ECB surprises markets with interest rate cut and purchases of private assets: Round-up of reactions from around Europe

As we predicted might happen, the ECB surprised markets yesterday with the announcement of an interest rate cut and the purchases of private assets.

Open Europe’s Raoul Ruparel has a full analysis on his Forbes blog, where he concludes:

“In summation, Draghi surprised the markets with some bullish action. That said, I remain unconvinced that these programmes will do much to boost inflation, growth or even credit supply in the Eurozone. Importantly, the ECB is nearing the end of the actions it can take, and it is very aware of this. The onus has now once again been shifted to governments, with the expectations rising for action. For the first time since 2012, pressure is now really increasing for Eurozone governments to reassess the Eurozone’s institutional structures and take action to pool further sovereignty. Draghi may have come bearing gifts for markets but he came with further warning for governments.”

Needless to say, the fallout from the ECB's announcements has been widespread and varied. Below are some of the best reactions from papers across Europe. As one might expect, the German press was less than impressed with the policies unveiled by Draghi:

Die Welt’s Economics Editor Sebastian Jost describes the announcement as “Draghi’s last roll of the dice”, and claims that the ECB has demonstrated “an unusual passion for experimentation”. He also argues that “the ECB has now done pretty much everything which appears to be economically justifiable. Whoever wants a stable monetary union should hope that it does not go any further.”

Süddeutsche Zeitung’s Economics Editor Ulrich Schäfer describes the ABS as a “highly dubious innovation”, claiming that it resembles many of the financial products that contributed to the initial financial crash “when no-one could ultimately identify who had lent whom how much, and therefore who had assumed what risk.” He concludes that it is “ironic” that the ECB wants to give such products “renewed respectability”.

FAZ’s Economics Editor Holger Steltzner criticises Italy and France for delaying structural reforms in order to get more help from the ECB. He also argues, “Does the purchase of securities, which banks are struggling under the burden of, even come under monetary policy?...How can the ECB eventually return to normal? As soon as it increases interest rates, it will threaten itself with losses.”

Again as many would have predicted, the Mediterranean press took a more sympathetic view of Draghi’s decisions.

An editorial in Spanish daily El País argues that “the ECB hasn’t disappointed…[but] it’s equally necessary that the governments with sound public finances – and notably the German government – intensify investment and temporarily back greater flexibility in the necessary requests for public finances adjustment in the eurozone as a whole.”

The deputy editor of Spanish daily El Mundo, John Müller, makes an interesting point, “The enormous debt – both private and public – that has been amassed, is such a huge burden that it is surprising that no-one is addressing the problem seriously...Yesterday, Draghi only asked for help [from eurozone governments] in the form of fiscal measures and reforms, but not [in the form] of debt restructuring. In short, we don’t know if the monetary sorcerer has correctly identified the reason why we have lost the favour of the gods of growth.”

Columnist Jean-Marc Vittori writes in French business daily Les Echos that “the currency won’t be enough to save Europe”, and argues, “[There’s] no tenable monetary union without budgetary union. In a continent where the temptation to withdraw is growing, this appears to be a challenge. Nonetheless, it’s the condition for the survival of the euro.”

Italian Economics Professor Donato Masciandaro writes in Il Sole 24 Ore, “Draghi couldn’t have been clearer: the later the necessary fiscal and structural policies come, the less effective monetary policy will be…Such a decisive statement should make everyone reflect. The [European] Union is like a bogged-down machine. It has at least four traction wheels – currency, taxation, competition and labour – but only one of them is working. In such a situation, the machine risks going under.”

Italian journalist Danilo Taino writes in Corriere della Sera, “[Italian Prime Minister Matteo] Renzi is a lucky guy, since no [Italian] Prime Minister ever got this sort of help from the ECB. This means, however, that [Renzi] won’t be able to ask for anything else from Draghi. The ECB President has reached the extreme limit – except for a difficult, potential government bond-buying programme. From now on, everything is in the hands of governments.”

One interesting take away, particularly from the articles from around the eurozone periphery, is that there seems to be a renewed push for measures such as further budgetary union and debt-pooling. It looks as though there is a growing acceptance of the limitations of ECB action, and the continued flaws in the Eurozone architecture – something which we have long warned of.

Handelsblatt: France is the new sick man of Europe

The front page of Germany financial daily Handelsblatt today depicts France as the sick man of Europe, warning that "a once proud nation faces economic decline." Of course warnings of French decline have been made before - notably the famous ticking baguette bomb on the front page of the Economist a couple of years ago - but it is striking that the German press is increasingly reflecting these concerns.

The front page trails a detailed eight page feature which the paper introduces by arguing that:

"Our most important neighbour is mired in crisis. France risks falling behind when it comes to its budget, its labour market and its industry. However, the country could be successful if only it stops making itself smaller."

The timing might be slightly ironic given that the French economy 'outperformed' the German economy in the last quarter - albeit by staying flat as Germany contracted by 0.2%. Handelsblatt has itself warned that Germany was "no longer a champion" but the German economy is still pretty robust, and should bounce back quickly, while France's problems are much more deeply entrenched.

German 'crackdown' on EU citizens’ access to benefits: what does it involve?

The issue of how to balance EU free movement and the rights of member states to control their welfare systems has been a long running issue, one which several countries (not only the UK) are struggling with. We've previously reported about how the influx of EU migrants has caused problems in Germany, prompting the grand coalition to commission a review into the issue.

In March, we reported on and analysed the key recommendations of the interim version, and now it appears the final version will be adopted by the German cabinet later this month. According to FAZ, here are the key points, which are virtually unchanged from the draft version:

• Limiting the period in which EU citizens can be registered as jobseekers to six months, after which they are obliged to leave the country if they are still unemployed. This is similar to the UK's current approach, although David Cameron announced last month that this would be toughened.
• Banning any EU citizens found guilty of “abusing or defrauding” the German welfare system from re-entering Germany for a period of five years. How easy this will be to enforce in the Schengen border-free zone is questionable.
• Making it harder to export child benefit abroad by demanding additional documentation and changing domestic taxation rules. David Cameron has also made this a priority and it remains unclear whether limiting payments to working migrants' children who live abroad is permissible under EU law.
• In addition, German municipalities are to get additional financial assistance from the government to cope with the effects of an influx of migrants to help cope with extra pressures on local services.

