Atlantic Council

Ahead of a two-day meeting of EU finance ministers in Brussels that starts Tuesday, Germany remains reluctant to cut taxes or significantly boost spending.  Merkel's hesitance to further contribute to EU rescue packages is increasingly putting her at odds with the UK, who recently reduced VAT, and France, who is expected to unveil new economic stimulus measures in the next few weeks.  The FT:

"Differences were widening on Monday over a European Commission €200 ($252.7) billion economic recovery plan, with France and the UK eager to see a big, coordinated stimulus package but Germany more critical of such reflationary measures.  A paper by the French presidency of the European Union, to be discussed at Tuesday’s EU finance ministers’ meeting in Brussels, was similar in content and tone to the Commission’s plan, with some passages apparently lifted directly from the proposal published last week, EU officials said.

In contrast, Germany remained skeptical, with Chancellor Angela Merkel yesterday ruling out significant tax cuts and Peer Steinbrück, finance minister, at the weekend likening countries that are ready to adopt large-scale deficit spending programs to 'lemmings' hurrying down the path to mass suicide.  The Brussels meeting will debate how EU countries haul their economies out of recession, ahead of a summit next week of EU heads of state and government that is set to approve the Commission proposals, if in modified form.

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A more robust approach is backed by France, with President Nicolas Sarkozy remarking pointedly last week after talks with Ms. Merkel that France was 'working' on a stimulus plan while Germany was still 'thinking' about what to do.  France, the UK, and others contend that an extra German stimulus would help not merely the German economy but the EU as a whole."

The WSJ similarly reports:

"While policy makers in the U.S. and elsewhere in Europe are drawing up ever-larger fiscal stimulus proposals, Ms. Merkel told her center-right Christian Democratic Union's annual conference that she would continue to strive for a balanced budget.

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Germany's government has been vocally skeptical about whether debt-fueled spending plans will work. But many of Ms. Merkel's conservative colleagues, as well as German business groups, economists and international organizations, are complaining that Germany is doing too little to lift its economy, which is contracting fast amid a slump in global exports.

Neighboring European countries such as France also are disappointed that Germany isn't taking the lead to revive growth through tax-and-spending measures.  Instead, Ms. Merkel lectured her party on financial discipline on Monday, praising the famously thrifty inhabitants of Swabia, the region around Stuttgart where the Christian Democrats' conference is being held.

The root of the global financial and economic crisis is known to every Swabian housewife, Ms. Merkel said: 'You can't keep on living beyond your means.'  A lack of thrift in advanced economies caused the crisis and can't be its cure, she said."

Merkel said the country might enact further fiscal measures in early 2009 if the economy remains unstable.  However, many economists are already criticizing the government for not taking seriously enough the major downturn Germany faces.

Related Posts:

• EU Economy Update
• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe

The European Commission president says Britain is closer to joining the Eurozone. This is apparently news to the Brits.

The UK is "closer than ever before" to joining the euro, according to the European Commission's president. Jose Manuel Barroso told French radio that British politicians were considering the move because of the effects of the global credit crunch.

However Downing Street said its position on the euro remained the same. Shadow foreign secretary William Hague said it was "extraordinary" ministers were talking EU about joining the euro "behind the British people's backs".

In 1997 Gordon Brown set five economic tests which he had to judge were met before recommending UK euro entry. The key test is whether the UK economy is coming together with those of countries in the eurozone and whether this can be sustained in the long-term. The second test, linked to this, is whether there is sufficient flexibility to cope with economic change. The remaining three tests assess the impact of joining the euro on jobs, foreign investment and the financial services industry.

Mr Brown has been seen as less keen on the UK adopting the euro than predecessor as prime minister, Tony Blair.

Opinion polls have suggested that any vote on scrapping the pound and adopting the euro would be lost, and in the UK the currency has not been a significant political issue for years.

One wonders whether Barroso knows something the Brown government doesn't wish to devulge or is merely popping off.  Then again, "closer than ever" is not the same as "close."

The EU is standing in the way of France's efforts to save its banking system.  Reuters:

 The European Commission is blocking a French plan to shore up the capital positions of big retail banks, insisting they must reduce their lending in return for state support, the Financial Times reported on Saturday.

France announced last month that it would lend 10.5 billion euros ($13.6 billion) to the country's six top lenders before year-end to prop up their capital reserves. Paris has argued that without state support, lenders would have shored up their capital positions by reducing loans in the face of malfunctioning interbank lending markets, a move that would deal a fresh blow to an already troubled economy.

The Financial Times said French Economy Minister Christine Lagarde spoke with European Union Competition Commissioner Neelie Kroes on Friday to persuade her to lift her veto on France's bank support package.  But Kroes was sticking to her view that banks cannot use state aid to increase their lending books, the paper said. "We have to apply the same criteria to everyone...support should be sufficient to offset the negative impact of the current financial crisis and no more," the paper quoted one anonymous official as saying.

