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EconomicRecoveryWatch_July2010

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Centre for European Studies
                         ECONOMIC RECOVERY WATCH



CONTENTS

WATCHTOWER

EU MEMBER STATES

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Centre for European Studies
                                             ECONOMIC RECOVERY WATCH


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Centre for European Studies
                                        ECONOMIC RECOVERY WATCH

15/07/2010                   ...
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  1. 1. Centre for European Studies ECONOMIC RECOVERY WATCH CONTENTS WATCHTOWER EU MEMBER STATES WORLDWIDE INSTITUTIONS EPP VIEWS OUR COMPETITORS' VIEWS FROM THE BLOGOSPHERE… ANNEX www.thinkingeurope.eu
  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 on 9 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 Growth and 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 these two approaches will find the full consensus of the Member States. Meanwhile, the European Commission is determined 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) still inhibit the basic freedoms proclaimed in the Treaties. The potential advantages of removing the last exceptions are impressive: according to The Economist, completing the Single Market just in the digital economy, by harmonising patents and removing other obstacles, might increase EU GDP by 4%. In the deepest economic crisis of its history, with staggering debt, weak growth and sagging global competitiveness, the EU would be suicidally stupid 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 service sector. The 2006 compromise on the Services Directive took years of hard negotiating. It is no coincidence that it is better known in France as the Bolkestein initiative (with a clear connotation of Frankenstein). And that was in times when the EU economy looked good. So how easy will it be now to confront the vested interests of trade unions, corporate oligopolists and other 20th century nostalgics, especially in continental Western Europe - in the crisis, facing the possibility of a double dip, with unemployment already disastrously high in some Member States and looming in others? And that includes Germany, to be fair, where the Monti report has collected some official applause although we all know perfectly well that some German lobbies were among the most visceral enemies 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 and remains true that in view of its global competitiveness as well its debt and demographic future, Europe needs to mobilise as much growth potential as possible. Maybe precisely in the digital economy, the obstacles are not as high as in other sectors. But even on services, we can’t afford not to try harder. Besides, some polls indicate that voters may be unexpectedly open to more flexible markets, precisely because the crisis seems to have created an atmosphere in which many are willing to work harder for less. Last but not least, the EU badly needs a project. With the euro crisis, the Lisbon hangover and enlargement fatigue casting long shadows over our fragile European souls, we need a new strategic goal. And even if Jacques Delors was right when he quipped that one does 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 sustainable recovery. It’s up to our leading politicians to spread this message, with courage and determination. www.thinkingeurope.eu
  3. 3. Centre for European Studies ECONOMIC RECOVERY WATCH 15/07/2010 To view full articles click on hyperlinks. EU Member States Austria Social Democratic (SPÖ) Labour Minister Rudolf Hundstorfer reported signs of recovery on the job front: the minister announced that new figures showed that the number of unemployed people declined by 7.3 per cent last month compared to June 2009, to 212,753. However, the figure does not consider the more than 284,000 jobless Austrians sitting controversial re-education courses provided by the Labour Market Services (AMS). In other news, People’s Party (ÖVP) Vice Chancellor Josef Pröll has appealed to European Union leaders to introduce a continental tax on financial transactions by next year. Meanwhile, the European Commission has given the green light for an extension of the Austrian bank assistance package for another six months. The agreement to subsidise the banks was set to expire at the end of July. However, coupled with the state aid extension, the European Commission also announced that two Austrian banks will be among the 91 institutes undergoing a stress test by a European financial market watchdog later this month. The Committee of European Banking Supervisors (CEBS) officials said they will examine the state of Erste Group and Raiffeisen Zentralbank (RZB) as well as Bank Austria’s (BA) Italian owner UniCredit. This goes against Austrian National Bank (OeNB) Governor Ewald Nowotny declarations earlier this year that he would not reveal precise findings of the affected Austrian institutes. Nowotny caused some controversy by labelling the stress test scheme a ‘temporary fashion trend coming from the United States’ last month. In terms of their foreign activities, Austrian banks are considering abandoning some of their subsidiaries in Hungary as the government there reveals plans to introduce a bank tax. Belgium The European Council Presidency holder has intervened in a row over European financial watchdogs in an attempt to avert a breakdown in talks to set up the supervisors by the start of next year. The country's finance minister Didier Reynders contacted his German, British and French counterparts asking them to back a compromise and end an impasse that threatens to derail plans for the watchdogs. The Belgians are asking countries such as Germany and Britain to agree to give the new EU regulators the final say over Berlin and London. At the heart of the disagreement is whether the watchdogs get powers to overrule individual Member States. Meanwhile, Belgium's central bank raised its forecasts for economic growth and inflation this year, but said debt-to-GDP would top 100 per cent. The economy will grow by 1.3 per cent this year, slightly more than previously forecast, and by 1.7 per cent in 2011 after contracting by 3.0 per cent in 2009, Central Bank Governor Guy Quaden said. Belgium's 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 5.9 percent in July 2008, but has fallen sharply since then. Bulgaria Right-wing leader Martin Dimitrov says that Bulgaria will face drastic fiscal demands if it decides to seek aid from the International Monetary Fund. This move would be a result of the government's failure to cut state spending. The Ministry of Finance has issued a special statement clarifying that it www.thinkingeurope.eu