This 'crackdown' comes at an interesting time for two reasons. Firstly, today's Bild reports, according to new figures from the German Federal Employment Agency, the number of EU citizens from Greece, Spain, Portugal, Italy and the ten Central and Eastern European member states claiming unemployment benefits in Germany has for the first time exceeded 300,000 after going up by 53,216 (21.6%) in April compared with April 2013. Secondly, confidence in the German economy is on the decrease which could add political momentum to those who want to further restrict free movement.

Is Germany emerging as the biggest obstacle to a liberal EU-US trade deal?

If you read our press summary, you will have noticed that the debate around the US-EU free trade deal (TTIP) is really picking up in Germany, with even the euro-critical AfD coming out against key elements of the deal ahead of the European elections.

Of all the mainstream newspapers in Europe, Süddeutsche Zeitung is the one that has devoted the most time and effort into covering the on-going negotiations over TTIP, and it has also published a number of comment pieces - both for and against.

In an opinion piece today, the paper's Economics correspondent Alexander Hagelücken argues that the debate around the EU-US free trade agreement (TTIP) has become “schizophrenic” amid mounting public opposition (as highlighted by the cartoon above). However, he argues that:

"European governments can escape the impasse by making it clear that they want to expand free trade via the TTIP principle while at the same time meeting the legitimate concerns of their citizens who do not want increased prosperity at the cost of losing environmental and health standards. GM foods? Only after passing the European approval procedure and with clear labeling. Investor lawsuits against environmental legislation such as Vattenfall’s legal challenge against the nuclear phase-out? Not before secret tribunals, but only in the ordinary courts."

He concludes that:

"Yes, such a path would not lead to unfettered capitalism with a neoliberal flavour but free trade with constraints. In other words, it would be the kind of social market economy which has given the [German] Federal Republic decades of prosperity after World War II, while tensions decreasing rather than increasing tensions between the social classes.” 

German public opinion will be a crucial factor in determining the success or failure of the TTIP negotiations. As with everything else these days, we suspect, on TTIP, as goes Germany, so goes Europe. 

Is Cameron the greatest pro-European of all EU heads of state and government?

As we've noted, the Juncker-hangover is already taking hold in parts of the German commentariat. In a hard-hitting piece, Lisa Nienhaus, the Economics Editor of Frankfurter Allgemeine Sonntagszeitung argues that the EU "needs more Cameron, not less".

"Hang on a minute, how exactly [was Cameron's opposition to Juncker] a mistake? He only said publicly what many think. Juncker may well be a jovial, cheerful bloke, but he is also an example of political mediocrity, who represents more of the same, a lack of ideas. Whoever wants to change Europe, and above all the opaque, hyper-bureaucratic European Commission, needs someone else in that post."

"Cameron did exactly the right thing. He did not only win the hearts of Brits but also of citizens in many other countries who worry about what will ultimately remain of the European Union, a bureaucratic entity that offers occupational therapy and valediction opportunities for veteran politicians. In this sense, Cameron is the greatest pro-European of all the heads of state and government."

She continues that Juncker did not enjoy a democratic mandate from the German people, and that Angela Merkel made a mistake by backing him:

"The Germans, for example, did not vote for the European People’s Party (of whom Juncker was the leading candidate) but the CDU. Juncker did not feature on the posters, it was Merkel. It is not the case that voters would have driven crazy if Merkel had ultimately arranged that someone else would have become the Commission President. In doing so, she would have shown that she takes this post seriously. Now she has only shown that she doesn't really care who takes this job."

As we have been arguing as well, Nienhaus adds that the European Parliament (EP) does not have more democratic legitimacy than the European Council, and the appointment of Juncker is effectively a power grab by the Parliament. She calls on Germans who share this view to support the UK:

"The heads of state and government are ultimately at least as democratically legitimised as the European Parliament. After all, they won national elections in their respective countries." 

"We can only hope that Angela Merkel does not take offence at [Cameron's] 'No’. We need the Brits in Europe, also for other reasons. The belief of the Brits that freedom is good for the economy, and that not everything has to be regulated by the state, is exactly that what the EU is currently missing."

Nienhaus concludes that the UK is vital for the future of the EU, and that the EU debate is missing some of the UK's beliefs:

"The suspicion among the Brits that the powers that have won want to initiate a redistribution of powers and favour a super-powerful state is widespread. That does not appeal to the liberal Brits. Those in Germany who share this view – and there are many – has to support the UK playing a greater role in the EU. We need more Cameron, not less."

Neinhaus's line is not universally accepted in Germany of course. Others have been sticking the boot into Cameron. Nonetheless, Berlin will be aware that last week’s EU summit is a foretaste of what life in the EU could be if the UK were to leave. Without Britain in the EU, Germany would face a bigger risk of being cornered by a block of Southern eurozone countries lead by Italy and France: something that is absolutely not in its long-term interests.

After the row: is Germany bringing the flowers and chocolate?

The dust from last Friday's extraordinary EU summit - the first at which an EU leader was actively outvoted over the appointment of the European Commission President - is starting to settle. As strong emotions recede, pragmatism is coming to the force both on the UK side - with David Cameron saying he is ready to put aside his differences with Juncker - and also on the continent and particularly in Germany.

Significantly, both German Finance Minister Wolfgang Schäuble (CDU) and German Vice-Chancellor Sigmar Gabriel (SPD) warn about the impact of a UK exit and stress the importance of the UK to the EU.

Here is Schäuble in today's FT:

“The EU without the UK is absolutely not acceptable, unimaginable. Therefore, we have to do everything, so that the interests and the positions of the UK find themselves sufficiently [represented].”

And, perhaps more surprisingly, here is Gabriel writing in today's La Repubblica:

"If we don’t manage together, over the coming years, to modernise Europe, make it less bureaucratic, respect national, regional and municipal responsibilities, then a large bourgeois majority of Britons – pushed by UKIP – will vote against Europe…The UK’s exit from the EU would signal the beginning of the end of the European project."

