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  2. 2. Centre for European Studies ECONOMIC RECOVERY WATCH ‘Watchtower’ Single Market 2.0: The Next Big Thing Foreword by CES Head of Research When former European Commissioner Mario Monti presented his report on completing the Single Market on9 May 2010, Europe’s attention was focused elsewhere: heads of government were focused on the euro bailout.What followed was the now familiar confrontation between German insistence on toughening up the Growthand Stability Pact and French insistence on a true gouvernement économique with real competences in macro-economic coordination. Almost three months later, it should be clear to any sober analyst that neither of thesetwo approaches will find the full consensus of the Member States. Meanwhile, the European Commission isdetermined to make the completion of the Single Market one of its flagship projects for the upcoming years. One of the eternal truths of the European Union is that the Single Market is incomplete. Not only in services,which is the most prominent example, but also national regulations (allowed through treaty exceptions) stillinhibit the basic freedoms proclaimed in the Treaties. The potential advantages of removing the last exceptionsare impressive: according to The Economist, completing the Single Market just in the digital economy, byharmonising patents and removing other obstacles, might increase EU GDP by 4%. In the deepest economic crisisof its history, with staggering debt, weak growth and sagging global competitiveness, the EU would be suicidallystupid to forgo the growth options contained in the completion of this essential tool of the integration process. But here is the snag: it was already difficult enough to achieve what we have now, for instance in the servicesector. The 2006 compromise on the Services Directive took years of hard negotiating. It is no coincidence that itis better known in France as the Bolkestein initiative (with a clear connotation of Frankenstein). And that was intimes when the EU economy looked good. So how easy will it be now to confront the vested interests of tradeunions, corporate oligopolists and other 20th century nostalgics, especially in continental Western Europe - inthe crisis, facing the possibility of a double dip, with unemployment already disastrously high in some MemberStates and looming in others? And that includes Germany, to be fair, where the Monti report has collected someofficial applause although we all know perfectly well that some German lobbies were among the most visceralenemies of Fred Bolkestein’s approach on services. Hence, the obstacles to a Single Market 2.0 are formidable. And yet, it is worth trying. Because it is andremains true that in view of its global competitiveness as well its debt and demographic future, Europe needs tomobilise as much growth potential as possible. Maybe precisely in the digital economy, the obstacles are not ashigh as in other sectors. But even on services, we can’t afford not to try harder. Besides, some polls indicate thatvoters may be unexpectedly open to more flexible markets, precisely because the crisis seems to have createdan atmosphere in which many are willing to work harder for less. Last but not least, the EU badly needs aproject. With the euro crisis, the Lisbon hangover and enlargement fatigue casting long shadows over our fragileEuropean souls, we need a new strategic goal. And even if Jacques Delors was right when he quipped that onedoes not fall in love with a Single Market, I would venture to say that at this point in time, love is not the issue.This is not about love but about fear and hope: the fear of irreversible decline versus the hope of sustainablerecovery. It’s up to our leading politicians to spread this message, with courage and determination.
  3. 3. Centre for European Studies ECONOMIC RECOVERY WATCH15/07/2010 To view full articles click on hyperlinks.EU Member StatesAustriaSocial Democratic (SPÖ) Labour Minister Rudolf Hundstorfer reported signs of recovery on the jobfront: the minister announced that new figures showed that the number of unemployed peopledeclined by 7.3 per cent last month compared to June 2009, to 212,753. However, the figure does notconsider the more than 284,000 jobless Austrians sitting controversial re-education courses providedby the Labour Market Services (AMS). In other news, People’s Party (ÖVP) Vice Chancellor Josef Pröllhas appealed to European Union leaders to introduce a continental tax on financial transactions bynext year. Meanwhile, the European Commission has given the green light for an extension of theAustrian bank assistance package for another six months. The agreement to subsidise the banks wasset to expire at the end of July. However, coupled with the state aid extension, the EuropeanCommission also announced that two Austrian banks will be among the 91 institutes undergoing astress test by a European financial market watchdog later this month. The Committee of EuropeanBanking Supervisors (CEBS) officials said they will examine the state of Erste Group and RaiffeisenZentralbank (RZB) as well as Bank Austria’s (BA) Italian owner UniCredit. This goes against AustrianNational Bank (OeNB) Governor Ewald Nowotny declarations earlier this year that he would not revealprecise findings of the affected Austrian institutes. Nowotny caused some controversy by labelling thestress test scheme a ‘temporary fashion trend coming from the United States’ last month. In terms oftheir foreign activities, Austrian banks are considering abandoning some of their subsidiaries inHungary as the government there reveals plans to introduce a bank tax.BelgiumThe European Council Presidency holder has intervened in a row over European financial watchdogsin an attempt to avert a breakdown in talks to set up the supervisors by the start of next year. Thecountrys finance minister Didier Reynders contacted his German, British and French counterpartsasking them to back a compromise and end an impasse that threatens to derail plans for thewatchdogs. The Belgians are asking countries such as Germany and Britain to agree to give the new EUregulators the final say over Berlin and London. At the heart of the disagreement is whether thewatchdogs get powers to overrule individual Member States. Meanwhile, Belgiums central bankraised 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 per cent in 2009, Central Bank Governor Guy Quadensaid. Belgiums public sector deficit was forecast at 5.0 per cent this year, revised from 5.4 percent.The bank also raised its 2010 inflation forecast to 2.0 per cent. Inflation in Belgium peaked at 5.9percent in July 2008, but has fallen sharply since then.BulgariaRight-wing leader Martin Dimitrov says that Bulgaria will face drastic fiscal demands if it decides toseek aid from the International Monetary Fund. This move would be a result of the governmentsfailure to cut state spending. The Ministry of Finance has issued a special statement clarifying that it