  4. 4. Centre for European Studies ECONOMIC RECOVERY WATCH was not involved in loan negotiations. The Bulgarian government projected a 3 per cent GDP increase according 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 Simeon Djankov foresees that the unemployment rate will be below 11.4 per cent at the end of 2011. The Bulgarian parliament has recently approved the 2010 State Budget Revision Act with 1 per cent GDP growth in 2010 and a deficit of 3.8 per cent under the EU accounting rules. According to the original 2010 budget, the deficit was planned at 1.9 per cent. Cyprus A wave of good news and expressions of careful optimism concerning the Cypriot economy was followed by the shock announcement on 13 July that Cyprus would be put under excessive-deficit surveillance by ECOFIN. At the end of June the Finance Minister expressed his hope that the government’s plan, combining public sector cuts and tax increases, would manage to put public finances in order. In early July, trade unions accepted zero increases in public servants pay but only under 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 the IMF alike. According to the finance minister, this made it likely that the Cypriot economy will maintain the pace of the minor recovery, and that it could grow even more in 2011. It could allow Cyprus to slowly withdraw the 400 million euro emergency package. Public deficit also shrank during 2010. On 5 July the IMF said that Cyprus will return to modest growth in 2011, but that more action was needed to attain the goal of a 3 per cent public deficit by 2013. However, the centre-left government failed to pass five bills through the parliament that would increase state revenue significantly: two tax bills (on corporate 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 meantime Cyprus will be subject to the new surveillance mechanisms of the EU, while the economic crisis seems to turn also into a political crisis for the island-state. CzechcRepublic A new Czech centre-right government made up of the Civic Democrats, TOP 09 and Public Affairs has just been sworn in, after a month and a half of coalition talks. The new government had pledged to carry out fundamental reforms and fight corruption. Already on 7 July, negotiating teams for the three parties closed the final chapters of their coalition agreement paving the way for reforms aimed at improving public finances. The incoming centre-right cabinet agreed that the 2011 state budget deficit would not exceed 140 billion crowns and that the overall deficit would not be more than 4.6 per cent of GDP. It has an ambitious goal to lower the budget deficit to less than 3 per cent of GDP by 2012 and 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 off staff. That will be felt immediately in the armed forces. The smallest party in the coalition – Public Affairs – demanded that 80 million euros be moved from defence spending to education. The government plans to increase the lower band of VAT from January 2011, from 10 per cent to 11 or 12 per cent. Czech university students will also start paying tuition fees, of up to 780 euros per year. The good news is that salaries for teachers will rise to 780 euros. Doctors who invest in their qualifications will be rewarded financially. People earning over 2,800 euros gross per month will pay lower www.thinkingeurope.eu
  5. 5. Centre for European Studies ECONOMIC RECOVERY WATCH compulsory state pension contributions to make the system fairer, seeing as the state cannot afford to pay them higher pensions. A strategic, long-term goal of Necas´s cabinet is a pension reform based on private pension schemes along with the solidarity public pension insurance. Denmark The troubled Amagerbanken is staggering after an announcement that its main shareholder, Karsten Ree, will stop efforts to save the troubled financial institution. The Financial Stability Company, which was set up by the state and the finance industry in 2008 to avert the worst affects of the financial crisis, has given Amagerbanken until 22 July to raise 750 million kroner, but with billionaire Ree’s statement it is uncertain whether the bank will be able to raise this amount in time. A new report by consultancy firm Copenhagen Economics has estimated that Denmark has missed out on earnings of 10 billion kroner, and 16,000 potential jobs in tourism, since 2000 because it has failed to keep up with its EU neighbours. However, the good news is that compared with April there were 2,000 fewer people unemployed, reducing the seasonally adjusted figure for unemployment to 112,700 people, or from 4.2 to 4.1 per cent of the workforce. However, the gross figure which takes into account both registered 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 effects of the financial crisis than their female colleagues. Estonia On 13 July, European finance ministers decided that Estonia would switch to the euro at the current target exchange rate when it enters the monetary union next year. The kroon will be converted at 15.6466 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 June reading. Ansip also promised that Estonia's second-quarter gross domestic product growth would be one of the fastest rates in the European Union. According to the Economist Intelligence Unit, Estonia may see its economy grow 3.6 per cent on average next year thanks to a favourable business environment. Bad news is that compared to 2008, the average monthly gross wages were in 2009 by 5 per cent lower and the average hourly gross wages were by 3.1 per cent lower, which was a first decrease in annual average monthly salary in 16 years. Finland The government of Mari Kiviniemi does not plan to enact massive changes in taxation. Tax increases set by the Vanhanen government will be adhered to, and slight changes are to be made in energy taxation. Minister of Finance Jyrki Katainen added that major tax reform could have unforeseen consequences 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 weakening of 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 last year. The GDP growth for 2011 and 2012 is estimated to be 2.5 per cent. In its Economic Bulletin, the Ministry of Finance points out that large public sector stabilisation packages could reduce demand and increase unemployment. Finland’s general government deficit-to-GDP ratio is almost at the level www.thinkingeurope.eu