This will be a severe test of the viability of the EU in a crisis.  The pre-Euro Exchange Rate Mechanism ultimately collapsed when states refused to follow central dictats at the cost of domestic economic pain.

UK

In the UK, RBS became the latest bank to be taken over by the government as a result of the financial crisis, according to IHT:

"The British government took majority control of Royal Bank of Scotland on Friday after investors shunned the lender's share sale, paving the way for a larger government role in Britain's banking sector.  Investors only signed up for 0.24 percent of the shares, which were offered as part of a plan to bolster the bank's capital, and the government had to take up the rest, leaving it with a 57.9 percent stake in RBS. The government agreed to buy a separate block of preferred shares bringing its investment in RBS to about £20 ($30.8) billion.

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RBS was one of three British financial services companies that tapped government help to fulfill stricter capital requirements intended to help them survive the credit crisis.  Lloyds TSB and the mortgage lender HBOS, which have recently agreed to combine, also relied on the government to take up any shares they could not sell to investors as part of a banking bailout plan orchestrated by Prime Minister Gordon Brown.  But some analysts warned that even those stricter capital rules might not guarantee the stability of Britain's banks as the turmoil in the financial markets continued."

The government will hold the RBS stocks until they are profitable again.

France

Ahead of expected benchmark rate cuts by the ECB, a proposed bailout of major French banks was blocked by the European Commission, who said France must reduce its lending rate before approval.  The FT reported:

"The French government’s plan to shore up the capital position of France’s six main retail banks is being blocked by the European Commission, which insists they must reduce their lending in return for state support.  Christine Lagarde, French finance minister, on Friday spoke to Neelie Kroes, EU competition commissioner, to persuade her to lift her veto on France’s €10.5 ($13.3) billion support package but Ms. Kroes is sticking to her view that banks cannot use state aid to increase their lending books.

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The French government reacted furiously to the Commission’s argument.  One senior official described it as 'ridiculous' and 'stupid' because it would exacerbate the credit crunch – the very thing Paris said it was trying to avert when it decided last month to inject capital into all its large high-street banks.

France – unlike the UK, Germany or Italy – intended to recapitalize all its lenders at the same time to ensure they did not tighten credit to business and households.  Paris argued that without state support, and in view of the frozen interbank lending markets, banks would have shored up their capital positions by reducing loans, with catastrophic consequences for the real economy."

Eurozone

Eurozone inflation fell in November due largely to increases in unemployment.  With fourth quarter projections anticipating a third straight quarter of negative growth, the ECB is expected to cut rates by as much as 1 percent in December from its current key rate of 3.25 percent.  This should continue to help inflation drop in early 2009.  The IHT provided details:

"Euro-zone inflation declined in November and unemployment jumped more than expected, reports showed Friday, lifting chances that the European Central Bank would increase the size of an expected interest rate cut next week to aid a shrinking economy.

With recession pressing on growth, the Italian government became the latest European country to offer an economic stimulus package, totaling €80 ($101.5) billion.  That came one day after Spain announced a €11 ($14) billion plan.  President Nicolas Sarkozy of France on Friday said he would present a €19 ($24.1) billion program next week that would help the struggling car industry and invest in infrastructure.

More evidence of the slowdown was reflected in data released by the Eurostat statistics office.  It said consumer price inflation in the 15-country euro area fell this month by 1.1 percentage points to 2.1 percent.  Forecasters had expected a decline to just 2.3 percent."

Related Posts:

• France and Germany Clash over EU Economic Rescue Plans
• More Fiscal Stimulus Planned for Europe

China postponed a summit with the EU scheduled for next Monday in France because of planned visits between the Dalai Lama and European heads of state, the FT reported:

"The Chinese government requested the meeting be postponed because several EU leaders, including President Nicolas Sarkozy of France, were planning to meet the Dalai Lama, Tibetan spiritual leader, the EU said in a statement.

The bloc said it regretted China’s decision to call off the summit, due to take place in the French city of Lyon, given the financial and economic crisis spreading around the world.  'The EU, which had set ambitious objectives for the 11th EU-China summit takes note and regrets China’s decision.  The EU will continue to promote a relationship of strategic partnership with China, particularly at a moment when the global economic and financial situation calls for very close co-operation between Europe and China.'"

In December, the Dalai Lama will meet with Sarkozy in Poland as well as visit the Czech Republic and the European Parliament in Belgium.  Tensions between the EU and China have been particularly pronounced this year:

"Chinese anger over European leaders willingness to meet the Dalai Lama has put severe strain on its relationships with several capitals, including London, Berlin and Paris.