Interesting coming from Gabriel whose actions and rhetoric over Juncker could well have been designed to force the UK towards the exit door. Meanwhile, today's editorial in French daily Le Monde - not a natural supporter of Cameron - claims that:

“It is not an insult to [Juncker] to note that he doesn’t have the profile of a new man in Brussels…One of the priorities for Mr Juncker must be to repair the relationship with London. And to show, by innovating, that it’s no longer business as usual in Brussels.”

These comments show that - as we argued in our instant response to the Juncker appointment - it's all still to play for when it comes to EU reform.

What do Wayne Rooney, Rambo and Don Quixote have in common?

The script is written and the scene is set: Cameron will go down fighting in his bid to prevent Jean-Claude Juncker from becoming the Commission President with only Viktor Orban for company. While this has earned him some relatively positive headlines in the British press, the German press has not wasted an opportunity to stick the boot in.

According to Bild, “Cameron is becoming more and more the Wayne Rooney of EU politics: he lines up, he loses, he goes home.” The paper adds that:

"Great Britain and Hungary - this is not the strongest alliance in the EU. This could be a foretaste of what could happen if the Brits decide leave the EU in the 2017 referendum announced by Cameron. Instead of taking part in the largest and most economically significant association of states in the world, the Brits will be locked outside. The relevance and influence of Great Britain will fall dramatically."  

Die Welt describes Cameron as “the loneliest man in Europe”, and earlier this week likened him to "Rambo" - running in head first all guns blazing. FAZ’s London correspondent Jochen Buchsteiner describes the Cameron as the “Don Quixote” of EU politics, noting that “a majority of Brits see him as a hero – even when he comes back home beaten.”

Of those three, we suspect Rambo is the most favourable comparison, even if it was not meant as such. At least, Rambo is usually the only guy left standing once the credits start to roll. 

Merkel sagt 'Jein': German reactions to Merkel's speech

Merkel's big speech yesterday was being trailed in the UK media almost a week in advance while the German media only began to cover it the day before. Its fair to say it didn't completely dominate the news in Germany yesterday - not with the conclusion of the trial of former German President Christian Wulff - but it nonetheless attracted a lot of coverage, comment and analysis. Here is our round-up of key German responses:

#Merkel beendet Rede vor Parlament in London. Betonte mehrfach die starke Rolle Großbritanniens. Cameron dürfte insgesamt zufrieden sein.
— Stefan Lange (@st_lange) February 27, 2014

Bundeskanzlerin #Merkel hat bei ihrem #London-Besuch #Großbritannien dazu aufgerufen, in der #EU zu bleiben. http://t.co/thgGlonvaX
— Berliner Zeitung (@BLZonline) February 27, 2014

#Merkel lässt #Cameron hängen http://t.co/YAXkvsgoYz
— Politik bei n-tv.de (@ntvde_Politik) February 27, 2014

Besuch in Großbritannien: #Merkel beschwört die Rolle Londons für eine stabile EU. http://t.co/MJQ2RZ0Rkr
— Tagesspiegel.de (@tagesspiegel_de) February 27, 2014

In terms of the speech itself, German media and commentators broadly picked out Merkel's call for the UK to stay in and help shape the EU, although N-TV went with “Merkel leaves Cameron hanging”. Today's headlines and comment pieces make for interesting reading; FAZ headlined their write-up with ‘Chancellor Jein' - Jein, for those who haven't worked it out already is a combination of Ja & Nein. Süddeutsche Zeitung goes with “Merkel’s lecture in Europe realism” adding that “she didn't close doors but remained vague”. Die Welt says “Merkel meets the Queen and resists Cameron”.

In terms of the comment pieces, Handelsblatt's EU correspondent Ruth Berschens argues that:

“The UK and Germany share a staggering amount of common ground... the list of common interest has now even been extended by a very important point: both Germany and the UK want to readjust the institutional structure of the EU... [However] even if the Chancellor wanted to she could not give Cameron a special status [for the UK in the EU]... Merkel has offered a limited EU treaty change for the Eurozone and that the EU Commission will voluntarily commit to stay out of specific policy areas. Now the ball is in the British court.”

Die Welt columnist Alan Posener writes in the Guardian that:

“Cameron will get his treaty changes sooner or later. In return, he should learn to walk the European walk and talk the talk – as Merkel does, while pushing a German agenda.” 

In a separate comment piece in Die Welt, Posener argues that a more integrated eurozone but with the possibility of other powers flowing back to member states would

“not create a Europe of ‘two-speeds’, but a freer Europe of differences and choices. Those who want more integration should be able to go down that path; those who prefer a looser European ‘dress’ should not have to leave the EU for that”.        

Süddeutsche Zeitung’s Foreign Affairs editor Stefan Kornelius points out that:

“Those, like the British Premier David Cameron, who hope for a herculean reform effort of the EU, including comprehensive treaty change, do not understand the EU. Europe moves cautiously, step by step, fittingly like the German Chancellor, with or without crutches.” 

He adds that Merkel’s speech understandably left a lot of questions unanswered such as

“What are the concrete plans for the strengthening of the economic and monetary union? Should governments agree on a common economic policy or does this competence go to the [European] Commission? Above all in terms of the Commission: which of Cameron’s complaints about Brussels are justified? Where do competences have to be checked and be trimmed back?”

In conclusion the broad response of the German media is much as we argued yesterday - Merkel did not give much away but left the door open to reform.

Open Europe Berlin: One year on

With the first anniversary of the founding of our sister organisation, Open Europe Berlin, fast approaching, it seems an appropriate time to look back at its achievements over its first year. Following an impressive launch in Berlin featuring a keynote speech by former ECB Chief Economist Ottmar Issing, under the expert guidance of its Director, Professor Dr Michael Wohlgemuth, and Deputy-Director, Nora Hesse, OEB has been making waves on the German EU policy scene and beyond. Its influence is sizeable and growing continuously.

Just last week, leading German daily, Die Welt, described OEB as having a growing influence on the German media, and commended it, in particular, for its success in using social media to contribute cutting-edge research and market-orientated concepts to the debate about the future direction of the EU. The piece notes that OEB research and proposals have "even received responses from the European Commission."  In the past 12 months, OEB has become a fixture in both the German and international press, and for many, OEB became the go-to source for information, analysis and comment in the run-up to the German elections, including internationally broadcast interviews with the BBC and Reuters (see here for a compilation of OE and OEB's best #btw13 hits).