  6. 6. Centre for European Studies ECONOMIC RECOVERY WATCH specified in the EU Stability and Growth Pact. The Ministry of Finance does not believe, either, that Finland’s debt-to-GDP ratio could rise to over 50 per cent by the end of 2012. France In the ongoing EADS-Boeing trade saga, EADS has submitted a new bid to build strategic tankers for the United States Air Force. An earlier bid from EADS with American partner Northrup Grumman was accepted and then later rescinded after Boeing protested. Initially it was unclear whether EADS would submit a new bid as it believes that there is a strong bias in favour of Boeing for American military procurement. This is the latest development in the state aid dispute between EADS subsidiary Airbus and Boeing which is now before the WTO. Meanwhile, budget cutbacks in Paris are drawing fire. The French government has committed to cutting its budget deficit by 33 per cent for 2011, a savings of 40 billion euros. However, it still remains unclear which government programmes will be most affected by the cuts. The budget vote is scheduled to be held on 17 November, however, it is feared that the unemployed, disabled and students will feel the brunt of austerity. Finally, inflation remained stable in the month of June and the French economy is on course to have an overall inflation rate of 1.5 per cent for 2010. Price increases remained stable at 1.4 per cent, but larger increases seen in day-to-day purchases such as food are off-set by a decrease in prices for big-ticket items such as electronic equipment and automobiles. Germany The euro crisis caused much pessimism in Germany and the country was the source of much speculation on the dissolution of the common currency. However, statements from leading German companies and trade figures show that the euro crisis had some benefit. The depreciated currency had the effect of increasing the global competitiveness of German goods, causing exports to increase by 11.4 per cent in the first five months of 2010. Der Spiegel has recently found government plans to deal with the possible insolvency of Eurozone countries. The Ministries of Finance and Justice have called for the creation of a ‘Berlin Club’ to oversee the ‘orderly insolvency’ of debt-laden Eurozone countries in which bondholders would be entitled to some, but not all, of their claims. According to Der Spiegel, there is a belief that a system of dealing with insolvent Eurozone members would not only reassure bondholders and investors but also send a strong message to states with a penchant for deficit spending. Preliminary studies of the German banking industry show that all major German banks will most likely pass EU ‘stress tests’. Deutsche Bank, Commerzbank and Postbank will most likely pass the stress tests, with all expected to pass the threshold of a 6% Tier I ratio under the stress scenario. Of the three banks, only Commerzbank received a government bailout during the crisis, which included a 16 billion euro cash injection. Greece The main economic and political event of July in Greece was the voting in by the Parliament of the new social security bill on 7 July. The bill was solidly supported by the Socialist majority, as well as by two independent MPs who had been expelled by the conservatives. The bill introduced radical and harsh changes, especially regarding certain privileges of women and younger members of the workforce. The minimum retirement age for women went up to 65, while a full pension from now on will require 40 years of work. A national strike was organised by unions on 8 July. The government www.thinkingeurope.eu
  7. 7. Centre for European Studies ECONOMIC RECOVERY WATCH tried to improve certain provisions of the social security bill ahead of the discussion of the individual articles of the law in Parliament in order to avoid defections in the voting of each article, which it finally achieved. The new bill though is expected to be challenged by trade unions in Greek and European courts. Already the State Auditors’ Council in Greece found some of its provisions unconstitutional. At the same time, trade unions and employer organizations were engaged in a tough negotiation concerning the new collective labour agreement. The agreement will have to reflect the changes in labour relations foreseen by the loan agreement Greece signed with the EU and the IMF, some of which are included in the social security bill. Greece won some praise from the European Commission for its efforts, but the general economic outlook for the country remains grim: Even though the economy is expected to contract less than predicted (3-4 per cent GDP reduction, as opposed to an expected 4 per cent), the OECD predicts that the unemployment rate in Greece will rise to 12.10 per cent in 2010 and 14.3 per cent in 2011. Tax hikes (especially in VAT) will lead to an increase of inflation to 6.5 per cent (up from 5.4 per cent in May). Due to the government’s austerity measures, public expenditure has fallen more than predicted, but government revenue remains less than expected. Rare positive news came when the European Investment Bank signed a loan agreement worth 2 billion euros with Greece on 1 July. The loan will particularly help Greece improve its infrastructure and conditions for long-term growth. Hungary An International Monetary Fund (IMF) delegation arrived in Budapest on 6 July for its first review of Hungary’s progress on complying with terms of a 2008 bailout since Prime Minister Viktor Orban took the office. The IMF wants Hungary to achieve the 3.8 per cent of GDP budget deficit target this year. In the meantime, the Hungarian parliament approved a bill loosening budget rules, ignoring the independent Fiscal Council, which said it would erode fiscal credibility. The bill removes the results of majority state-owned companies from the budget and widens the government’s ability to forego supplementary budgets in case of overspending. In an effort to persuade investors the government can reach its deficit target, Orban announced plans to raise 120 billion forint ($527 million) this year from a new tax on banks. He also said Hungary would cut public spending, reduce personal income taxes and lower taxes for small businesses. However, the government failed to reach agreement with banks 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. In the 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 Hungarian government not to introduce the special tax to be levied on banks. There are cold vibes between the International Monetary Fund and the Hungarian government as the cabinet presented its economic plans as solid facts, showing little flexibility, while the IMF has reservations about the new tax on banks. It is also critical of the cabinet’s plan to cut the corporate tax rate and says that if the government wants to lower taxes, it should focus on labour taxes instead. Ireland Irish manufacturing output continued to increase in June but the growth rate was the slowest in the last four months. Although the operating conditions improved, the sector’s input costs have risen due to the higher cost of raw materials. Additionally, the employment rate fell back in June after signalling expansion a month before. The net job creation is not expected until 2011 as the unemployment rate www.thinkingeurope.eu