  4. 4. Centre for European Studies ECONOMIC RECOVERY WATCHwas not involved in loan negotiations. The Bulgarian government projected a 3 per cent GDP increaseaccording to the 2011 Budget Act. There will be no increase in taxes or cuts in salaries and pensions.The planned budget deficit will reach 2.7 per cent of GDP. The country’s Finance Minister SimeonDjankov foresees that the unemployment rate will be below 11.4 per cent at the end of 2011. TheBulgarian parliament has recently approved the 2010 State Budget Revision Act with 1 per cent GDPgrowth in 2010 and a deficit of 3.8 per cent under the EU accounting rules. According to the original2010 budget, the deficit was planned at 1.9 per cent.CyprusA wave of good news and expressions of careful optimism concerning the Cypriot economy wasfollowed by the shock announcement on 13 July that Cyprus would be put under excessive-deficitsurveillance by ECOFIN. At the end of June the Finance Minister expressed his hope that thegovernment’s plan, combining public sector cuts and tax increases, would manage to put publicfinances in order. In early July, trade unions accepted zero increases in public servants pay but onlyunder the condition that the government enacts measures that will increase revenue as well.Unemployment kept rising, but Cyprus received good comments by credit-rating agencies and theIMF alike. According to the finance minister, this made it likely that the Cypriot economy will maintainthe pace of the minor recovery, and that it could grow even more in 2011. It could allow Cyprus toslowly withdraw the 400 million euro emergency package. Public deficit also shrank during 2010. On 5July the IMF said that Cyprus will return to modest growth in 2011, but that more action was neededto attain the goal of a 3 per cent public deficit by 2013. However, the centre-left government failed topass five bills through the parliament that would increase state revenue significantly: two tax bills (oncorporate and property tax) and three bills on tax evasion, public expenditure and urban planning.Now the government will try to curb spending through ‘aggressive’ salary cuts. In the meantimeCyprus will be subject to the new surveillance mechanisms of the EU, while the economic crisis seemsto turn also into a political crisis for the island-state.CzechcRepublicA new Czech centre-right government made up of the Civic Democrats, TOP 09 and Public Affairs hasjust been sworn in, after a month and a half of coalition talks. The new government had pledged tocarry out fundamental reforms and fight corruption. Already on 7 July, negotiating teams for the threeparties closed the final chapters of their coalition agreement paving the way for reforms aimed atimproving public finances. The incoming centre-right cabinet agreed that the 2011 state budget deficitwould not exceed 140 billion crowns and that the overall deficit would not be more than 4.6 per centof GDP. It has an ambitious goal to lower the budget deficit to less than 3 per cent of GDP by 2012and to have a balanced budget by 2016. It wants to begin by saving around two billion euros next year.Ministers will be faced with the choice of cutting salaries in state sector by 10 per cent or laying offstaff. That will be felt immediately in the armed forces. The smallest party in the coalition – PublicAffairs – demanded that 80 million euros be moved from defence spending to education. Thegovernment plans to increase the lower band of VAT from January 2011, from 10 per cent to 11 or 12per cent. Czech university students will also start paying tuition fees, of up to 780 euros per year. Thegood news is that salaries for teachers will rise to 780 euros. Doctors who invest in their qualificationswill be rewarded financially. People earning over 2,800 euros gross per month will pay lower
  5. 5. Centre for European Studies ECONOMIC RECOVERY WATCHcompulsory state pension contributions to make the system fairer, seeing as the state cannot afford topay them higher pensions. A strategic, long-term goal of Necas´s cabinet is a pension reform based onprivate pension schemes along with the solidarity public pension insurance.DenmarkThe troubled Amagerbanken is staggering after an announcement that its main shareholder, KarstenRee, will stop efforts to save the troubled financial institution. The Financial Stability Company, whichwas set up by the state and the finance industry in 2008 to avert the worst affects of the financialcrisis, has given Amagerbanken until 22 July to raise 750 million kroner, but with billionaire Ree’sstatement it is uncertain whether the bank will be able to raise this amount in time. A new report byconsultancy firm Copenhagen Economics has estimated that Denmark has missed out on earnings of10 billion kroner, and 16,000 potential jobs in tourism, since 2000 because it has failed to keep upwith its EU neighbours. However, the good news is that compared with April there were 2,000 fewerpeople unemployed, reducing the seasonally adjusted figure for unemployment to 112,700 people, orfrom 4.2 to 4.1 per cent of the workforce. However, the gross figure which takes into account bothregistered unemployed and those who on job-creation or retraining schemes remained the same.The new jobless figures were particularly good news for men, who had suffered more from the effectsof the financial crisis than their female colleagues.EstoniaOn 13 July, European finance ministers decided that Estonia would switch to the euro at the currenttarget exchange rate when it enters the monetary union next year. The kroon will be converted at15.6466 per euro, the official target since Estonia joined the European exchange rate grid in 2004.Estonian Prime Minister Andrus Ansip said the inflation rate in July will be much lower than the Junereading. Ansip also promised that Estonias second-quarter gross domestic product growth would beone of the fastest rates in the European Union. According to the Economist Intelligence Unit, Estoniamay see its economy grow 3.6 per cent on average next year thanks to a favourable businessenvironment. Bad news is that compared to 2008, the average monthly gross wages were in 2009 by5 per cent lower and the average hourly gross wages were by 3.1 per cent lower, which was a firstdecrease in annual average monthly salary in 16 years.FinlandThe government of Mari Kiviniemi does not plan to enact massive changes in taxation. Tax increasesset by the Vanhanen government will be adhered to, and slight changes are to be made in energytaxation. Minister of Finance Jyrki Katainen added that major tax reform could have unforeseenconsequences on the Finnish economy, although it would have been a politically expedient decision.The Ministry of Finance estimates that thanks to the growth in the global economy and the weakeningof the euro, Finland’s gross domestic product (GDP) will grow more than was forecast earlier this year.According to the ministry, Finnish GDP will grow in the current year by 1.5 per cent compared with lastyear. The GDP growth for 2011 and 2012 is estimated to be 2.5 per cent. In its Economic Bulletin, theMinistry of Finance points out that large public sector stabilisation packages could reduce demand andincrease unemployment. Finland’s general government deficit-to-GDP ratio is almost at the level