OEB research is already proving to be a leading source of analysis on key European issues including EU regulatory policy; banking union; the EU budget and the EU’s current democratic deficit. Research and media commentary aside, it has also managed to secure interviews with important German figures, including the renowned German economist Hans Werner-Sinn, and Bernd Lucke, leader of the anti-euro Alternative für Deutschland party, whose rapid rise has commanded attention around the world. The OEB blog is also a regular source of interesting information and comment, including guest posts from esteemed figures such as former FDP MP Frank Schäffler, Barenberg Chief Economist Holger Schmieding and Charles B. Blankart, an advisor to German Economy Ministry.

Fundamentally, however, Open Europe Berlin has, and will, continue to play an important role in helping to understand the role of Germany in the future of Europe. And as we have been arguing for quite some time, there is great scope for cooperation between the UK and Germany to agree on strategic and systemic changes to the way the EU operates. How this dynamic plays out, will, no doubt, have an important role in shaping the future of the European Union and both countries' places within it.

Handelsblatt asks, "Where is the inflation?"

That’s today’s front page of German daily Handelsblatt, with the headline asking “Where is the inflation?”

A stark reminder of what remains a key issue in German (and therefore European) politics. We could barely ever imagine such a front page in the UK, particularly when annual inflation is running at only 1.6% (August 2013).

Inside the paper there is a ten page section discussing the issue. Essentially, Handelsblatt is questioning why, when there has been such significant money printing and low interest rates in the eurozone, is there yet to be inflation. This is put in context with a comparison to the hyperinflation of the 1920’s Weimer Republic, another reminder that this episode in the country’s history continues remains firmly embedded in the German psyche.

The discussion itself is obviously hugely technical, but the paper’s explanations for why inflation is (yet) to show up is quite telling about the debate in Germany.

• Central banks only measure consumer prices – the paper essentially suggests that the usual metric of inflation, the Consumer Price Index (CPI), does not fully capture the real inflation rate since it does not include things such as asset prices and house prices.

• The increased money supply is not feeding through to the real economy – the suggestion here is that, although money supply is being increased significantly, it is not feeding through to the real economy because banks are not lending out and because people and companies are saving more. It could also be down to the fact that banks, companies and the government are deleveraging (paying off debts and reducing their size) in order to become more stable in the wake of the crisis. For these reasons, the money created has stayed within the financial system rather than leaking to the wider economy and hitting inflation – at least not yet.

• Still too early to fully judge the impact of the ECB’s policies – this seems to be linked to the argument above but the paper suggests that the low interest rates and other non-standard measures which the ECB has undertaken (such as unlimited long term loans) are yet to have their full impact. The suggestion seems to be that, as the economy recovers, the true impact of the policies will become clear.

• So, what will happen? The paper concludes that these policies are likely to have some impact and that inflation will show up at some point.

Although this is clearly just the view of one paper, the tone and line of argument here is quite telling.

Clearly, there is still concern that inflation will show up and even that it may already have and be going unnoticed. This fits with recent concerns raised by the Bundesbank that low interest rates and loose monetary policy can pump up financial bubbles and set the scene for the next crisis.

This debate is here to stay in Germany and Europe. As the ECB considers further long term lending operations (LTROs), how to deal with actions of other central banks and the large divergence in growth between Germany and some struggling countries, it could come to the fore once again. 

Deliberations begin as hearings draw to a close in Karlsruhe

The hearing at the German Constitutional Court into claims against the ECB's crisis policies is now over. Day one saw verbal jousting between the two men to the left (Bundesbank President Jens Weidmann and ECB Executive Board Member Jörg Asmussen) which we covered on our live blog. Day two of the hearing was a bit more cagey and less political but possibly more revealing in terms of the Court's thinking.

Constitutional Court Judge Peter Müller kicked off by reiterating the strict rules of the game:

“it is clearly defined in which china shop the elephant of monetary policy is not allowed – monetary state financing.” 

Clemens Fuest, Research Director at the Oxford University Centre for Business Taxation, shrugged his shoulders and replied:

“If OMT is ECB’s commitment to buy state bonds to a non-defined extent, than I wouldn’t know how to prevent the contact with the china shop”  

Being slightly more direct (as might be expected), Head of the Ifo Institute Hans-Werner Sinn said that the ECB engages in “regional fiscal policy” and that the Central Bank’s OMT programme is basically “a free insurance for investors when a state goes bankrupt”.

It's clear the Court remains concerned that the ECB could overstep its mandate. President of the Court Andreas Vosskuhle suggested that the current conditions attached to the OMT, the ECB’s bond-buying programme, are on a “very abstract level” but if correctly applied “could be a good middle way…of distinguishing between monetary and fiscal policy”.

A rather diplomatic construction but conditionality is a key issue here, as we’ve pointed out. The fundamental problem is that since there is no legal documentation and the OMT has never been tapped, it is very challenging for the court to judge how strictly the conditions will be applied. They could make a value judgement over whether they trust the ESM and eurozone politicians to fully implement the conditions but this could well be beyond the scope of the legal judgements the Court is allowed to make.

As Süddeutsche Zeitung's Markus Zydra points out, there is significant ambiguity around one of Asmussen's key points - that the OMT is practically limited since it can only purchase short term bonds. This is especially true given ECB President Mario Draghi's (and other's) previous remarks that there are no ex-ante limits to the OMT. Chief economists of DZ Bank Stefan Bielmeier put it nicely saying, “there is a dual rhetoric of the ECB…[they] tell everybody what they want to hear” - exactly as we noted here.

A running theme of the coverage following day two has been the signfiicant time given to those arguing against the ECB. ECB proponents reportedly told Handelsblatt “we feel like at an away game”, given the level of opposition support. The paper even goes so far as to question the neutrality of the court's referees given the line-up of known ECB critics it had called to provide evidence at the hearing (e.g. Hans-Werner Sinn, Kai Konrad, Harald Uhlig, Franz-Christoph Zeitler, Clemens Fuest).

How the Court will rule remains to be seen. It's clear they have some serious concerns about the policies but are struggling given the hypothetical nature of the case - the OMT remains undefined and unused, so any claims against it rely on second-guessing its implementation. Ultimately, it could be a question of whether they take the ECB at its word or not. Approval of policies but with some extra constraints remains the most likely outcome.