  8. 8. Centre for European Studies ECONOMIC RECOVERY WATCH reached 13.4 per cent. Growth has been noted in the number of new business but the increase in the new export orders was mainly due to external demand. Also, the continuous weakness of the euro causes inflationary pressures on the market. Irish government seeks extension of the bank guarantee scheme. Last month Ireland joined Germany, Sweden, Spain, Latvia, Poland and eight other EU member states in getting its state guarantee scheme approved until the end of June. Ireland is struggling to manage a heavy sovereign debt burden. The country issued a guarantee for €400 billion in bank liabilities during the peak of the crisis in September 2008 which was one of the most extensive of such schemes at that time. The state guarantee was originally planned to last two years. The Minister of Finance Brian Lenihan has recently stated that the Commission will most probably extend the scheme under the current terms and conditions until 29 September 2010. Furthermore, the guarantee will be modified in order to seal prolongation until the end of the year. This move was caused by the turmoil in sovereign and corporate debt market caused by concerns about the ability of highly 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 to support the banking sector and advance fiscal consolidation have helped gain policy credibility and stabilise the economy. Italy The income of the average Italian family is decreasing. According to ISTAT, the Italian government statistics agency, the income of the average Italian family decreased by 2.6 per cent in the first quarter of 2010 compared with the first quarter of 2009. This is combined with a rise in consumption of 0.5 per cent and a fall of 10.5 per cent in savings and investment. A study has revealed the most and least expensive cities in Italy. The study, partly commissioned by Unioncamere, the Italian union of chambers of commerce, shows that Bolzano-Bozen is the most expensive city in Italy, with prices 5.6 per cent above the national average. The study has also revealed that the cheapest city is Naples, with prices 6.2 per cent below the national average. In general terms, the more expensive places are located in the northern regions of the country where there greater public spending in areas such as health spending. The Holy See has registered a deficit for a third year running. Recent figures show a deficit of 4.1 million euros in 2009. This increase can be attributed to increase expenditures by Pope Benedict XVI in the execution of his duties and a decrease in donations as a result of the economic crisis. Benedict XVI’s predecessor, John Paul II, began publicly disclosing the Vatican accounts in an attempt to show that the Roman Catholic Church was not as a wealthy as rumours had stated. Latvia In order to achieve consolidation of next year’s budget (571.4 million euros), cuts will be necessary in the social sector, said IMF and World Bank consultant Janis Platais. It must be understood that the state will have less tax revenue at its disposal than previously. Therefore, the only possibility is to spend less on pensions, healthcare, education, culture. Of course, pensions could be kept at the current level, but in such an event there would be a lack of money for healthcare. This could be compensated 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 state structures, the consultant admits that there are many problems which have not been solved. Fair competition and eradication of the plundering of state resources will have extremely great significance www.thinkingeurope.eu
  9. 9. Centre for European Studies ECONOMIC RECOVERY WATCH in Latvia’s exit from the current crisis. vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvggg Lithuania Lithuanian 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, which will require further spending reductions of about 5 per cent of gross domestic product. Lithuania pushed through one of Europe’s toughest austerity programs last year and in 2010, with budget cuts averaging a combined 12 per cent of GDP, to bring down the deficit and qualify for the euro. The measures exacerbated last year’s recession, when output shrank by 14.8 per cent. Recently, the Lithuanian parliament has also approved plans to reduce parental leave benefits to help narrow the budget deficit. Now, Lithuania provides 90 per cent of the parents’ salary in their first year of leave and 75 per cent in the second year. From July 2011, parents who take one year of leave will get 100 per cent of their salary. For those who will stay with children for two years, benefits will be reduced to 70 per cent in the first year and to 40 per cent in the second year. Netherlands Caretaker Finance Minister Jan Kees de Jager said that he wants to publish the results of checks of the so-called stress tests which a number of Dutch financial institutions are undergoing. He said that at least four Dutch banks are undergoing these tests, but declined to give more details, with the results due around 23 July. The aim of the stress tests is to find out if the banks have enough capital to withstand another two years of an economy that may deteriorate. Meanwhile, a majority of MPs have doubts about whether central bank president Nout Wellink is the right man to push through a ‘cultural change’ at the bank. Although the caretaker finance minister defended Wellink in parliamentary debate, MPs from across the political spectrum said the central bank had repeatedly failed to show enough 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 failed to show enough teeth during the credit crisis, the takeover of ABN Amro bank and the swift rise of internet savings back Icesave, MPs said. The central bank has been given until 1 August to draw up a plan to overhaul its operations and implement a ‘cultural change.’ MPs do not have the right to appoint the central bank president, but a lack of support would be an important signal that he should go, experts say. Poland Economists say that the Polish economy may expand by more than 3 per cent in 2010. According to the Central Statistical Office, the country's 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 experts advise that Poland should continue structural reforms and make sure that public finances are more flexible and the pension system reform is completed. The victory of Bronislaw Komorowski in Poland’s presidential elections is not a guarantee that the country will go ahead with vital fiscal reforms. The experts claim that the ruling Civic Platform party Komorowski belongs to will not be willing to risk introducing extensive reforms before the next year’s parliamentary elections. Also, the country’s manufacturing output grew for the seventh consecutive month. It increased by 14 per cent in May 2010 compared to May 2009 – mainly due to growing inventories and exports. Although growth in www.thinkingeurope.eu