  6. 6. Centre for European Studies ECONOMIC RECOVERY WATCHspecified in the EU Stability and Growth Pact. The Ministry of Finance does not believe, either, thatFinland’s debt-to-GDP ratio could rise to over 50 per cent by the end of 2012.FranceIn the ongoing EADS-Boeing trade saga, EADS has submitted a new bid to build strategic tankers forthe United States Air Force. An earlier bid from EADS with American partner Northrup Grumman wasaccepted and then later rescinded after Boeing protested. Initially it was unclear whether EADS wouldsubmit a new bid as it believes that there is a strong bias in favour of Boeing for American militaryprocurement. This is the latest development in the state aid dispute between EADS subsidiary Airbusand Boeing which is now before the WTO. Meanwhile, budget cutbacks in Paris are drawing fire. TheFrench government has committed to cutting its budget deficit by 33 per cent for 2011, a savings of 40billion euros. However, it still remains unclear which government programmes will be most affectedby the cuts. The budget vote is scheduled to be held on 17 November, however, it is feared that theunemployed, disabled and students will feel the brunt of austerity. Finally, inflation remained stablein the month of June and the French economy is on course to have an overall inflation rate of 1.5 percent for 2010. Price increases remained stable at 1.4 per cent, but larger increases seen in day-to-daypurchases such as food are off-set by a decrease in prices for big-ticket items such as electronicequipment and automobiles.GermanyThe euro crisis caused much pessimism in Germany and the country was the source of muchspeculation on the dissolution of the common currency. However, statements from leading Germancompanies and trade figures show that the euro crisis had some benefit. The depreciated currencyhad the effect of increasing the global competitiveness of German goods, causing exports to increaseby 11.4 per cent in the first five months of 2010. Der Spiegel has recently found government plans todeal with the possible insolvency of Eurozone countries. The Ministries of Finance and Justice havecalled for the creation of a ‘Berlin Club’ to oversee the ‘orderly insolvency’ of debt-laden Eurozonecountries in which bondholders would be entitled to some, but not all, of their claims. According toDer Spiegel, there is a belief that a system of dealing with insolvent Eurozone members would not onlyreassure bondholders and investors but also send a strong message to states with a penchant fordeficit spending. Preliminary studies of the German banking industry show that all major Germanbanks will most likely pass EU ‘stress tests’. Deutsche Bank, Commerzbank and Postbank will mostlikely pass the stress tests, with all expected to pass the threshold of a 6% Tier I ratio under the stressscenario. Of the three banks, only Commerzbank received a government bailout during the crisis,which included a 16 billion euro cash injection.GreeceThe main economic and political event of July in Greece was the voting in by the Parliament of thenew social security bill on 7 July. The bill was solidly supported by the Socialist majority, as well as bytwo independent MPs who had been expelled by the conservatives. The bill introduced radical andharsh changes, especially regarding certain privileges of women and younger members of theworkforce. The minimum retirement age for women went up to 65, while a full pension from now onwill require 40 years of work. A national strike was organised by unions on 8 July. The government
  7. 7. Centre for European Studies ECONOMIC RECOVERY WATCHtried to improve certain provisions of the social security bill ahead of the discussion of the individualarticles of the law in Parliament in order to avoid defections in the voting of each article, which itfinally achieved. The new bill though is expected to be challenged by trade unions in Greek andEuropean courts. Already the State Auditors’ Council in Greece found some of its provisionsunconstitutional. At the same time, trade unions and employer organizations were engaged in atough negotiation concerning the new collective labour agreement. The agreement will have to reflectthe changes in labour relations foreseen by the loan agreement Greece signed with the EU and theIMF, some of which are included in the social security bill. Greece won some praise from the EuropeanCommission for its efforts, but the general economic outlook for the country remains grim: Eventhough the economy is expected to contract less than predicted (3-4 per cent GDP reduction, asopposed to an expected 4 per cent), the OECD predicts that the unemployment rate in Greece will riseto 12.10 per cent in 2010 and 14.3 per cent in 2011. Tax hikes (especially in VAT) will lead to anincrease of inflation to 6.5 per cent (up from 5.4 per cent in May). Due to the government’s austeritymeasures, public expenditure has fallen more than predicted, but government revenue remains lessthan expected. Rare positive news came when the European Investment Bank signed a loanagreement worth 2 billion euros with Greece on 1 July. The loan will particularly help Greece improveits infrastructure and conditions for long-term growth.HungaryAn International Monetary Fund (IMF) delegation arrived in Budapest on 6 July for its first review ofHungary’s progress on complying with terms of a 2008 bailout since Prime Minister Viktor Orban tookthe office. The IMF wants Hungary to achieve the 3.8 per cent of GDP budget deficit target this year. Inthe meantime, the Hungarian parliament approved a bill loosening budget rules, ignoring theindependent Fiscal Council, which said it would erode fiscal credibility. The bill removes the results ofmajority state-owned companies from the budget and widens the government’s ability to foregosupplementary budgets in case of overspending. In an effort to persuade investors the governmentcan reach its deficit target, Orban announced plans to raise 120 billion forint ($527 million) this yearfrom a new tax on banks. He also said Hungary would cut public spending, reduce personal incometaxes and lower taxes for small businesses. However, the government failed to reach agreement withbanks on the proposed tax, and none of the other measures have been approved by parliament.Investors are looking for assurances the government has the political will to stick to its fiscal plans. Inthe meantime, six foreign banks with operations in Hungary, KBC, Intesa Sanpaolo, Bayern LB,UniCredit, Raiffeisen International and Erste Bank, asked the IMF for help, to convince the Hungariangovernment not to introduce the special tax to be levied on banks. There are cold vibes between theInternational Monetary Fund and the Hungarian government as the cabinet presented its economicplans as solid facts, showing little flexibility, while the IMF has reservations about the new tax onbanks. It is also critical of the cabinet’s plan to cut the corporate tax rate and says that if thegovernment wants to lower taxes, it should focus on labour taxes instead.IrelandIrish manufacturing output continued to increase in June but the growth rate was the slowest in thelast four months. Although the operating conditions improved, the sector’s input costs have risen dueto the higher cost of raw materials. Additionally, the employment rate fell back in June after signallingexpansion a month before. The net job creation is not expected until 2011 as the unemployment rate