A final ruling is due for September although many involved expect a delay until after the German Federal Elections on 22 September. In the meantime, there are already those calling for a re-match in Luxembourg.

ECB gears up for German Constitutional Court scrutiny

This is set to be an important week for the ECB and therefore the eurozone.

As we noted in a flash analysis this morning, the German Constitutional Court (GCC) will hold a hearing on the 11 and 12 June focusing on whether the ECB’s policies have infringed either its own or the Bundesbank’s mandate, and if these have created fiscal risks without democratic approval.

The focus of the case will be the OMT, the ECB’s flagship bond buying programme, the announcement of which is widely seen to have played an important role in easing the eurozone crisis.

Why is the case important?

1. Highlights the tensions at the heart at the eurozone: the case is a microcosm of the wider debate as to whether Germany is willing and able (in terms of legal constraints) to do what is seen as necessary to save the eurozone. It also puts pay to the idea that once the German government has a fresh mandate following September’s election, there will be a swift move towards more eurozone integration – these legal questions will remain and will continue to crop up.
2. Pits the ECB against the Bundesbank: linked to the point above but this is also a very awkward division within the eurozone architecture, as personified by the confrontation of the ECB's Jörg Asmussen on one hand and Bundesbank President Jens Weidmann on the other. The Bundesbank will likely have to keep implementing ECB policies despite it now being well known that it fundamentally disagrees with them. 
3. Further constraints on crisis policies: in the end, the GCC will likely rule in favour of the ECB. However, as with previous rulings, it could set out red lines and restrictions to protect the German Constitution – this could throw a new element of risk into the crisis.
4. Increased transparency on ECB actions: this is something which we, and others, have been calling for for some time. One benefit of the case is that it has increased scrutiny on the OMT with the ECB now admitting it may be forced to published the legal documents which will layout the practical functioning of the OMT. This could generally be beneficial, although if markets do not like what they hear then it could actually contribute to market jitters.

With this final point in mind, there was an interesting story in FAZ over the weekend, which suggested that the OMT is not in fact as “unlimited” as had first been thought. Indeed, FAZ claimed that it is limited to €524bn, since the ECB will only be allowed to purchase debt with maturity between one and three years.

This constraint was always known, as we noted when the programme was announced. The cap essentially arises because this is the total amount of debt from Italy, Spain, Ireland and Portugal (i.e. those countries most likely to access OMT). The cap doesn’t seem to be hard and fast then, since countries could simply issue more short term debt. However, this does come with its own risks (another point we raised at the time), and the ECB has suggested it would look to prevent such an approach, although it hasn't said how.

Handelsblatt goes even further, suggesting that there is an internal rule which limits the ownership of bonds by the ECB to 50% of the given market, suggesting this means the cap is even lower at €260bn.

But even if the cap isn't quite what it’s cracked up to be, it’s very interesting that the ECB itself is selling it to the GCC as a limit. Clearly, there is some concern about the outcome on its part.

Despite a definitive ruling not expected until the end of the summer at the earliest, and more likely after the September elections, there could well be plenty of interesting revelations and disputes aired over the next few days, which we will of course be covering in detail.

Splits in Germany (and beyond) over banking union?

It’s been a week of 'splits' over Europe and it looks like another one may be emerging – although this time in Germany.

German Finance Minister Wolfgang Schäuble had an article in the FT arguing:

"While today’s EU treaties provide adequate foundation for the new supervisor and for a single resolution mechanism, they do not suffice to anchor beyond doubt a new and strong central resolution authority.

We should not make promises we cannot keep. The overly optimistic predictions about a single supervisor starting work as early as January 2013 cost the EU credibility.

A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place.

A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort."

Essentially, pointing out that a full centralised banking union is some time away, post EU treaty change. This potentially has implications for the UK, as much of Schäuble's solution, with the exception of the common eurozone supervision, would apply to all 27 members - the question for non-eurozone countries, including the UK, is how they will be affected by the 'second stage' of his solution. On the other hand, treaty change, as we've noted before would potentially enable the UK to put forward its own amendments.

However, German ECB Executive Board Member Jörg Asmussen espoused a different view in comments to the German press this afternoon:

"It is the aim [of the banking union] to make the Eurozone more robust against banking crises with an orderly, cross-border resolution of systemically relevant banks without leaving the burden on the taxpayer or the central bank."

"We think this is best ensured by a common resolution regime, a joint resolution fund that is financed by banks' contributions and a common resolution scheme…The entire tool kit should be available along with the Single Supervisory Mechanism."

So, much stronger on the need for a clear centralised authority as soon as possible, preferably when the ECB takes on its supervisory role at the start of next year. This also seems to imply then that such a move could be done without changing the EU treaties.

To be honest this is not an entirely new position, it is something other members of the ECB have previously called for. Nevertheless, it represents a fairly significant split between two leading political voices in Germany over what is now the key policy for reforming the eurozone.

It's also worth noting that at a press conference earlier today the Spanish and Portuguese leaders both put forward a similar argument to that of Asmussen on the need for an immediate 'full' banking union. Meanwhile, Eurogroup Head Jeroen Dijsselbloem said that the issue of treaty change could be dealt with "later on" but admitted that "understandable questions" were being asked on this front.

We, as with all those following the crisis, wait with bated breath for German Chancellor Angela Merkel to declare which side she comes down on. So far she has managed to dodge taking any big eurozone decisions ahead September's election in Germany, but with key discussion on banking union coming up next month its not clear whether she can continue to do so on this one.

Sorry - who are you again? The rather indifferent German response to French socialists' attack on Merkel

Who wears the trousers?

On Friday Le Monde got a big scoop with the news that French President Hollande’s Socialist party had drafted a strongly worded paper criticising Angela Merkel and her focus on austerity, accusing her amongst other things of “selfish intransigence”. It’s not exactly news that all was not well with the ‘Franco-German motor’ but still pretty explosive stuff and we were keenly anticipating what the German response would be. 