  10. 10. Centre for European Studies ECONOMIC RECOVERY WATCH exports means that Polish products are competitive on international markets it may also be a sign of weakening of the zloty. Meanwhile, Marek Belka, chief of the National Bank of Poland (NBP), urges the government to tackle the budget deficit as it may soon result in investors’ interest in Polish bonds weaken significantly. According to the NBP’s calculations the country’s debt amounted to 220 per cent of GDP. This number considers all the state’s hidden financial obligations that are rarely considered 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 case scenario, the adoption of the common currency will take place no sooner than in 2019. This assumption depends on such volatile factors as government declarations, macroeconomic situation and the reliability of economic policy. Currently Poland meets only one of the four criteria – long-term interest rates. The country is still not a part of the European Exchange Rate Mechanism and does not fulfill 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. Portugal According to information released on 13 July 2010, Portugal’s bond rating was downgraded again by Moody’s, from Aa2 to A1. Moody’s stated that the Portuguese government’s financial strength will continue to weaken over the medium term. The Portuguese economy’s growth prospects are likely to remain 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 avoided a Greek-style debt crisis. The government has slashed government spending and arranged a bond auction in the hopes of calming investors. This latest change in Portugal’s debt rating has affected the euro. Currency trading on the morning on 13 July saw the euro continue its decline, falling 0.5 per cent at 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 an average yield of 1.947 per cent, down from an average of 2.955 per cent in the bond sale in May. The lower yield was interpreted as increased confidence in the Portuguese economy; however the lowering of the credit rating clearly shows tough times ahead for the Socrates government. Romania The fifth instalment from Romania's stand-by agreement with the International Monetary Fund was sent on 7 July to the Romanian Central Bank's reserve. An IMF mission will arrive in Romania on 26 July to evaluate whether Romania has fulfilled the conditions assumed in the stand-by agreement and to discuss the economic targets for the next year with the authorities. The IMF team will go through the stage of the recommendations submitted last year by another team and will advise the Romanian National Agency for Fiscal Management (ANAF) on better ways to use the instruments made available by information technology. Earlier, the IMF Managing Council approved the rectification of the inflation rate for 2010 from 3.5 per cent to 7.9 per cent, after Romanian authorities raised the VAT from 19 to 24 per cent. IMF chief of mission to Romania Jeffrey Franks noted that the IMF board were impressed by the speed at which the Romanian Government found an alternative after the Constitutional Court ruled out the cut in pensions was unconstitutional. Asked whether a cut in pensions would have been more adequate, Franks gave a negative answer, saying that the Fund proposed an increase in taxes during the last visit. The IMF is now waiting for a clear sign from the Romanian Government to start discussions on a new agreement, which could start within the coming www.thinkingeurope.eu
  11. 11. Centre for European Studies ECONOMIC RECOVERY WATCH months. Meanwhile, Romania's unemployment rate has dropped for a third month in a row, down to 7.44 per cent in June from 7.67 per cent in May, as announced by the National Unemployment Agency. The rate is lower than the average euro zone unemployment rate of 10 per cent reported by Eurostat in May. Slovakia Slovakia’s new centre-right government, which was sworn in on 9 July, faces a challenge to bring the rapidly-growing public debt under control. The state budget deficit for the first six months of 2010 has already amounted to 65 per cent of the full-year budget. It means that meeting the original full-year target would require that government expenditures not exceed revenues by more than 1.3 billion euros in the second half of the year. This, according to some analysts, could be possible only through timely and restrictive measures. On European affairs, the framework agreement on the European Financial Stability Facility (EFSF) needs Slovakia's 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 backed a stabilisation mechanism for Eurozone countries but backed away from a separate euro-area countries' bail-out loan to Greece. Slovakia’s portion of the Eurozone’s multi-billion-euro emergency rescue package will not change, said Slovakia’s new Prime Minister Iveta Radičová after talks with the president of the Eurogroup of eurozone finance ministers, Jean-Claude Juncker, in Brussels on 13 July. According to Ms Radicova's spokesman, Rado Bato, Slovakia will demand a ‘binding agreement’ of the Eurozone countries that they reform their banking sector and the EU's Eurostat statistics office, amongst other measures. Slovenia The first quarter of 2010 saw no signs of economic recovery : GDP declined by 0.5 per cent in real terms compared with the previous quarter and year-on-year (by 1.2 per cent), which shows that economic 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 ended with a promise that the government would provide short-term aid to Slovenia's troubled construction sector primarily through the launch of certain investments. A special bank loans scheme for builders was not discussed. The Slovenian parliament passed