  8. 8. Centre for European Studies ECONOMIC RECOVERY WATCHreached 13.4 per cent. Growth has been noted in the number of new business but the increase in thenew export orders was mainly due to external demand. Also, the continuous weakness of the eurocauses inflationary pressures on the market. Irish government seeks extension of the bank guaranteescheme. Last month Ireland joined Germany, Sweden, Spain, Latvia, Poland and eight other EUmember states in getting its state guarantee scheme approved until the end of June. Ireland isstruggling to manage a heavy sovereign debt burden. The country issued a guarantee for €400 billionin bank liabilities during the peak of the crisis in September 2008 which was one of the most extensiveof such schemes at that time. The state guarantee was originally planned to last two years. TheMinister of Finance Brian Lenihan has recently stated that the Commission will most probably extendthe scheme under the current terms and conditions until 29 September 2010. Furthermore, theguarantee will be modified in order to seal prolongation until the end of the year. This move wascaused by the turmoil in sovereign and corporate debt market caused by concerns about the ability ofhighly indebted states to service borrowings. Finally, on 7 July the International Monetary Fund (IMF)concluded the consultation with Ireland and considered that the authorities’ decisive measures tosupport the banking sector and advance fiscal consolidation have helped gain policy credibility andstabilise the economy.ItalyThe income of the average Italian family is decreasing. According to ISTAT, the Italian governmentstatistics agency, the income of the average Italian family decreased by 2.6 per cent in the first quarterof 2010 compared with the first quarter of 2009. This is combined with a rise in consumption of 0.5per cent and a fall of 10.5 per cent in savings and investment. A study has revealed the most and leastexpensive cities in Italy. The study, partly commissioned by Unioncamere, the Italian union ofchambers of commerce, shows that Bolzano-Bozen is the most expensive city in Italy, with prices 5.6per cent above the national average. The study has also revealed that the cheapest city is Naples, withprices 6.2 per cent below the national average. In general terms, the more expensive places arelocated in the northern regions of the country where there greater public spending in areas such ashealth spending. The Holy See has registered a deficit for a third year running. Recent figures show adeficit of 4.1 million euros in 2009. This increase can be attributed to increase expenditures by PopeBenedict XVI in the execution of his duties and a decrease in donations as a result of the economiccrisis. Benedict XVI’s predecessor, John Paul II, began publicly disclosing the Vatican accounts in anattempt to show that the Roman Catholic Church was not as a wealthy as rumours had stated.LatviaIn order to achieve consolidation of next year’s budget (571.4 million euros), cuts will be necessary inthe social sector, said IMF and World Bank consultant Janis Platais. It must be understood that thestate will have less tax revenue at its disposal than previously. Therefore, the only possibility is tospend less on pensions, healthcare, education, culture. Of course, pensions could be kept at thecurrent level, but in such an event there would be a lack of money for healthcare. This could becompensated by giving up reduced VAT rates for medication. In any case, everyone will have to suffer.Moreover, Latvian legislation states that pensions should be indexed. Assessing reforms to statestructures, the consultant admits that there are many problems which have not been solved. Faircompetition and eradication of the plundering of state resources will have extremely great significance
  9. 9. Centre for European Studies ECONOMIC RECOVERY WATCHin Latvia’s exit from the current crisis. vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvgggLithuaniaLithuanian Prime Minister Andrius Kubilius said that Lithuania is on course to adopt the euro by 2014.The country is also on track to cut its deficit to 3 per cent of gross domestic product by 2012, whichwill require further spending reductions of about 5 per cent of gross domestic product. Lithuaniapushed through one of Europe’s toughest austerity programs last year and in 2010, with budget cutsaveraging a combined 12 per cent of GDP, to bring down the deficit and qualify for the euro. Themeasures exacerbated last year’s recession, when output shrank by 14.8 per cent. Recently, theLithuanian parliament has also approved plans to reduce parental leave benefits to help narrow thebudget deficit. Now, Lithuania provides 90 per cent of the parents’ salary in their first year of leaveand 75 per cent in the second year. From July 2011, parents who take one year of leave will get 100per cent of their salary. For those who will stay with children for two years, benefits will be reduced to70 per cent in the first year and to 40 per cent in the second year.NetherlandsCaretaker Finance Minister Jan Kees de Jager said that he wants to publish the results of checks of theso-called stress tests which a number of Dutch financial institutions are undergoing. He said that atleast four Dutch banks are undergoing these tests, but declined to give more details, with the resultsdue around 23 July. The aim of the stress tests is to find out if the banks have enough capital towithstand another two years of an economy that may deteriorate. Meanwhile, a majority of MPs havedoubts about whether central bank president Nout Wellink is the right man to push through a ‘culturalchange’ at the bank. Although the caretaker finance minister defended Wellink in parliamentarydebate, MPs from across the political spectrum said the central bank had repeatedly failed to showenough muscle. MPs were debating a damning report on the collapse of independent bank DSB,which said the central bank should never have issued it a banking licence. But the bank had also failedto show enough teeth during the credit crisis, the takeover of ABN Amro bank and the swift rise ofinternet savings back Icesave, MPs said. The central bank has been given until 1 August to draw up aplan to overhaul its operations and implement a ‘cultural change.’ MPs do not have the right toappoint the central bank president, but a lack of support would be an important signal that he shouldgo, experts say.PolandEconomists say that the Polish economy may expand by more than 3 per cent in 2010. According tothe Central Statistical Office, the countrys GDP grew by 3 per cent in the first quarter of 2010 in year-on-year terms. The European Union economy has expanded by just 0.5 per cent. The IMF expertsadvise that Poland should continue structural reforms and make sure that public finances are moreflexible and the pension system reform is completed. The victory of Bronislaw Komorowski in Poland’spresidential elections is not a guarantee that the country will go ahead with vital fiscal reforms. Theexperts claim that the ruling Civic Platform party Komorowski belongs to will not be willing to riskintroducing extensive reforms before the next year’s parliamentary elections. Also, the country’smanufacturing output grew for the seventh consecutive month. It increased by 14 per cent in May2010 compared to May 2009 – mainly due to growing inventories and exports. Although growth in