However, even taking into account the number of caveats (not an official policy document etc.) this reaction was pretty muted, both in terms of the media and politicians (in contrast the story was still on the front page of Le Figaro today). Most of the main German papers ran the story online, only setting out the basic facts (e.g. Handelsblatt, Süddeutsche, Tagesspiegel), and noting it represented a struggle between moderates and radicals within the party. However the Welt write-up included a bit of editorial comment:

“As unemployment in France rises ever higher, just like the budget deficit, while President Francois Hollande’s popularity falls ever lower, the breakout attempts of the governing socialists become increasingly desperate.” 

Bild, which normally isn't shy of stirring up controversy looks to have completely ignored the issue at least online – although it did strike back by reporting on a French comic strip mocking Hollande. FAZ, which can usually be relied upon to come down like a ton of bricks on anything smacking of fiscal irresponsibility, also didn't give the story that much coverage, although its co-publisher Günther Nonnenmacher had a rather wistful piece in which he claimed that that it was symptomatic of the way Germany was becoming increasingly isolated in Europe. This was also the tone adopted by two retired SPD politicians who had a guest piece in Süddeutsche in which they argued that:

“There are markers that some German will react [to this foreign criticism] as was standard in the days of the Weimar republic. We may fall into a spiral of snivelling self-indulgence and coming increasingly into conflict with a justified criticism from outside. Instead let us try to understand why others are reacting how they are reacting.”

Likewise the response from politicians was quite muted, with few senior coalition politicians speaking out although the SPD’s former foreign minister Frank-Walter Steinmeier accused Merkel herself of having strained Franco-German relations.

So what does this tell us? Well clearly the German media and politicians are unusually introspective and cautious not to stir a nationalistic argument, but that’s hardly news. More interestingly is the degree of relative indifference.

This speaks volumes about the changing power balance between the two countries.

Are Cypriots really wealthier than Germans? And is there some great hidden wealth that southern Europe can tap into?

Yesterday, the ECB released its first survey on household wealth, which produced some surprising results – not least that Germany (on paper) seems to have one of the lowest levels of median wealth, below that of bailed out countries such as Cyprus and Greece. With the German anti-bailout mood on a high, this kind of stuff is poltically quite explosive - and it was all over German press this morning.

But what about the actual survey? Undoubtedly an important effort to increase the level of data on this aspect of the eurozone economy (important for spotting future crises) but the survey itself suffers from some serious flaws.

Much has been written about this already so we won’t regurgitate all the arguments but here are the key flaws as we see them:

• Much of the data comes from 2010, with some even going back as far as 2008. This makes cross country comparisons tricky (due to distortions from the crisis) but also means that the fall in wealth in the non-core eurozone countries will not be picked up by the data.
• Households are much larger in the southern countries – particularly with more working adults living under the same roof.
• The key distortion comes from the huge disparity in home ownership, it reaches levels around 80% in southern countries compared to 44% in Germany. Not only have house prices fallen significantly since 2010 in the southern countries but they have much further to fall. The point being that these prices remain inflated from the bubble (partly due to bank forbearance and slow adjustment), meaning that the ‘wealth’ they represent is not really there (see more on this below).
• As Luxembourg and Cyprus demonstrate the influence of large financial sectors and huge foreign investments can also have a significant distortionary effect on the figures.
• Various levels of wealth inequality across the economies also skew the figures.

Even with those points in mind though, some have argued that this survey demonstrates that there is huge wealth in the southern countries and that they should not therefore be receiving bailouts.

So why can't this 'wealth' in southern economies simply be tapped to help fund struggling governments? Well, it may not be that simple. Consider the below:

• A government decides it wants to tap into the ‘wealth’ of its citizens. Since much of this is home ownership, the best way to do this would be a property tax on the value of homes (this could equally be extended to other assets as a wealth tax) – say around 5% for illustrative purposes here.
• The government institutes the tax, but people struggle to pay because, as the survey showed, despite high ‘wealth’ they are struggling with income and cash flows. Many households are also heavily indebted and in negative equity on their mortgages.
• People across the country rush to sell their houses to avoid the impact of the tax. There is little new demand (foreigners certainly don’t want to invest), so the influx of supply cause house prices to crash.
• The tax instantly fails to receive much revenue, but the knock-on effects are worse. Many people are pushed into insolvency and default on their mortgages and other loans.
• Domestic banks (large in many of these countries) are hit hard by this and see their losses spiral. They reduce lending further, harming economic growth and forcing business to lay off more workers.
• Some banks may even need to be recapitalised, something which the government can ill afford and may possibility prompt a bailout request (what we were trying to avoid in the first place).
• Added uncertainty and depressed economic outlook push up government borrowing costs.

Admittedly, this is an extreme scenario (it also works best applying it to a country such as Spain). But it serves to highlight the point that, much of this ‘wealth’ is left over from from the previous boom. This has long been clear to many, including us, who have predicted house prices will fall further in countries such as Spain (which the Commission also said today in its report on macro-economic imbalances) – thereby eroding this wealth. Tapping into such ‘wealth’ is incredibly difficult, since when you move to catch it, it evaporates.

That banks in many of these countries have been pushing forbearance (delaying foreclosure) is further evidence – if this wealth existed in the housing market surely they would have been better of forcing foreclosure and seizing the assets (admittedly some legal questions but the broad point stands). Furthermore, public assets sales such as those pursued in Greece look like great revenue sources on paper but in practice have produced limited success, partly due to lack of demand.

There are plenty of arguments against taxpayer-backed bailouts - moral hazard, political divisiveness, debt sustainability problems, inefficiency and unfairness (to name but a few) - without over-reading this survey.

"Why EU mandarins refuse to learn"

Has anything changed since the 15th century?

Die Welt’s Foreign Affairs Editor Clemens Wergin today has a blistering op-ed on the current state of affairs in Europe, entitled “Why EU mandarins refuse to learn”. Here are the key parts:

“The disastrous decisions regarding the future of Europe have been completely without consequences. Despite all the mistakes made the system appears to be incapable of adapting. The tanker remains on the wrong course.”

“It belongs to the biggest disappointments for convinced democrats that up until now, neither on the European level or on that of the nation states, there are no noteworthy efforts to clarify the causes of the euro crisis… The Bundestag has also not covered itself in glory. There has been no cross-examination of Hans Eichel and Gerhard Schröder why they agreed to let Greece join the euro despite the fact that already then there was a strong suspicion that the Greek figures were problematic.”