an act on state guarantees for securing financial stability in the Eurozone, which forms the legal framework for Slovenia's participation in mechanisms of financial aid, as well as an act enabling Slovenia's participation in the Eurozone's bailout package for Greece. Parliament also passed the supplementary budget for this year whose aim is to keep Slovenia's budget deficit at 5 per cent of GDP at the close of an emergency session dedicated to the budget. Later, the biggest opposition party, the Democrats (SDS), presented a fourth package of measures to boost the economy. Unlike the previous proposals, which included mostly long-term measures, the new package focuses on short-term measures. Finally, Slovenia's inflation rate dropped by a further 0.2 percentage points to 1.9 per cent at the annual level in June despite consumer prices rising by 0.3 per cent at the monthly level, the Statistic Office reported. Spain Spain announced politically unpopular labour and pension reforms in the face of financial market pressure on Eurozone states to clean up their finances. The country even won praise from German www.thinkingeurope.eu
  12. 12. Centre for European Studies ECONOMIC RECOVERY WATCH Chancellor Angela Merkel after the cabinet in Madrid approved a decree to overhaul rigid hire-and-fire laws intended to restore economic competitiveness. EU leaders denied a report in the Spanish business 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 savings banks to private investors, acting to limit political interference in a sector plagued by bad property loans as it stepped up efforts to overhaul its financial system. The new law, which the government said opposition lawmakers would approve, complements an ongoing consolidation of Spain's unlisted regional lenders, known as ‘cajas.’ Although the cajas avoided the meltdown stemming from toxic U.S. mortgage-related assets during the first part of the financial crisis, they are heavily exposed to Spain's own property crash. Economy Minister Elena Salgado said that the consolidation process is virtually complete and has shrunk the network of 45 savings banks to 19, all of which EU stress tests had shown were solvent. UnitedcKingdom The country’s deficit reached the record high of 11 per cent of GDP in the 2009-2010 fiscal year. The Labour government failed to repair public finances. It created the need for the George Osborne’s emergency budget that was delivered on 22 June. Mr Osborne, the Conservative Chancellor of the Exchequer, set an objective of balancing the cyclically adjusted current budget within five years. He took the overall fiscal consolidation to 6.3 per cent of GDP during this parliamentary term. He has decided that the VAT rate will be raised from 17.5 per cent to 20 per cent in January 2011 which should result in the 0.8 per cent GDP increase in 2011-2012. The bulk of the fiscal tightening will derive from spending cuts, including cuts in welfare. This will increase their contribution to the overall retrenchment to 4.6 per cent of GDP. Additionally, government spending will fall from over 47 per cent of GDP in 2009-10 to under 41 per cent, and borrowing from the current level of 11 per cent of GDP to 2 per cent. The gravest error in this budget seems to be walling off health, leading to enormous 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, UK interest rates maintained at 0.5 per cent - a record low level since March 2009. Moreover, the Bank of England's Monetary Policy Committee decided not to inject any more money into the economy under its policy of quantitative easing while the calls have been growing for an increase in rates to curb 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 slowdown from the 0.9 per cent expansion seen before. The Consumer Prices Index reached a 17-month high of 3.7 per cent in April. It fell back to 3.4 per cent in May but remains well above the Bank of England's 2 per cent target. www.thinkingeurope.eu
  13. 13. Centre for European Studies ECONOMIC RECOVERY WATCH WORLDWIDE China While European and American banks were suffering from the crisis, China transformed itself from an indebted communist bureaucracy into something resembling a mature market economy. This transition 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 value are Chinese. Six years ago, this number was zero. The finance sector has tremendous potential in China as only less than 1 per cent of AgBank’s retail customers have mortgages. Chinese banks – being largely under government’s protection – did not suffer too much from the crisis. The system is to a large extent closed. Foreigners have minority stakes in Chinese companies but their own operations have less 1 per cent by profits of a market share on the mainland. Also, Chinese banks make less than 4 per cent of their profits abroad. Inflation may soon become a serious threat to China, with the 2009 extreme credit expansion likely to cause prices to increase. China’s GDP growth will most probably remain strong at approximately 10.5 per cent in the second quarter of 2010. The country’s industrial production is expected to have diminished slightly from 16.5 per cent in May to 15 per cent in June 2010. China has noted a surge in the trade surplus and exports, beating market expectations. Exports for June increased by 43.9 per cent on the same month in 2009 last but the $20bn trade surplus is so far the largest in 2010. The experts say that the effect of the European debt crisis had not been as bad as they expected. These records are first since China’s last month’s decision to allow its currency to trade more freely against dollar following Western politicians arguments that yuan is undervalued and gives China an unfair trading advantage. The strong June trade figures may therefore trigger further relaxation in yuan controls. A stronger currency would dampen Chinese exports and boost home consumer spending on cheaper imported products. Iraq The oil sector provides 95 per cent of the government revenue and employs only 1 per cent of the workforce. Beyond oil, Iraq does not export much of anything. It is an industrial pygmy that is noted as the 175th out of 183 countries surveyed by the World Bank for ease of starting a business. According to the IMF, the country's economy has grown by more than 7 per cent in 2010 – mostly due to investment by foreign oil companies. Most Iraqis still do not have full-time jobs. Banks charge up to 20 per cent in interest on small loans and sometimes demand 300 per cent in collateral should they need to recoup capital in a fire sale. The central bank was bombed on 13 June and the state Trade Bank of Iraq a week later, killing a total of 44 people. These attacks will probably result in even more reticent banks. SouthcKorea The South Korean central bank has unexpectedly increased interest rates to 2.25 per cent for the first time since the outbreak of the financial crisis. Before this increase the rate was at the record low level of 2 per cent. The country’s central bank gave no clear indication of its future policy moves but it is probable that the gradual tightening will continue reaching the 3 per cent level by mid-2011. This www.thinkingeurope.eu