Relations between China and France, holder of the EU’s rotating presidency, have been especially fraught this year.  There were violent protests in Paris against the parading of the Olympic torch en route for Beijing following the repression of riots in Tibet.  Anger over French criticism prompted a boycott of French businesses and goods by Chinese consumers.  Mr. Sarkozy threatened to boycott to the games’ opening ceremony unless Beijing entered a dialogue with the exiled Tibetan leadership."

Reuters also noted increased strain on EU-China relations, especially over trade disputes:

"At a meeting between Asian and EU leaders in Beijing last month, the EU side backed a greater say for China in global financial bodies but urged China to use its clout to help to resolve the global crisis.  The mood for that meeting was strained by a decision a day earlier by the European Parliament to award its annual human rights prize to Hu Jia, a Chinese dissident jailed for subversion after testifying to the assembly last year.

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This month Brussels imposed anti-dumping duties on Chinese-made candles and non-alloy steel products and added tariffs to imports of some citrus fruits products.  China routinely denies it breaks trade rules and says Europe resorts to protectionism against its low-cost advantage."

Sarkozy intends to move ahead with plans to meet the Dalai Lama, a French official said.

Kosovo and Serbia have agreed on the deployment of the EU's policing and justice mission in Kosovo, EULEX, which is scheduled to take over from UNMIK as early as the end of this year.  Last week, Kosovar officials protested that proposals for a separate police force for ethnic Serbian towns within Kosovo was a violation of the young country's sovereignty.  Now, RFE/RL reports that Kosovo still rejects the plan in principle but is willing to cooperate:

"Ban Ki-moon said in a report that Kosovo had rejected his amended six-point plan for the deployment of EULEX, which Serbia has accepted. However, its government had indicated it was 'willing to cooperate with EULEX.'  Ban had instructed UN personnel to prepare for EULEX to take an enhanced operational role in Kosovo.

Police, customs officers, and judges in the Serbian-run areas of Kosovo would be under the UN umbrella, while their Albanian counterparts would work with EULEX.  Despite its pledge of cooperation, Kosovo has officially rejected Ban's plan as violating its constitution and resulting in a de facto partition of the fledgling state."

Reuters similarly stated:

"Russia and Western powers on the UN Security Council were negotiating behind closed doors on Tuesday in an attempt to clinch their first agreement on the issue of Kosovo since it seceded from Serbia.

Security Council diplomats, most of whom spoke on condition of anonymity, said they hoped to agree a statement supporting the deployment of a European Union law and justice mission in Kosovo to be adopted by the council as early as Wednesday."

Some are now questioning if the plan for two forces represents a de facto partition of Kosovo, although UN officials have rejected the idea.  As stated in an earlier post, it seems surprising that Kosovo is now against EULEX along with Serbia and Russia.

At a Monday meeting, Sarkozy and Merkel both agreed not to adopt the valued-added tax cuts enacted in the UK to stimulate spending, an interesting reversal from the leading role Brown took in October after unveiling his financial rescue measures.  However, this seems to be about all France and Germany can agree on.  The FT wrote:

"Mr. Sarkozy let slip his frustration with Berlin when talking about the need for fresh measures to support the economy.  'France is working on it, Germany is thinking about it,' he said.

There is intense irritation in the French government at Ms. Merkel’s reluctance to do more to support Germany’s growth with a fiscal stimulus, especially given Berlin’s sound finances."

Merkel remains insistent that Germany will not contribute further funds to any proposed EU-wide rescue package.  Deutsche Welle reported that, "Merkel's government has already pledged 1.3 percent of GDP to energize the German economy, but Brussels is to request a further 1 percent of GDP to help pull the continent out of the financial doldrums."

Furthermore, tensions between other countries in the union also persist, according to the IHT:

"Countries including Germany and France want all European countries, whatever their public finances, to spend 1 percent of their gross domestic product to stimulate growth, a figure that would work out roughly to a combined €130 ($167) billion.  This idea is opposed by countries like Latvia and Hungary, which argue that their financial situation gives them no room to cut taxes or increase spending.

Whether or not all nations are asked to meet the 1 percent target, the commission is expected to say that its budget deficit rules will be applied flexibly.  Member states will be given longer than usual to bring their budgets back into balance because of the exceptional circumstances."

The stimulus package is expected to be announced on Wednesday and submitted to EU leaders in December.

Related Post:

• More Fiscal Stimulus Planned for Europe – Peter Cassata

Last week, German Economics Minister Michael Glos said that the EU is planning a massive economic stimulus package to which all member states will be expected to contribute.  This was confirmed over the weekend with news that European Commission president José Manuel Barroso will unveil the details of the package Wednesday.  The FT reported:

"Coordinated national stimulus programs and accelerated spending of regional aid funds are the central elements of a European Union economic recovery plan to be unveiled on Wednesday by EU policymakers.

