressureon it to strengthen its currency, as they fear damaging repercussions if they challenge the world’sfastest growing economy, Reuters reports. China has stressed that a decision to unshackle the Yuanwould depend on conditions at home, despite increasing pressure from Washington and the IMF for itto take the necessary measures. The Yuan has been at a flat rate against the dollar since mid 2008despite its economic recovery in 2009, which has granted it an edge over export competitors andgreatly limited their room for maneuver. And it appears that Europe too is unlikely to join any vocalchorus against on China, as amidst talks on the Greek crisis and financial concerns closer to homethere seems to be little appetite to get overly involved in the issue. Unlike the U.S., however, which issaid to be preparing a report due to appear in April branding China a “currency manipulator.IndiaIndian shares reached a 25-month high, as sentiments were boosted by earning optimism and firmglobal equities. Experts were divided on future Indian market prospects, however, with some pointingto eurozone concerns that could potentially cause problems for the market in the future. In othernews, analysts have forecast a 10.6 per cent rise in pay for India this year, led, for the most part, bycompanies supplying domestic markets as opposed to those relying on exports as in the past.However, it is unlikely that the benefits will be felt by all, as prices, particularly food prices, continue tosoar. Inflation has increased almost seven-fold since last October, with the food inflation rate forFebruary alone at 17.8 per cent. Some experts have therefore advised companies to be cautious withtheir wage increases, as these could in the long-run serve to exacerbate the situation.USA More optimistic prospects on the horizon for Greece following the deal struck in Europe at the end oflast week have contributed towards a fall in U.S. government debt prices. As a result, Wall Street wasset for a higher open for the day, with Greece preparing to launch a sovereign bond issue. In othernews, U.S. consumer spending rose during the month of February for the fifth month in a row, even ifthis did not take analysts – who for the most part had been expecting the 0.3 per cent increase – bysurprise. However, even if it failed to make a major impact on U.S. financial markets, it is still a positive
  14. 14. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.sign for the U.S. economy, commentators maintain. Elsewhere, stagnant U.S. incomes havecontributed towards pushing saving levels down to an annual rate of $340 billion, their lowest levelsince October 2008.INSTITUTIONSEuropean Parliament: A majority of MEPs now believe that the financial sector should be obligedto pay its debt back to society by contributing towards the costs of the economic recovery, possibly inthe form of a financial transaction tax. On the 10 March 536 MEPs succeeded in having a resolutionon this passed, and called on the Commission to explore what the impact of implementing such a taxwould be. On March 17, the Parliament’s Employment Committee also discussed the potential impactof introducing minimum incomes in Member States, ahead of a report to be published by Portugueseleftist MEP Ilda Figueiredo (GUE/NGL). Figueiredo has said that "poverty is an infringement of humanrights", and has recommended that a minimum income directive be introduced in Europe. A discussionof the report will be held on the 27 April, and the Committee will vote on it in June.European Commission: At the first formal meeting of representatives of EU Member States on theEU2020 strategy that the Commission unveiled last month, European leaders agreed to increasecooperation on economic policy in an effort to boost growth over the coming years, with an increasedsupervisory role for the Commission envisaged. Greater cooperation on the part of Member Stateswould be necessary, they agreed, in order to tackle the long-term challenges of the economic crisis, aswell as to confront those of the ageing population, climate change and globalisation. Quantitativetargets for increasing employment, boosting R&D investment and meeting environmental challengeswere decided upon, and it was agreed, on the recommendation of the Commission, that differentnational targets for each country should be set. These targets will then be analysed in June in order todetermine if they are capable of reaching the overall goals, although disagreements on the targets tobe set for education and poverty still persist. The EU will be monitoring the development andperformance of these ‘national reform programmes’, with detailed plans to be submitted by eachMember State. The Commission has also been charged by the Council with developing suggestions asto how best to improve economic coordination between three Eurozone Member States. CommissionPresident Barroso also expressed his satisfaction at the agreement reached on Greece by EU Heads ofState during the European Council last week. Referring to the plan developed to rescue theMediterranean country as a “historical” one, he stressed that it was a success both for Greece and forthe financial stability of the eurozone as a whole. He appealed to G-20 leaders not to “water downtheir ambitions" ahead of their next summit, and stressed that "fresh ideas" will still be the essentialto project’s success.