  14. 14. Centre for European Studies ECONOMIC RECOVERY WATCH decision follows similar ones made in Canada, Australia, Malaysia and India. Unlike many Asian economies, majority of developed countries are not yet confident enough of a sustained economic recovery to raise the cost of borrowing. According to the Bank of Korea’s forecast the South Korean economy – 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 South Korean government and the central bank seem to be increasingly confident about economic prospects and concerned about the possible inflation risks. UnitedcStates Hopes that a lower trade deficit was indicative of economic recovery have come into doubt. Since January 2010, the trade gap has shrunk by US$700 million, however, analysts believe that this decline could be attributed to low imported oil prices rather than an increase in exports. Various key figures in the decentralised Federal Reserve have publicly stated that the central bank system has no plans for further monetary easing. President of the Richmond Federal Reserve Jeffery Lacker believes that the Federal 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 preventing aid for the unemployed that was first proposed by the Democrats in a wider employment bill in November 2009. But even with the unemployment rate stuck well above 9 per cent, the bill, which was approved by the House of Representatives, has run aground in the Senate as Republicans and some conservative Democrats balk at further inflating the federal debt. Even after Democratic leaders cut the total cost of the legislation in half to about US$100-billion, they still came up a few votes short when they tried to pass the measure before breaking for a week after the 4 July holiday. INSTITUTIONS G-20: Leaders from the world’s top 20 economies met in Toronto on 26-27 June for a crucial meeting on the future of the world economy. A strong push for fiscal consolidation and the rebalancing of the global economy, a bank levy and financial reform made for a packed agenda. The first and foremost challenge for leaders was to ensure confidence so that global recovery will not be derailed. They expressed strong support for the determined actions taken by the EU to safeguard stability and growth in Europe. Leaders agreed to continue to resist protectionist pressures and refrain from raising trade and investment barriers, and agreed on the need to complete the Doha Development Round of negotiations. World leaders faced a complicated task in Toronto. On the one hand, there are signs of economic recovery, especially in Asia, from which the EU will no doubt benefit, but on the other hand aggregate global domestic demand is looking much gloomier. Leaders in the end agreed on the importance of a coordinated approach at global level that combines carefully calibrated and growth- friendly fiscal consolidation with following through on fiscal stimulus, tailored to national circumstances. Participants agreed to specific minimum targets for deficit reduction and the stabilisation and reduction of debt. The G20 Toronto Summit Declaration was released following the conclusion of the G20 Summit meeting. www.thinkingeurope.eu
  15. 15. Centre for European Studies ECONOMIC RECOVERY WATCH ECOFIN Meeting: During the ECOFIN meeting on 12 July the Economic and Finance ministers were not able to come to many conclusions, especially not in the field of the tax package. The Council adopted a political guideline for continuing negotiations with the European Parliament on the reform of financial supervision in Europe. The EU finance ministers endorsed a demand of the British Chancellor George Osborne that the European Banking Authority, one of three EU financial supervisory bodies, should be set up in London, not in Frankfurt. EU finance ministers agreed to hand the Belgian EU presidency a new negotiating mandate on the EU's financial supervisory package, in a fresh bid to secure an agreement with the European Parliament by this September. Parliament last week delayed a vote on the package, giving time to Member States to moderate their position on the roles of three new agencies in the banking, insurance and financial market sectors. A deal in September is needed so that the new bodies can be up and running by 1 January 2011. The Council took 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. The Council established broad economic policy guidelines under the new Europe 2020 strategy. In the context of initiatives under way with the aim of improving the economic governance of the European Union, it gave the go-ahead for the introduction of a "European semester" for the surveillance of the budgetary and structural policies of the Member States. The Council also opened excessive deficit procedures in relation to Bulgaria, Cyprus, Denmark and Finland, making recommendations on the measures to be taken to reduce their deficits to below the reference value of 3 per cent of gross domestic product. The Council has also completed the legislative procedure relating to the SWIFT agreement, by concluding an agreement with the United States on the transfer of financial messaging data for the purposes of the Terrorist Finance Tracking Program. . EU finance ministers will also hold substantive discussions on a Europe-wide bank levy and tax on financial transactions in September. European Parliament: Members of the European Parliament have accused national governments of seeking cuts to the European Union's budget that would undermine attempts to spur economic growth. Ambassadors from the Member States have agreed to a draft budget for 2011 of €126.58 billion, €3.6bn less than the draft budget presented by the European Commission in April. Sidonia Jedrzejewska, a Polish centre-right MEP who is preparing the Parliament's position on the 2011 budget, pointed out that the budget lines concerned were supposed to pay for the Europe 2020 strategy, which aims to boost competitiveness and stimulate growth. In the meantime, MEPs have called for a ’European youth guarantee’ aimed at ensuring that young unemployed people do not remain jobless for more than four months. European deputies signed the resolution as figures show that more than 5.5 million under 25 year-olds were unemployed in December 2009 - equivalent to 21.4 per cent of all young people in Europe...... European Commission: The European Commission has come forward with proposals to step up the protection of bank deposits. The package of plans presented on 12 July by the European Commissioner for the Internal Market and Financial Services, Michel Barnier, also aims to protect investors from Bernie Madoff-style fraud events, by reforming current EU legislation in the area. For those who lose out due to fraud such as pyramid schemes or administrative malpractice, the new rules www.thinkingeurope.eu