"Democracy is adaptive and able to correct itself. However this is out of the question in the worst crisis to hit Europe after the war. Here, the euroscepticism of many of the continent’s citizens is justified. They see that in this crisis that this Europe is not created on transparency, enlightenment and accountability. This creates the impression that they are dealing with a conspiracy of the elite, conspiracy against common sense."

“EU elites are afraid of washing their dirty laundry for fear it will portray the European project in a bad light… It is part of the pride and ethos of a democratic polity to clarify failures and to draw consequences.”

“With the exception of the changes to the eurozone’s regulatory framework forced through by the Germans there have been no intentions of rethinking the fundamental assumptions of the EU… One gets the justifiable impression that nothing can divert EU mandarins from their current path and their pre-conceived opinions. The euro has not worked? Ok, let's try an even higher dose of community building… In Brussels they mourn over bad poll numbers and believe that this is only down to national populists who have wrongly explained Europe.” 

"With Portugal, Spain and Greece there was once the quiet hope that good European governance would be diffused via a kind of osmosis process from the EU headquarters in Brussels into the periphery. That has worked only in part. In some respects, the abundant money from the EU’s structural funds has had the opposite effect to that which was intended. They have strengthened clientelistic structures and made people there believe their system somehow works. Ultimately, politicians always had enough money via Brussels assistance to distribute to cronies and voters. As long as money was available, many people profited from this system. Then along came the crisis which showed that it just does not work and carries with it significant competitive disadvantages.” 

"At present, the EU is obviously not an adaptive system. Nothing is solved, no one is held accountable. Responsibility for consequential mistakes is lost somewhere between the many capital cities and the corridors of Brussels. As long as this does not change, one should not be surprised by the bad reputation that this European undertaking enjoys among citizens."

 Taking no prisoners. For German speakers, it's worth reading the entire piece. 

No backing down: Germany comes out swinging over claims it is the neighbourhood bully

Given all the Germany-bashing over the last week, in the wake of the Cyprus bailout deal (some of it completely ridiculous), it's easy to forget that the Germans themselves are remarkably united over the agreement. In fact, the feeling is that Germany, collectively, just got a fair bit more assertive over its eurozone policy.

On Friday, before a new agreement was finally reached and with Cyprus’ euro membership on the line, German Chancellor Angela Merkel – reportedly in an angry mood - told MPs from her coalition parties that it was wrong for Cyprus to "test" Europe and that while she preferred to see to see Cyprus stay in the single currency but was prepared for an exit.

And with respect to anti-German sentiments, speaking to ZDF this morning, Finance Minister Wolfgang Schäuble bluntly stated that:

“It is always the case, also in the classroom: When you sometimes have better results, the others, who have difficulties, can be a bit jealous.” 

German Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) called on EU leaders to show more solidarity with Germany, claiming that:

"I wish that that the individuals at the highest levels of the EU including the President of the Commission and the President of the Council also display solidarity with us and defend the Germans against unjust accusations".

Meanwhile the opposition SPD and Greens have said they will both vote to approve the deal. It is not just German politicians who are being increasingly assertive. In our daily monitoring of the German press, we've sensed a hardening of tone and rhetoric throughout the crisis, not least in response to the overtly anti-German tone of many of the anti-austerity protests in the south. Referring specifically to the Nazi-themed nature of the protests, Ulrich Clauß argues in Die Welt that:

“In terms of the endemic prevalence of corruption in government and administration and in close to all parties in their respective parliamentary spectrums, these countries rank alongside third-world dictatorships. On the whole we are talking about countries in which ‘good governance’ seems to be an alien concept… in terms of political culture, there is an extreme divide between North and South in Europe.”

Writing in FAZ, Klaus-Dieter Frankenberger argues that:

“The Cypriots like to see themselves as the victims. It is not however their European partners who are responsible for the mess they are in… In the crisis countries many blame their plight less on corrupt elites and bad policies but on the alleged lack of solidarity in the North for which read: neo-hegemonic Germany.”

Last week, following the Cypriot parliament’s rejection of the original bailout agreement, Bild columnist Hugo Müller-Vogg argued in a piece entitled “We’re the scapegoats” that:

“Politicians there have acted extremely irresponsibly. Now they are extremely brazen in their demands from those who have solidly managed their economies. Moreover, they insult those who are supposed to help them. Without German guarantees there would be no bailout fund. But of all things we Germans are being hit in the crisis countries not only criticism but even open hatred… If it was not an issue of Europe’s future, there would only be one appropriate response: deal with your own mess”.

Writing in Die Welt, Director of the Hamburg Institute of International Economics Thomas Straubhaar describes the Cypriot bailout deal as a “turning-point” in the eurozone crisis, arguing that:

“Up until now, the bankrupt countries have been able to use fear of a domino effect to extort Europe. That is now over because the strong eurozone countries have the better hand – and they should not be afraid to play it”.

The implications of a Germany more prepared to assert its viewpoint has huge implications for the future of the eurozone and the EU as a whole. Remember who holds the cheque book...

Bild ups the ante: Will Italy's political clowns destroy the euro?

Yesterday Bild's online edition asked will the Italians destroy or euro? Today the same headline appears in the print edition, complete with a mock up of as Grillo and Berlusconi as clowns.

However, its not just the tabloid press that are using this analogy - Peer Steinbrück, the SPD's chancellor candidate, yesterday told a rally that "I am appalled that two clowns have won", going on to warn that the result would likely increase problems within the eurozone.

The North - South tensions in the eurozone are unlikely to easy anytime soon...

Cameron's EU speech: German media cautious but receptive

Yesterday we brought you some instant reaction to Cameron's speech from European media and politicians. In this blog post, we round up reaction from the German press after they've had a day to digest it - a crucial barometer of how much, if any, purchase Cameron's agenda can count on in Berlin. What struck us was that the media, overall, tackled the complex issue where next for the UK in Europe, with admirable balance. Criticism tended to focus on Cameron's perceived pandering to UKIP and his own party. But equally there was also strong support for parts of his argument.