  10. 10. Centre for European Studies ECONOMIC RECOVERY WATCHexports means that Polish products are competitive on international markets it may also be a sign ofweakening of the zloty. Meanwhile, Marek Belka, chief of the National Bank of Poland (NBP), urges thegovernment to tackle the budget deficit as it may soon result in investors’ interest in Polish bondsweaken significantly. According to the NBP’s calculations the country’s debt amounted to 220 percent of GDP. This number considers all the state’s hidden financial obligations that are rarelyconsidered in book keeping – social benefits system, healthcare and other conditional responsibilities.Poland still does not meet many of the criteria required to join the euro zone. In the worst casescenario, the adoption of the common currency will take place no sooner than in 2019. Thisassumption depends on such volatile factors as government declarations, macroeconomic situationand the reliability of economic policy. Currently Poland meets only one of the four criteria – long-terminterest rates. The country is still not a part of the European Exchange Rate Mechanism and does notfulfill the price stability or the fiscal criteria due to the excessive deficit – 7.1 per cent of GDP in 2009.Therefore, economists find the Polish government’s goal of euro adoption in 2012 unlikely.PortugalAccording to information released on 13 July 2010, Portugal’s bond rating was downgraded again byMoody’s, from Aa2 to A1. Moody’s stated that the Portuguese government’s financial strength willcontinue to weaken over the medium term. The Portuguese economy’s growth prospects are likely toremain relatively weak unless recent structural reforms bear fruit over the medium-to-longer term.This fresh cut in the government’s credit rating is the latest installment in the saga of Portugal avoideda Greek-style debt crisis. The government has slashed government spending and arranged a bondauction in the hopes of calming investors. This latest change in Portugal’s debt rating has affected theeuro. Currency trading on the morning on 13 July saw the euro continue its decline, falling 0.5 per centat 8.30 GMT, to US$1.2536. This announcement falls on the heels of a somewhat successful six-month bond sale in the beginning of July. The sale of the bonds maturing in January 2011 carried anaverage yield of 1.947 per cent, down from an average of 2.955 per cent in the bond sale in May. Thelower yield was interpreted as increased confidence in the Portuguese economy; however thelowering of the credit rating clearly shows tough times ahead for the Socrates government.RomaniaThe fifth instalment from Romanias stand-by agreement with the International Monetary Fund wassent on 7 July to the Romanian Central Banks reserve. An IMF mission will arrive in Romania on 26 Julyto evaluate whether Romania has fulfilled the conditions assumed in the stand-by agreement and todiscuss the economic targets for the next year with the authorities. The IMF team will go through thestage of the recommendations submitted last year by another team and will advise the RomanianNational Agency for Fiscal Management (ANAF) on better ways to use the instruments made availableby information technology. Earlier, the IMF Managing Council approved the rectification of theinflation rate for 2010 from 3.5 per cent to 7.9 per cent, after Romanian authorities raised the VATfrom 19 to 24 per cent. IMF chief of mission to Romania Jeffrey Franks noted that the IMF board wereimpressed by the speed at which the Romanian Government found an alternative after theConstitutional Court ruled out the cut in pensions was unconstitutional. Asked whether a cut inpensions would have been more adequate, Franks gave a negative answer, saying that the Fundproposed an increase in taxes during the last visit. The IMF is now waiting for a clear sign from theRomanian Government to start discussions on a new agreement, which could start within the coming
  11. 11. Centre for European Studies ECONOMIC RECOVERY WATCHmonths. Meanwhile, Romanias unemployment rate has dropped for a third month in a row, down to7.44 per cent in June from 7.67 per cent in May, as announced by the National UnemploymentAgency. The rate is lower than the average euro zone unemployment rate of 10 per cent reported byEurostat in May.SlovakiaSlovakia’s new centre-right government, which was sworn in on 9 July, faces a challenge to bring therapidly-growing public debt under control. The state budget deficit for the first six months of 2010 hasalready amounted to 65 per cent of the full-year budget. It means that meeting the original full-yeartarget would require that government expenditures not exceed revenues by more than 1.3 billioneuros in the second half of the year. This, according to some analysts, could be possible only throughtimely and restrictive measures. On European affairs, the framework agreement on the EuropeanFinancial Stability Facility (EFSF) needs Slovakias signature in order to become operational. If signed,Slovakia’s share in the package will amount to 4.37 billion euros. The new Slovak government backeda stabilisation mechanism for Eurozone countries but backed away from a separate euro-areacountries bail-out loan to Greece. Slovakia’s portion of the Eurozone’s multi-billion-euro emergencyrescue package will not change, said Slovakia’s new Prime Minister Iveta Radičová after talks with thepresident of the Eurogroup of eurozone finance ministers, Jean-Claude Juncker, in Brussels on 13 July.According to Ms Radicovas spokesman, Rado Bato, Slovakia will demand a ‘binding agreement’ of theEurozone countries that they reform their banking sector and the EUs Eurostat statistics office,amongst other measures.SloveniaThe first quarter of 2010 saw no signs of economic recovery : GDP declined by 0.5 per cent in realterms compared with the previous quarter and year-on-year (by 1.2 per cent), which shows thateconomic activity dropped to the lowest level since the beginning of the economic and financial crisis.A recent meeting of representatives of the government, construction companies and banks endedwith a promise that the government would provide short-term aid to Slovenias troubledconstruction sector primarily through the launch of certain investments. A special bank loans schemefor builders was not discussed. The Slovenian parliament passed an act on state guarantees forsecuring financial stability in the Eurozone, which forms the legal framework for Sloveniasparticipation in mechanisms of financial aid, as well as an act enabling Slovenias participation in theEurozones bailout package for Greece. Parliament also passed the supplementary budget for thisyear whose aim is to keep Slovenias budget deficit at 5 per cent of GDP at the close of an emergencysession dedicated to the budget. Later, the biggest opposition party, the Democrats (SDS), presented afourth package of measures to boost the economy. Unlike the previous proposals, which includedmostly long-term measures, the new package focuses on short-term measures. Finally, Sloveniasinflation rate dropped by a further 0.2 percentage points to 1.9 per cent at the annual level in Junedespite consumer prices rising by 0.3 per cent at the monthly level, the Statistic Office reported.SpainSpain announced politically unpopular labour and pension reforms in the face of financial marketpressure on Eurozone states to clean up their finances. The country even won praise from German