[Barroso] will set out the case that the EU can kill two birds with one stone by adopting expansionary fiscal policies that not only pull Europe out of its recession but also improve its long-term competitiveness."

Although Commission officials did not mention the size of the plan in their brief to EU governments, German sources claimed it would total €130 ($164) billion, roughly 1 percent of the EU's GDP.  Further details also emerged about the proposed package:

"[The EU’s fiscal rulebook, the stability and growth pact,] was reformed in 2005 to permit bigger deficits in times of economic distress, and EU policymakers say the Commission will be tolerant of rising deficits next year as long as governments make a firm commitment to balancing their budgets over the medium term – for example, by 2013.

For the EU’s less prosperous member states in central and eastern Europe, and depressed areas in western Europe, the Commission will propose to 'front-load' the distribution of EU regional aid funds.  These amount to €347 ($439) billion for 2007-2013, but some money allocated for 2011, 2012, and 2013 would be spent instead in 2009 and 2010.  The Commission will also endorse special help for Europe’s car and construction industries."

In the UK, Chancellor of the Exchequer Alistair Darling is expected to announce a further stimulus plan and tax cuts on Monday.  According to the IHT:

"The British government is expected on Monday to announce a cut in the sales tax as part of a package of measures to stimulate the economy.  According to media reports, Brown would temporarily cut the value-added tax by 2.5 points to 15 percent.

Including the cost of various tax breaks, The Sunday Times reported that the government would spend about £16 ($24) billion to keep the economy from slowing further.  The Sunday Telegraph put the cost to taxpayers at £15 billion to £20 billion."

In an interview with the BBC, Brown called the measures temporary and tried to relieve concerns that the increased spending would lead to higher taxes later.  With the EU's two largest economies already in recession and the U.S. expected to enter its own soon, the global financial crisis marches forward.

Related Posts:

• G20 Summit: The View from Europe – Peter Cassata
• Financial Crisis: The (Evolving) View from Europe – Peter Cassata
• Financial Crisis: The View from Europe – James Joyner

After a unanimous vote by the Security Council, the UN will send 3,000 additional peacekeepers to the MONUC mission in Democratic Republic of Congo, Reuters reported.  Given the UN's belatedness, the decision is a positive response to recent increases in violence in DRC.  However, the peacekeepers' rules of engagement have been questioned:

"Aid workers have criticized MONUC for lack of action in allowing a humanitarian disaster to develop in Congo's North Kivu province, where a quarter of a million people have fled recent fighting between the Congolese army and Tutsi rebels.

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France's UN ambassador, Jean-Maurice Ripert, who led negotiations on the French-drafted reinforcement resolution, suggested that MONUC needed to be more aggressive in protecting civilians and implementing its mandate.  'The rules of engagement, if they are strong enough, they are not being used strongly enough,' he said."

Furthermore, human rights groups are urging the EU to send its own rapid response troops as well because the UN deployment could take a couple months:

"While Congo's government and aid agencies welcomed the extra UN troops, some groups urged the European Union to immediately send a bridging rapid reaction force, citing likely delays of up to two months before the UN reinforcements arrived.

'The question still remains, what do we do in the interim?  The option of EU troops still has to be considered,' said Anneke Van Woudenberg, Congo researcher of Human Rights Watch."

The extra peacekeepers will be drawn mainly from Angola, Kenya, and Senegal.  The Independent describes the MONUC expansion in greater detail:

"The UN agreement, unanimously voted at a meeting of the Security Council in New York means 3,100 more troops will be dispatched. The UN peacekeeping mission, Monuc, is already the largest of its kind in the world with 17,000 soldiers but that covers an area equivalent to much of Europe and amounts to only 6,000 in the warring zone between the lakes of North and South Kivu."

On Thursday, the European Commission urged the EU to begin extraction of vast energy resources in the Artic.  Three member states – Denmark, Finland, and Sweden – possess territory in the region.  The FT said:

“The Commission’s initiative reflected concern about the risk of sharp rivalries among global powers in a region that is not governed by a specific international treaty regime and where no single country has sovereignty over the North Pole or the ocean around it.

According to the US Geological Survey, the Arctic accounts for about 22 per cent of the world’s undiscovered, technically recoverable resources, including 30 per cent of natural gas and 13 per cent of oil.”

In a report, the Commission stated:

“Arctic resources could contribute to enhancing the EU’s security of supply concerning energy and raw materials in general. However, exploitation will be slow, since it presents great challenges and entails high costs due to harsh conditions and multiple environmental risks.”

The recommendations follow recent debate over territorial claims in the Arctic as climate change causes polar ice to recede, making resource extraction easier.