  16. 16. Centre for European Studies ECONOMIC RECOVERY WATCH would increase compensation from €20,000 to €50,000. A third component to Monday's initiative saw the 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 a global levy on banks to pay for future bank bail-outs failed to win support at last month's G20 meeting in Canada, although European officials have vowed to push ahead regardless. The European Commission also published a report on labour market and wage developments in 2009 and a Green Paper on adequate, sustainable and safe European pension systems. On 30 June, the European Commission 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 the first steps towards a ‘necessary and absolutely essential’ evolution from monetary union to economic union, Rafael Dezcallar de Mazarredo, Spanish Ambassador to Germany, told EurActiv Germany in a recent interview. Spain's six-month tenure at the EU helm, which came to an end in June, witnessed a series of EU-level discussions on proposals for budget supervision and possible sanctions for member states that do not respect the rules. Belgium, which took over the European Union's six-month presidency on 1 July, wants an EU deal on a bank tax by the end of the year, Finance Minister Didier Reynders said in a newspaper interview on 4 July. On EU economic governance, Reynders said this had to protect jobs as well as the environment. On public debt and deficits, he said stability pact rules had to 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 public finance rules. The European Commission has proposed such a plan. EPP Views EPP MEP Salvador Garriga has been appointed the rapporteur for the new European Parliament special committee for financial and budgetary resources beyond 2013. This special committee was created in order to ascertain the political priorities of the European Parliament for the next Financial Perspective which will come into force in 2013. As well, the EPP Group gave its approval to the SWIFT agreement with the United States, leading to its passage in the European Parliament. ‘After the addition of Parliament's fundamental requests, the EPP Group gave its consent to this new Agreement in order to prevent and fight terrorism in Europe and find transactions by terrorist groups all around the world,’ said EPP Group Vice-Chairman Manfred Weber MEP, EPP Group Coordinator in the Committee of Civil Liberties Simon Busuttil MEP, and EPP Group Shadow Rapporteur Ernst Strasser MEP, after the EP vote today in Strasbourg. ‘We made all the efforts possible in order to guarantee a binding twin-track approach to establish a European TFTP in a short delay, in order to permit the extraction of data on EU soil and thus stop the transfer of bulk data to the US. In fact, this new Agreement will be transitional until the European Union creates its own system for the investigation of terrorist financing,’ Weber, Busuttil and Strasser explained. www.thinkingeurope.eu
  17. 17. Centre for European Studies ECONOMIC RECOVERY WATCH OUR COMPETITORS’ VIEWS The Socialist and Democrat Group in the European Parliament agreed to the passage of the SWIFT agreement, with some reservations. S&D leader Martin Schulz said, ‘During the last months the European Parliament was strong enough to say no to a 'security without safeguards' deal. It is the duty of the EU and the US to cooperate in protecting citizens from terrorism, but citizens have also the right to be protected against excessive state intrusion into their lives and potential mistakes.’ Schulz also lamented an alleged lack of progress at the G20 Summit in Toronto. Not only was there a lack of progress according to the S&D Group leader, but there was also that unequivocal call for the EU to unilaterally adopt a bank tax. According to Schulz: ‘This meeting of the leaders of the 20 wealthiest nations in the world over the week-end in Toronto has raised many expectations in Europe but was a complete failure. The coordinated excessive budget cuts by European governments are pushing the world 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 financial transaction tax to put the costs of the crisis where they belong. This is a real disappointment. The EU should 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 the world dealing with their political and economic problems Euro zone currency crisis is only beginning Charlie Fell wonders what will be the consequences of the banking crisis. Testing the European banks' stress tests The Economist’s blogger comments on the Europe’s committee of bank supervisors’ decision to set criteria for the largest banks’ abilities to withstand a downturn. Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc Additional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, Giovanni Mastrobuonovvvvvvvvvvvvvvvvv ,,,,,,,,,,, Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc Questions and comments: kkralikova@thinkingeurope.eu www.thinkingeurope.eu
  18. 18. Centre for European Studies ECONOMIC RECOVERY WATCH ANNEX ECFIN Economic Briefs Edited by Marco Buti Strategies for a post-crisis world: enhancing European growth Keynote speeches at the Brussels Economic Forum 2010 The 11th Brussels Economic Forum, held on 25-26 May 2010, took place against a background of the Greek debt crisis and keen debate on the future of Europe's economic governance. In that sense it took place at the ideal moment. Participants debated the causes and consequences of the crisis, and the best way to spur economic growth in Europe, including on how to make growth greener and more sustainable. This special edition of DG ECFIN's Economic Brief series reproduces the keynote speeches from the conference. 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 University To 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) www.thinkingeurope.eu

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