  15. 15. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.International Monetary Fund (IMF): The head of the IMF Dominique Strauss-Kahn has said thatbetter coordination of economic policy is key to strengthening Europe’s common currency. At adebate in Warsaw, Strauss-Kahn and other experts agreed that the financial crisis has exposed theweaknesses of the European policy framework that have existed since the introduction of the euro,and recommended that economic governance in the eurozone be strengthened. He stressed thenecessity of correct implementation of the Lisbon agenda on the part of all Member States, as well asthe importance for Europe of looking outwards and ahead. The IMF Head said he remains positive onthe whole about Europe’s long-term prospects, and urged policy makers to turn the current challengeinto an opportunity. In other news, the IMF has announced that it will increase the availability offinancial sector data, in line with the growing consensus that gaps in data have majorly contributed tothe global economic crisis. It will do this by modifying and broadening the data included in the SpecialData Dissemination Standard (SDDS), a tool developed in the 1990s to further the dissemination offinancial data across member countries.EPP ViewsLeader of the EPP Group in the European Parliament Joseph Daul has commended EU Member Statesfor allowing solidarity to prevail over national interest in relation to the Greek crisis, congratulatingthem on the “brave solution” that they have come up with after last week’s negotiations in Brussels.He said that the European states had come together to tackle the issue “like a family”, and welcomedthe renewed European commitment to greater economic coordination that has been made. Hestressed that the most important lesson for Europe is that it must be prepared to change its attitudeswhen called upon to do so, and to take responsibility upon itself when needed. Daul expressed hissupport of Member States’ renewed commitment to reinforcing budgetary supervision, and indirectly,therefore, of easier imposition of sanctions on negligent countries in the future. Prior to this, after theEuropean Parliament adopted its 2009 Annual Report on the eurozone and public finances on the 25thof March, Sophie Auconie, MEP and EPP Group Rapporteur, called again for greater Europeaneconomic coordination. The benefits of a common currency and the actions of the European CentralBank have already proven their worth in this crisis, she stated, but major economic and socialimbalances in Europe persist. Coordination of European budgets is needed to tackle this, as well aspermanent and political economic governance.On the same day, José Manuel Fernandes, MEP and EPP Group Spokesman on the Resolution onPriorities for the 2011 budget procedure, other sections, explained that the priority of the EPP Groupis to secure “a sustainable budgetary policy and a detailed justification for each expenditure" in theupcoming budget, and that it therefore proposes “the abolishment of the purely incrementalbudgetary model” and the implementation of “a zero-base budget that enables efficiency andsavings". MEPs have also voted overwhelmingly to adopt a report by EPP MEP Sidonia Jędrzejewskastressing the importance of issues of youth and education, support for young workers andentrepreneurs, innovation, equal opportunities and regional development, among other things.
  16. 16. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.OUR COMPETITORS’ VIEWSS&DPrior to developments at the end of last week, Head of the Socialists and Democrats in the EuropeanParliament Martin Schulz declared that EU leaders should show more solidarity towards Greece.According to him, Greece has “done its job” by developing and implementing its austerity programme– something which, according to him, other European Heads of State have not. He pointed inparticular to German Chancellor Angela Merkel, declaring her to be chief amongst those failing to keeptheir promises. He expressed his belief that recourse to the IMF should not be pursued, and that asolution should instead be sought within the eurozone itself. This came after praise from S&Dquarters earlier in the month for the measures undertaken by Greece to tackle its financial crisis.Support for Greek Prime Minister Papandreou was strong after what was described by S&D membersas an “impressive performance” at a European Parliamentary hearing in March, with Stephen Hughes,vice-president in charge of economic and social affairs. In other news, the S&D Group succeeded inhaving a report urging EU Member States to fulfill their Official Development Aid (ODA) commitmentsto developing countries passed by a margin of 5 votes. The report, which was drafted by Spanish S&DMEP Enrique Guerrero, proposes the establishment of a tax on financial transactions, as well as debtcancellation for the poorest countries, among other things. Earlier in the month S&D MEPs expresseddissatisfaction at the EU2020’s project to create jobs and boost economic recovery, criticising it forlack of precision and concrete proposals.ALDEALDE welcomed the deal struck by EU leaders on a solution to the Greek crisis during their two-daymeeting last week, saying that it has finally put an end to a “dangerous uncertainty” existing inEurope. However, ALDE continues to stress the short-term nature of this solution, stating that Europewill have to develop a longer-term crisis response as well. According to the party, this wouldnecessarily include the establishment of a European Monetary Fund, as well as the creation of acommon market for bonds. Of fundamental importance too would be the strengthening of the EU2020 strategy, which, according to ALDE, is currently too loosely coordinated to achieve its long-termgoals.
  17. 17. Centre For European Studies ECONOMIC RECOVERY WATCHLast updated on 30/03/2010 To view full articles click on hyperlinks.FROM THE BLOGOSPHERE…Not a great leap forwards, but not a bust up either: the Charlemagne columnist comments on therescue to the Greek crisisThe euros big fat failed wedding: Gideon Rachman elaborates on the situation of the euro currencynowadays.With the marginalised Brits in Brussels: Gideon Rachman comments on the increasingly marginal roleplayed by Britain in the European Union.Are Spain and Italy next in line?: Edin Mujagic asks what European states are next in line for majoreconomic difficulties.Editor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccAdditional Assistance: Diana Wasilewska, Ioana Lung, Patricia Murrayvvvvvvvvvvvvvvvvvvvvvvv ,,,,,,,,,,,Design: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments: