| The euro zone is still at the crossroads of either moving toward a federal structure, or breaking up. The former implies individual governments yielding much more sovereignty, which comes up against the problem of the “democratic deficit”. The most convincing arguments in favour of a single market, (a common currency and interest rates, and solidarity amongst euro zone members) will come to nought if voters rebel against the moves towards a fiscal union. |
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| Within the grand debate about yielding or sharing sovereignty is the immediate problem of a banking union, and how banking will be supervised.in the euro zone, if not EU-wide, (Common regulation, in the sense of the rules to be followed, is already in place.) We see banking union as a first and necessary step towards the federal structure which we have long seen as the only means to the euro’s survival. |
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| Yet again, central banking control comes up against the democratic deficit. Banking supervisors in individual countries are not exactly democratically elected, but they are at least answerable to parliaments. The ECB is answerable only to its own (appointed) board and perhaps to some officials in Brussels, who themselves are not elected. (The bank’s shareholders are the central banks themselves of the full EU, and not just the euro-zone,) |
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| In addition, there is a practical question of there being just too many banks in Europe for a single authority to supervise them all, although a system of delegation to national authorities may solve this issue. The problem may also be lessened by beginning with large banks, and covering smaller banks only from 2014 (at the earliest). |
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| As we have already observed in our Weekly, Draghi has, even unwittingly, become a politician, acting where European leaders, in their paralysis, do nothing (which may be presented in simplistic terms as Germany versus the rest). Tomorrow, he will be announcing a bond buying programme, based on a 24-person board, in which Germany has only one vote. In theory, Germany could still prevent the whole plan going through, as could the German Constitutional Court. In practice, such opposition is highly unlikely, as that really would end the single-currency experiment -- a consideration that gives Draghi the courage to “take on” Merkel. |
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| Except that Merkel may have quietly moved over to Draghi’s side anyway. That is what Josef Joffe, editor of Die Zeit, affirms in the FT. He suggests that Merkel wants a quiet time for the twelve months leading up to the next election, and has concluded that the Constitutional Court will criticise the German Government but give a qualified “yes” to a degree of mutualisation. Joffe goes on, by the way, to warn of the risk of inflation, and of the disincentive to reform. |
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| The move to a central bank taking initiatives which used to be reserved for elected governments is paralleled in the USA. As Clive Crook of Bloomberg writes, inaction by a grid-locked Congress and an Administration preoccupied with the November elections has pushed the Fed to take a political lead in managing the economy. Crook laments the lack of democracy but, as many would, prefers someone doing something to encourage recovery over stalemate. |
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| “La rentrée” is, as every year, seeing a slew of new corporate bond issues, the difference with the summer period being that most of the names are well known. The yields of companies in the “South” are significantly higher than in the “North”, which is in itself a measure of how the euro zone, in its present form, is failing to fulfil even one of its basic promises. |
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Macro Focus |
| United States |
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| GDP expanded more than estimated in Q2 (1.7% annually), reflecting an improvement in the trade deficit and a pickup in household spending. Retail spending increased by 0.4% in July. Confidence among consumers measured by the Thomson Reuters/University of Michigan index climbed to 74.3, the highest level in three months. However, manufacturing has since declined. |
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| More contracts were completed in July (+2.4%) to purchase previously owned homes. |
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| Euro Zone |
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| Economic confidence in the euro area fell in August: the index of executive and consumer sentiment in the euro zone dropped to 86.1 from 87.9 in July. |
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| Unemployment rose to a record and inflation quickened as rising energy costs threaten to deepen the economic slump. The euro zone jobless rate was 11.3 % in July, the same as in June after that month’s figure was revised higher. |
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| Spain, France, Austria and Belgium returned to the market this week after a month-long pause, with Germany also selling debt. |
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| United Kingdom |
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| The manufacturing rebounded more than economists forecast in August with the PMI Manufacturing index surging to 49.5 from 45.2 in July. |
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| House prices rose the most in more than 2 1/2 years in August (1.3% MoM). The average price in August was £ 164,729 pounds, still however down 0.7 % from a year earlier. |
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| Switzerland |
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| While the KOF economic indicator climbed to a one-year high in August (1.57), PMI manufacturing contracted for a fifth straight month (46.7). |
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| Government officials and economic forecasters may cut their predictions for growth this year after gross domestic product unexpectedly fell in the second quarter (-0.1% QoQ). |