  12. 12. Centre for European Studies ECONOMIC RECOVERY WATCHChancellor Angela Merkel after the cabinet in Madrid approved a decree to overhaul rigid hire-and-firelaws intended to restore economic competitiveness. EU leaders denied a report in the Spanishbusiness newspaper El Economista that the United States, the EU and the IMF were preparing a 250-billion-euro credit line for Spain. Furthermore, the country also decided to open its troubled savingsbanks to private investors, acting to limit political interference in a sector plagued by bad propertyloans as it stepped up efforts to overhaul its financial system. The new law, which the government saidopposition lawmakers would approve, complements an ongoing consolidation of Spains unlistedregional lenders, known as ‘cajas.’ Although the cajas avoided the meltdown stemming from toxic assets during the first part of the financial crisis, they are heavily exposed to Spainsown property crash. Economy Minister Elena Salgado said that the consolidation process is virtuallycomplete and has shrunk the network of 45 savings banks to 19, all of which EU stress tests had shownwere solvent.UnitedcKingdomThe country’s deficit reached the record high of 11 per cent of GDP in the 2009-2010 fiscal year. TheLabour government failed to repair public finances. It created the need for the George Osborne’semergency budget that was delivered on 22 June. Mr Osborne, the Conservative Chancellor of theExchequer, set an objective of balancing the cyclically adjusted current budget within five years. Hetook the overall fiscal consolidation to 6.3 per cent of GDP during this parliamentary term. He hasdecided that the VAT rate will be raised from 17.5 per cent to 20 per cent in January 2011 whichshould result in the 0.8 per cent GDP increase in 2011-2012. The bulk of the fiscal tightening will derivefrom spending cuts, including cuts in welfare. This will increase their contribution to the overallretrenchment to 4.6 per cent of GDP. Additionally, government spending will fall from over 47 percent of GDP in 2009-10 to under 41 per cent, and borrowing from the current level of 11 per cent ofGDP to 2 per cent. The gravest error in this budget seems to be walling off health, leading toenormous cuts on other departments – average of 25 per cent by 2014-15. Without the ring-fencing,the cuts would be at 14 per cent. Britain still has a long way to recover from the six-quarter recession.Excess capacity and banks’ continuous reluctance to lend could result in dampening business. Also, UKinterest rates maintained at 0.5 per cent - a record low level since March 2009. Moreover, the Bankof Englands Monetary Policy Committee decided not to inject any more money into the economyunder its policy of quantitative easing while the calls have been growing for an increase in rates tocurb inflation. According to the estimations by the National Institute of Economic and Social Research(Niesr) the British economy grew by 0.7 per cent in the three months to the end of June - a slowdownfrom the 0.9 per cent expansion seen before. The Consumer Prices Index reached a 17-month high of3.7 per cent in April. It fell back to 3.4 per cent in May but remains well above the Bank of Englands 2per cent target.
  13. 13. Centre for European Studies ECONOMIC RECOVERY WATCHWORLDWIDEChinaWhile European and American banks were suffering from the crisis, China transformed itself from anindebted communist bureaucracy into something resembling a mature market economy. Thistransition has been completed by the Agricultural Bank of China – the last of the five large state-owned banks - to list. Currently, four of the world’s ten largest banks according to their market valueare Chinese. Six years ago, this number was zero. The finance sector has tremendous potential inChina as only less than 1 per cent of AgBank’s retail customers have mortgages. Chinese banks – beinglargely under government’s protection – did not suffer too much from the crisis. The system is to alarge extent closed. Foreigners have minority stakes in Chinese companies but their own operationshave less 1 per cent by profits of a market share on the mainland. Also, Chinese banks make less than4 per cent of their profits abroad.Inflation may soon become a serious threat to China, with the 2009 extreme credit expansion likely tocause prices to increase. China’s GDP growth will most probably remain strong at approximately 10.5per cent in the second quarter of 2010. The country’s industrial production is expected to havediminished slightly from 16.5 per cent in May to 15 per cent in June 2010. China has noted a surge inthe trade surplus and exports, beating market expectations. Exports for June increased by 43.9 percent on the same month in 2009 last but the $20bn trade surplus is so far the largest in 2010. Theexperts say that the effect of the European debt crisis had not been as bad as they expected. Theserecords are first since China’s last month’s decision to allow its currency to trade more freely againstdollar following Western politicians arguments that yuan is undervalued and gives China an unfairtrading advantage. The strong June trade figures may therefore trigger further relaxation in yuancontrols. A stronger currency would dampen Chinese exports and boost home consumer spending oncheaper imported products.IraqThe oil sector provides 95 per cent of the government revenue and employs only 1 per cent of theworkforce. Beyond oil, Iraq does not export much of anything. It is an industrial pygmy that is noted asthe 175th out of 183 countries surveyed by the World Bank for ease of starting a business. According tothe IMF, the countrys economy has grown by more than 7 per cent in 2010 – mostly due toinvestment by foreign oil companies. Most Iraqis still do not have full-time jobs. Banks charge up to 20per cent in interest on small loans and sometimes demand 300 per cent in collateral should they needto recoup capital in a fire sale. The central bank was bombed on 13 June and the state Trade Bank ofIraq a week later, killing a total of 44 people. These attacks will probably result in even more reticentbanks.SouthcKoreaThe South Korean central bank has unexpectedly increased interest rates to 2.25 per cent for the firsttime since the outbreak of the financial crisis. Before this increase the rate was at the record low levelof 2 per cent. The country’s central bank gave no clear indication of its future policy moves but it isprobable that the gradual tightening will continue reaching the 3 per cent level by mid-2011. This
