Spain, deficits and the Euroregulator to rule them all?
Eurozone finance ministers wrapped a two-day summit on Tuesday, and the results were encouraging—for what they did and didn’t do.
The group did agree to extend Spain’s deficit reduction targets, provided the government boosts tax revenue (a VAT hike and tax evasion clampdown are expected). Spain’s deficit can now reach 6.3% of GDP (up from 5.3%) in 2012 and 4.5% (from 3.0%) in 2013. 2014’s target is 2.8%, though that can likely be adjusted if needed. Overall, it’s a welcome development—higher targets likely mean fewer immediate public-sector cuts, which perhaps reduces economic angst a bit.
Ministers also made progress on Spain’s bank bailout, agreeing to release the first aid tranche of €30 billion by month’s end (plans for the remaining €70 billion are still to be determined). As expected, the funds will be lent to Spain’s bank bailout fund, which will channel money to banks as needed. All banks receiving aid must adopt specific reforms, and Spain must overhaul its banking regulatory system—a rather strange condition, considering officials still aim to replace national regulatory schemes with a eurozone-wide body.
Which brings us to what the group didn’t do: Make any progress on said eurozone bank regulatory scheme. The European Commission—the idea’s driving force—still expects to complete it by yearend, but Germany’s finance minister, among others, said it will take at least a year given “it’s complicated, [and] it isn’t easy to do.” We rather agree: Rushing this increases the likelihood of creating a solution in search of a problem. It will take time and careful debate to devise a useful scheme that promotes, rather than hinders, banks’ efficient functioning.
Granted, delaying the euroregulator means the bank bailout funds will remain on Spain’s balance sheet longer—but if markets become troubled by the increased debt load, officials have shown they’re willing to do what’s needed to ease the strain.
UK data—cheery or dreary?
Tuesday, the Office for National Statistics revealed May brought unexpected positive data for the UK. Manufacturing output rose 1.2% m/m—considerably better than the -0.1% decline expected. May’s manufacturing data were the highest in a year, and, though some predict manufacturing will decelerate in June as a workday was moved up to May for Her Majesty’s Diamond Jubilee, increased factory orders potentially suggest more upcoming positive data for the UK.
And manufacturing data weren’t the only positive news: Imports, exports and the trade deficit also contributed positively to the UK economy. Exports to non-EU countries rose, and seasonally adjusted exports rose 6.6% m/m overall. Coupled with a 1% m/m rise in imports, May’s total trade increased quite nicely. While such month-over-month data are historically volatile, May’s UK data would seemingly suggest economic conditions are less dire than typically advertised.
Chinese trade—cheery or dreary?
Handwringing over China’s economic trajectory arose once again Tuesday as the nation’s Customs Administration released June trade data. There were seemingly two main sources of angst: conclusions the eurozone’s economic weakness had materially impacted exports and fears that weaker-than-expected imports suggest a slow Chinese domestic economy.
Perhaps eurozone weakness contributed to export growth’s slowing from roughly 15% y/y in May to 11.3% y/y last month. But eurozone weakness isn’t exactly sneaking up on anyone, perhaps explaining why June’s 11.3% growth topped analysts’ expectations. (An example of how, as our boss Ken Fisher has detailed numerous times, markets efficiently discount widely known information.)
As for the import data, it’s critical to recall just how volatile monthly data often are—June’s well-below estimated 6.3% y/y growth follows a sharp 12.7% May gain. And it was largely paced by commodities—which led the charge higher the prior month. Year-over-year data show a clearer picture: In the last year, iron ore imports are up +9.7%, aluminum +33.3%, copper +47% and coal +65.9%. And all this comes before we’d expect to see the full impact of China’s monetary loosening. In the end, it doesn’t seem to us these data confirm the weak China fears many are projecting.
What’s déjà vu in German?
If eurozone events have seemed to be on repeat the last few years, perhaps it’s because they have been. In the latest instance, the German Constitutional Court is considering an injunction that would delay the launch of the permanent eurozone bailout fund, the ESM. Injunction proponents argue the bailout fund violates the German constitution—ceding too much parliamentary budget power. Never mind Parliament ratified German participation in the fund on June 29.
The same court considered a similar injunction against the EFSF, predecessor to the ESM in September 2011. EFSF opponents maintained the German government had overcommitted itself without parliamentary approval. The court ultimately ruled German participation in the EFSF legal, but said future bailouts would require parliamentary budget committee approval—a lower standard of approval than a full parliamentary vote. Shortly thereafter, German Chancellor Angela Merkel, not one to gamble, had the entire Parliament approve (overwhelmingly) an EFSF expansion.
How the court rules this time is anyone’s guess. However, a few things are certain—given eurozone leaders’ resolve to preserve the monetary union, it seems clear no matter the court’s decision, they’ll push to find ways to do what needs to be done and continue muddling through the eurozone’s woes.