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.
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.
In order to boost its nascent recovery, Spanish PM Rajoy has announced that the country will cut taxes and add €6.3 bn in stimulus. The government will lower the corporate tax rate from 30% to 25% and try to put more money back in the pockets of families in an effort to “improve the competitiveness of the economy, raise savings and above all else to boost employment,” said Rajoy. However, many will be skeptical of the plans, as Spain has promised to meet a target of a 3% budget deficit in 2016, but is still running a 5.6% deficit this year and is forecasted to manage a 6.1% deficit in 2015. The €6.3 stimulus would be part-funded by the private sector and part-funded by the public sector, and Rajoy hopes it will boost investment in research and development and “re-industrialise” the nation. The move is part of a political attempt to boost the popularity of Mr. Rajoy’s party, PP, after they performed poorly in recent European parliamentary elections. Many Spaniards feel as though they are yet to benefit from the reported 1% growth of the economy.
FINSUM: Spain is loosening the belt to boost its recovery despite the fact that this runs directly against current EU fiscal doctrine. Hopefully it has the intended effect, because the budget deficit stills looks wide, and the country cannot afford to slip further.