  14. 14. Centre for European Studies ECONOMIC RECOVERY WATCHdecision follows similar ones made in Canada, Australia, Malaysia and India. Unlike many Asianeconomies, majority of developed countries are not yet confident enough of a sustained economicrecovery to raise the cost of borrowing. According to the Bank of Korea’s forecast the South Koreaneconomy – already third largest in Asia – will continue to expand in 2010 at the fastest rate since 2006.Even the presence of overseas risks will not stop the positive trends in Asian economies. Both SouthKorean government and the central bank seem to be increasingly confident about economic prospectsand concerned about the possible inflation risks.UnitedcStatesHopes that a lower trade deficit was indicative of economic recovery have come into doubt. SinceJanuary 2010, the trade gap has shrunk by US$700 million, however, analysts believe that this declinecould be attributed to low imported oil prices rather than an increase in exports. Various key figures inthe decentralised Federal Reserve have publicly stated that the central bank system has no plans forfurther monetary easing. President of the Richmond Federal Reserve Jeffery Lacker believes that theFederal Reserve has done what is reasonably necessary and that ‘*it+ would take a very substantial,unanticipated adverse shock’ for further action to be appropriate. Partisan squabbling is preventingaid for the unemployed that was first proposed by the Democrats in a wider employment bill inNovember 2009. But even with the unemployment rate stuck well above 9 per cent, the bill, whichwas approved by the House of Representatives, has run aground in the Senate as Republicans andsome conservative Democrats balk at further inflating the federal debt. Even after Democratic leaderscut the total cost of the legislation in half to about US$100-billion, they still came up a few votes shortwhen they tried to pass the measure before breaking for a week after the 4 July holiday.INSTITUTIONSG-20: Leaders from the world’s top 20 economies met in Toronto on 26-27 June for a crucial meetingon the future of the world economy. A strong push for fiscal consolidation and the rebalancing of theglobal economy, a bank levy and financial reform made for a packed agenda. The first and foremostchallenge for leaders was to ensure confidence so that global recovery will not be derailed. Theyexpressed strong support for the determined actions taken by the EU to safeguard stability andgrowth in Europe. Leaders agreed to continue to resist protectionist pressures and refrain from raisingtrade and investment barriers, and agreed on the need to complete the Doha Development Round ofnegotiations. World leaders faced a complicated task in Toronto. On the one hand, there are signs ofeconomic recovery, especially in Asia, from which the EU will no doubt benefit, but on the other handaggregate global domestic demand is looking much gloomier. Leaders in the end agreed on theimportance of a coordinated approach at global level that combines carefully calibrated and growth-friendly fiscal consolidation with following through on fiscal stimulus, tailored to nationalcircumstances. Participants agreed to specific minimum targets for deficit reduction and thestabilisation and reduction of debt. The G20 Toronto Summit Declaration was released following theconclusion of the G20 Summit meeting.
  15. 15. Centre for European Studies ECONOMIC RECOVERY WATCHECOFIN Meeting: During the ECOFIN meeting on 12 July the Economic and Finance ministers werenot able to come to many conclusions, especially not in the field of the tax package. The Counciladopted a political guideline for continuing negotiations with the European Parliament on the reformof financial supervision in Europe. The EU finance ministers endorsed a demand of the BritishChancellor George Osborne that the European Banking Authority, one of three EU financialsupervisory bodies, should be set up in London, not in Frankfurt. EU finance ministers agreed to handthe Belgian EU presidency a new negotiating mandate on the EUs financial supervisory package, in afresh bid to secure an agreement with the European Parliament by this September. Parliament lastweek delayed a vote on the package, giving time to Member States to moderate their position on theroles of three new agencies in the banking, insurance and financial market sectors. A deal inSeptember is needed so that the new bodies can be up and running by 1 January 2011. The Counciltook a decision authorising Estonia to adopt the euro as its currency with effect from 1 January 2011,and to this end definitively fixed the conversion rate between the Estonian kroon and the euro. TheCouncil established broad economic policy guidelines under the new Europe 2020 strategy. In thecontext of initiatives under way with the aim of improving the economic governance of the EuropeanUnion, it gave the go-ahead for the introduction of a "European semester" for the surveillance of thebudgetary and structural policies of the Member States. The Council also opened excessive deficitprocedures in relation to Bulgaria, Cyprus, Denmark and Finland, making recommendations on themeasures to be taken to reduce their deficits to below the reference value of 3 per cent of grossdomestic product. The Council has also completed the legislative procedure relating to the SWIFTagreement, by concluding an agreement with the United States on the transfer of financial messagingdata for the purposes of the Terrorist Finance Tracking Program. . EU finance ministers will also holdsubstantive discussions on a Europe-wide bank levy and tax on financial transactions in September.European Parliament: Members of the European Parliament have accused national governmentsof seeking cuts to the European Unions budget that would undermine attempts to spur economicgrowth. Ambassadors from the Member States have agreed to a draft budget for 2011 of €126.58billion, €3.6bn less than the draft budget presented by the European Commission in April. SidoniaJedrzejewska, a Polish centre-right MEP who is preparing the Parliaments position on the 2011budget, pointed out that the budget lines concerned were supposed to pay for the Europe 2020strategy, which aims to boost competitiveness and stimulate growth. In the meantime, MEPs havecalled for a ’European youth guarantee’ aimed at ensuring that young unemployed people do notremain jobless for more than four months. European deputies signed the resolution as figures showthat more than 5.5 million under 25 year-olds were unemployed in December 2009 - equivalent to21.4 per cent of all young people in Europe......European Commission: The European Commission has come forward with proposals to step upthe protection of bank deposits. The package of plans presented on 12 July by the EuropeanCommissioner for the Internal Market and Financial Services, Michel Barnier, also aims to protectinvestors from Bernie Madoff-style fraud events, by reforming current EU legislation in the area. Forthose who lose out due to fraud such as pyramid schemes or administrative malpractice, the new rules
