Eq: Dev ex-US
In a much stronger than expected action, the ECB’s President, Mario Draghi, yesterday announced that the bank would enact a series of moves to combat inflation. The ECB will begin charging banks 0.1% for deposits (a negative interest rate), introduce a €400 bn loan stimulus program, and no longer withdraw money from the system to account for its bond purchases in 2010 and 2011. Further, Draghi made a strong statement which boosted markets and offered confidence that the ECB would not let Europe drift into deflation, saying “if required, we will act swiftly with further monetary policy easing”. Draghi also noted that in relation to the prospect of quantitative easing, which is much more complicated and politically sensitive in the EU than in the US, the ECB would “intensify preparatory work related to outright purchases”.
FINSUM: This is the boldest move the ECB has made since 2012, when Draghi effectively saved the Euro. Hopefully, it will have the intended effect, though markets are hoping for more QE.
The German government is finally giving in to relentless business demands and is set to lift the ban on fracking within the country by next year. The business sector has been lobbying relentlessly for the government to allow fracking in order to be more competitive with the US, but the recent boost the movement has received by the apparent need for energy independence from Russia has added gravitas. The government has mandated that fracking would still need to be approved as safe to other resources and the population, with safety having proven a major sticking point in the German coalition government’s opposition to fracking in recent years. German business and consumers have been plagued by high taxes and duties on energy as the country implements a switch to renewable sources of power. Businesses say this has made them less competitive on the global stage. Germany is home to an estimated 2.3 tn cubic meters of natural gas, which could provide 35% of its needs on an annual output basis.
FINSUM: So one of the big opponents to fracking on the continent has fallen. It may be only a matter of time until the EU and other European governments also give in.
In what is highlighting more the dysfunction inherent in the Eurozone than the success of the single currency, Lithuania passed a major hurdle to joining the Euro yesterday when the European Central bank formally announced that the country had met its monetary conditions for adoption of the currency. From January 2nd next year the country will begin using the Euro. In theory, all countries in the EU are obligated to move towards making the necessary reforms to join the Euro, but in reality, the final seven countries have made no changes, and have no current plans to do so. Sweden, Hungary, Romania, Bulgaria, Croatia, Poland, and the Czech Republic are all members of the EU, but not the Eurozone and are legally obliged to make efforts to join. However, none appear eager to do so because of the European debt crisis and the “straitjacket” of a single currency that the crisis has highlighted. Lithuania says it is pressing ahead with joining because it will provide additional “security” for the country, especially in light of new pressures from Russia. A single currency helps small countries defend themselves from currency speculators by handing over central banking duties to their EU parent.
FINSUM: The Euro crisis has deeply sapped any desire countries formally had to join the Euro, and with anti-EU populism thriving, it does not appear this will change any time soon.
Economic figures for the Eurozone were released yesterday, and the results were dismal—inflation dropped to just 0.5% in May, after reading 0.7% in April. Even in the strongest inflationary country in Europe, Germany, prices only rose a measly 0.9%, showing just how anemic price growth is across the Eurozone. The strong drop, which negates any hope of a strengthening trend for inflation, means that the ECB is very likely to act in easing monetary conditions in order to stoke inflation. Economists expect the bank to take a number of possible measures as a first step, including lowering interest rates, extending more loans to financial institutions, and possibly implementing a negative deposit rate to encourage lending. The bigger prospect is whether such early first steps could be the preliminary stages of a move towards Federal Reserve-style quantitative easing, something the ECB has discussed but not committed to. Eurozone unemployment stands at 11.7%, with rates above 25% continuing in Greece and Spain.
FINSUM: The ECB’s long-standing policy conservatism is being strongly tested by the lack of inflationary pressure in the Eurozone. Will this be the moment they step outside their shell with QE—likely not. However, if they do, financial markets will soar.
After months of threatening Scotland, a triumvirate of three of the UK’s most established parties has come together and offered Scotland an extensive package of reforms and devolved powers were it to elect to stay in the union come its September referendum vote. Were Scotland to stay, they would receive increased taxation powers, including the ability to raise and lower tax bands and collect value-added tax, as well as the power to control some social welfare distribution, like housing benefit. Altogether, the new powers would mean Scotland would be responsible for collecting and administering up to 50% of the taxes which fund its budget, a significant step up from current levels. The latest offer of powers has been a joint effort of Labour, the Lib Dems, and particularly the Conservatives, who hope the offer will boost their popularity in Scotland, where they have struggled to gain support for decades.
FINSUM: England finally appears to be taking the right approach with Scotland, offers instead of threats. Polls show that most Scots simply favour having more powers rather than leaving the union altogether, so this tactic could prove effective.
In what is surely a conundrum of 21st century Europe, thousands of people are taking to the streets across Spain in order to call for a democratic referendum on the country’s monarchy. The calls for the devolution of the royal family come just as Spanish King Juan Carlos has abdicated in favour of his son. King Juan Carlos had been immensely popular for leading the country to democracy and capitalism, but since 2012 he and his family’s reputation has been severely tarnished by a corruption scandal that involved an expensive elephant hunting holiday while the country was at the height of its financial crisis. The King’s daughter, Princess Cristina, is also under a separate investigation for corruption. The king plans for his son, a former Olympic Yachtsman, to take over as King now that he has abdicated at 76 years old.
FINSUM: An old constitutional monarchy potentially voting to rid itself of its royal family is a major social change in Europe and could be a bellwether for more cultural upheaval as populism rises across the continent.