In a piece with the strong headline: "The Ignorance of the Cherry-picking Westerwelle", Die Welt's London correspondent Thomas Kielinger argues that:

“David Cameron has called for a fundamental reform of the EU so that his country can remain a member. This has nothing to do with blackmail… When [German Foreign Minister] Guido Westerwelle repeated his well worn assertion that the UK would not be allowed to ‘cherry-pick’ in its relations with the EU he was guilty of exactly the same thing that he denounces. He picked out of the speech that which fits his argument while he ignored that which he did not want to hear.”

"Cameron is in no way alone in his analysis of the changes that are coming for the EU, which one cannot address as being 'business as usual.' The overdue plans to stabilize the euro zone bring with them a deepening of the EU that also will have wide-reaching consequences for the countries not belonging to the euro. Those need to be not just discussed, but also most likely negotiated. It is not anti-European when the British prime minister brings these up. “It is not anti-European of Cameron to remind of the threat to the EU’s competitiveness [or] the creeping democratic deficit and the lack of public confidence in the EU and its institutions… Great Britain is approaching the EU question in a 'practical' not emotional way, Cameron says. That would do us all some good."

On a much more critical note we have Der Spiegel, which it must be said has consistently adopted a Cameron-critical position. Their UK Correspondent Christoph Scheuermann argues that:

“Cameron's vision of Europe is a free trade area with access to the beaches of the Mediterranean. Beyond that, he doesn't associate the project with a past or a future. Apart from vague demands like competitiveness, flexibility and fairness, he has no idea how the EU should develop… He's isolated partly because his interest in Europe stems from fear rather than any desire to shape it.”

FAZ's Klaus-Dieter Frankenberger argues that:

“Once the agitation has settled over real or perceived British special demands, the country's European partners should quietly sit down and study Cameron's wish list and not just immediately dismiss it as cherry picking. Cameron’s strategy may be risky, but his analysis is not wrong... A solid [EU] framework is essential. Nonetheless this framework has to accommodate a range of traditions, mentalities and objectives. This means that without flexibility, it won’t work either. Europe's challenge is to find a way of combining that flexibility with commitment. Pragmatic British and other sceptics should be able to warm others to that idea.”

Süddeutsche’s Martin Winter argues that:

“Since the crisis, the formula that more Europe is always good for Europeans is no longer valid. It would be good to know what ‘more Europe’ means in detail and who will be expected to bear its political and financial costs. Brussels’ almost planned economy mentality in the crisis does not inspire confidence. A blunt European debate – which is not conceivable without Britain – could lead to greater clarity… The statement currently heard in Brussels that Britain needs Europe more than Europe needs Britain is foolish and dangerous… Above all, it is in the interest of both the Germans and the French, not only to pull the British along, but to bring them to the centre of the European debate."

Finishing on a lighter note we have Bild Zeitung which in its print edition had a very tongue-in-cheek list of 8 reasons for "Why we don't need the Brits in the EU" which included pearls of wisdom such as using imperial measurements, driving on the 'wrong' side of the road, eating chips with vinegar and drinking stale beer, as well as having a higher debt than Greece, Spain, Portugal and Ireland combined. However, in an equally tongue-in-cheek online piece which paid tribute to "the crazy Brits" citing everything from the Royal Family and Boris Johnson to the Loch Ness Monster and the Sex Pistols, argues that:

“With his promise of a referendum, David Cameron has turned the old continent upside down… Most EU countries have tacitly agreed to build Europe above the heads of the people. Motto: The European project is simply too important for democratic participation. And then along comes this Cameron!... The Europeans are collectively pissed… and want to convince the combative Cameron that he is acting against the interests of his own country. Some even speak of expulsion and want the friends of mint sauce and those who drive on the left completely out of the EU. But dear Britons, please stay! You are so crazy. We need your opposition, your obstinacy rather than a united Europe.”

Who said Germans don't do sarcasm...? Potentially plenty of scope for support if the UK, with partners, is able to pitch its proposals for EU-reforms in a smart way.

Cameron's poker face?

No, Europe hasn't collectively turned against Cameron (which you would think from reading headlines like these - seriously?). Though several politicians from around Europe haven't exactly come out celebrating following Cameron's speech - which doesn't help the Tories - he's getting a fair hearing amongst several commentators. 

Enrico Brivio, columnist for Italy´s main business daily Il Sole 24 Ore, provides a vivid if mixed analysis of the speech, saying:

“Poker players in the Old West said you play more comfortably when you put the gun on the table. And David Cameron has today put the referendum gun on the table of European negotiations.”

He says Cameron has taken 'a big gamble', but has nonetheless decided to follow a “lucid political strategy which [Italian] politicians…don´t always show.” 

Rzeczpospolita foreign editor Jerzy Haszczyński is a bit more supportive arguing:

“David Cameron is right. The EU is far from ideal. It tries to make everything uniform, including the working hours of British doctors, it does not value the diversity of states and nations, it does not support competitiveness. And it is increasingly undemocratic. David Cameron is correct to demand a real debate about the future of the EU. He is right to suggest that the EU has forgotten about its citizens, about their will as expressed through elections to national parliaments, and that it is comfortable making decisions behind closed doors. However, this does not mean that David Cameron is right to accept the fact that his country could in a few years leave the EU.” 

Meanwhile, in a front-page comment piece for Die Welt this morning, assistant chief editor Andrea Seibel argues:

There is 'nothing final' about the ‘Franco-German engine’ for Europe and that “the British scepticism, their non-conformity and liberalism have always also been the engine of Europe…Today a German-British axis is needed. From now on it’s not about the past anymore, but about the future of the continent.” 

Although her colleague Daniel D. Eckert was less enthused, tweeting:

“Cameron’s goals are honourable. But they only fit an EU which is conceived as a free trade zone. Euroland doesn’t function like that”. 

Elsevier's political editor Eric Vrijsen argues that:

“While David Cameron dares, [Dutch Prime Minister] Mark Rutte dives...in the Dutch coalition agreement between VVD and PvdA it is stated that the national state must regain competences back from Brussels… [but] Rutte is shying away [because] he is stuck with a coalition partner which is clearly pro-European”. 

We would note the Dutch comments on the return of powers being part of the coalition agreement are particularly interesting. We’ll have more on that, especially with rumours in the Dutch press today that Rutte could look to launch his own "balance of competencies" review.