  16. 16. Centre for European Studies ECONOMIC RECOVERY WATCHwould increase compensation from €20,000 to €50,000. A third component to Mondays initiative sawthe Commission publish a White Paper on insurance guarantee schemes, designed to provide last-resort protection to consumers when insurers are unable to fulfill their commitments. An EU plan for aglobal levy on banks to pay for future bank bail-outs failed to win support at last months G20 meetingin Canada, although European officials have vowed to push ahead regardless. The EuropeanCommission also published a report on labour market and wage developments in 2009 and a GreenPaper on adequate, sustainable and safe European pension systems. On 30 June, the EuropeanCommission tabled new economic governance plans to strengthen the Stability and Growth Pact,proposing to cut EU farm payouts for countries found to breach the rules.European Council: The outgoing Spanish EU Presidency will be remembered for overseeing thefirst steps towards a ‘necessary and absolutely essential’ evolution from monetary union to economicunion, Rafael Dezcallar de Mazarredo, Spanish Ambassador to Germany, told EurActiv Germany in arecent interview. Spains six-month tenure at the EU helm, which came to an end in June, witnessed aseries of EU-level discussions on proposals for budget supervision and possible sanctions for memberstates that do not respect the rules. Belgium, which took over the European Unions six-monthpresidency on 1 July, wants an EU deal on a bank tax by the end of the year, Finance Minister DidierReynders said in a newspaper interview on 4 July. On EU economic governance, Reynders said this hadto protect jobs as well as the environment. On public debt and deficits, he said stability pact rules hadto be applied with the same rigour to all EU states and sanctions must be made more automatic.Reynders said he opposed taking away EU agricultural funds from states which did not obey EU publicfinance rules. The European Commission has proposed such a plan.EPP ViewsEPP MEP Salvador Garriga has been appointed the rapporteur for the new European Parliamentspecial committee for financial and budgetary resources beyond 2013. This special committee wascreated in order to ascertain the political priorities of the European Parliament for the next FinancialPerspective which will come into force in 2013. As well, the EPP Group gave its approval to the SWIFTagreement with the United States, leading to its passage in the European Parliament. ‘After theaddition of Parliaments fundamental requests, the EPP Group gave its consent to this new Agreementin order to prevent and fight terrorism in Europe and find transactions by terrorist groups all aroundthe world,’ said EPP Group Vice-Chairman Manfred Weber MEP, EPP Group Coordinator in theCommittee of Civil Liberties Simon Busuttil MEP, and EPP Group Shadow Rapporteur Ernst StrasserMEP, after the EP vote today in Strasbourg. ‘We made all the efforts possible in order to guarantee abinding twin-track approach to establish a European TFTP in a short delay, in order to permit theextraction of data on EU soil and thus stop the transfer of bulk data to the US. In fact, this newAgreement will be transitional until the European Union creates its own system for the investigation ofterrorist financing,’ Weber, Busuttil and Strasser explained.
  17. 17. Centre for European Studies ECONOMIC RECOVERY WATCHOUR COMPETITORS’ VIEWSThe Socialist and Democrat Group in the European Parliament agreed to the passage of the SWIFTagreement, with some reservations. S&D leader Martin Schulz said, ‘During the last months theEuropean Parliament was strong enough to say no to a security without safeguards deal. It is the dutyof the EU and the US to cooperate in protecting citizens from terrorism, but citizens have also the rightto be protected against excessive state intrusion into their lives and potential mistakes.’ Schulz alsolamented an alleged lack of progress at the G20 Summit in Toronto. Not only was there a lack ofprogress according to the S&D Group leader, but there was also that unequivocal call for the EU tounilaterally adopt a bank tax. According to Schulz: ‘This meeting of the leaders of the 20 wealthiestnations in the world over the week-end in Toronto has raised many expectations in Europe but was acomplete failure. The coordinated excessive budget cuts by European governments are pushing theworld in the wrong direction. This austerity policy is raising the threat of plunging back into recession.On top of that, the summit missed the opportunity to introduce a banking tax and a financialtransaction tax to put the costs of the crisis where they belong. This is a real disappointment. The EUshould nevertheless take the lead and go ahead with a banking tax and a financial transaction tax,despite opposition from its partners.’FROM THE BLOGOSPHERE…Could Greece come right after all? Gideon Rachman elaborates on the idea of Greeks surprising theworld dealing with their political and economic problemsEuro zone currency crisis is only beginning Charlie Fell wonders what will be the consequences of thebanking crisis.Testing the European banks stress tests The Economist’s blogger comments on the Europe’scommittee of bank supervisors’ decision to set criteria for the largest banks’ abilities to withstanda downturn.Editor: Roland FreudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffResearch Assistance: Katarína KrálikováccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccAdditional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, GiovanniMastrobuonovvvvvvvvvvvvvvvvv ,,,,,,,,,,,Design: José Luis FontalbacccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccQuestions and comments:
  18. 18. Centre for European Studies ECONOMIC RECOVERY WATCHANNEX ECFIN Economic Briefs Edited by Marco ButiStrategies for a post-crisis world: enhancing European growthKeynote speeches at the Brussels Economic Forum 2010The 11th Brussels Economic Forum, held on 25-26 May 2010, took place against a background of theGreek debt crisis and keen debate on the future of Europes economic governance. In that sense ittook place at the ideal moment. Participants debated the causes and consequences of the crisis, andthe best way to spur economic growth in Europe, including on how to make growth greener and moresustainable.This special edition of DG ECFINs Economic Brief series reproduces the keynote speeches from theconference.Speakers: Olli Rehn, European Commissioner for Economic and Monetary Affairs Herman Van Rompuy, President of the European Council Elena Salgado, Second Deputy Prime Minister and Minister of Economy and Finance, Spain José Manuel Barroso, President of the European Commission Connie Hedegaard, European Commissioner for Climate Action Mario Monti, President, Bocconi UniversityTo read Keynote speeches at the Brussels Economic Forum 2010, click here.(ECFIN Economic Briefs. 9. July 2010. Brussels. pdf. 28pp. Tab. Graph. Ann. Bibliogr. Free.)KC-AY-10-009-EN-N ISSN: 1831-4473)