Eq: Dev ex-US


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.

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