July 4 2012

Socialist government plans windfall tax on big businesses, France chooses ‘tax-based retrenchment’, Germany hit by euro services slowdown, Christine Lagarde: not in the mood to renegotiate with Greece…

Powered by Guardian.co.ukThis article titled “Eurozone crisis live: France raises taxes to tackle deficit” was written by Graeme Wearden, for guardian.co.uk on Wednesday 4th July 2012 14.14 UTC

3.01pm: Suggestions this afternoon that Spain might announce another raft of austerity cutbacks soon and tax rises soon, worth €30bn.

From Reuters:

“The idea is to cut the cost of the public service, freeze pensions, cut unemployment benefits,” one source said

More details here.

Mariano Rajoy’s government needs to make significant further cuts to hit its deficit targets, economists believe – €30bn would go a fair way to reducing the annual borrowing towards the EU’s 3% target.

2.33pm: Speaking of banking scandals, a fraud case has been opened in Spain has been opened into former executives at Bankia – the financial group which was bailed out in May.

The lawsuit accuses 33 officials, including ex chairman Rodrigo Rato, of several serious charges – including price-fixing, falsifying accounts, and fraud.

As reported this morning, public anger against the Spanish financial sector is raging, with protests outside the Barcelona bourse today.

2.12pm: Alert: the UK Treasury Select Committee has just begun its hearing with Bob Diamond over the Libor scandal My colleague Andrew Sparrow is live-blogging it here.

1.55pm: From Dublin, Henry McDonald gets intouch with more details of today’s rise in Irish unemployment:

A further 2,700 people joined the dole queues in Ireland last month, the Republic’s Central Statistics Office said today. It means Ireland’s unemployment has raised from 14.7% in May to 14.9% in June.

Ireland’s Small Firms Association (SFA) described the figures as
“disappointing, but not surprising”.

“While we have seen some job announcements in recent weeks, the live register figures clearly show action to date is not enough to stem the tide,” said SFA spokesperson Avine McNally.

“These figures show that our labour market is fragile and the overall figures highlight the huge challenges that are being faced to get people back to work.”

City analyst have described Ireland as the big winner of last week’s EU summit. Tomorrow it will try to sell £500m of three-month debt for the first time since its bailout – a test of investor confidence (although admittedly even Greece can sell 3-month Treasury bills).

1.26pm: Some photos from the negotiations in Cyprus today over its bailout have just arrived:

This image shows finance minister Vassos Shiarly in the centre (in front of the cameraman). Other key people in the room include Delia Velculescu (second on the left) who is leading the Troika mission, and EC official Maarten Verwey (fourth left).

12.57pm: Our correspondent in Paris, Angelique Chrisafis, has written about the challenge facing François Hollande as the opponent of ‘Eurozone austerity’ faces the challenge of balancing the budget.

As Angelique explained earlier this week, Hollande will struggle to simply put the burden on large companies and the rich:

The state auditor, who failed to lay the blame for France’s economic gloom at the door of the last right-wing government, said tax rises must be balanced with a closer look at public spending. It recommended the government consider tough decisions over how to trim the fat off the public sector, at 56% of GDP the eurozone’s biggest. Proposals included cutting jobs in the civil service, on both a national and local level, and ending tax breaks and loopholes.

So while Hollande hopes to hire 60,000 new teachers, he will pay for it by cutting the same number of other government posts.

12.30pm: Here’s some expert reaction to the revised French budget announced today (see 11.47am for details) from Nicholas Spiro of Spiro Sovereign Strategy:

Fiscal consolidation has taken centre stage in France and, in the short-term at least, it will be tax-led.

While the spending restraint announced by Mr Ayrault [France's PM] this morning is by no means negligible – annual rises in public expenditure will be capped at 0.8% for the next five years – the government will focus its efforts on revenue-raising measures to meet its budget deficit target of 3% of GDP in 2013.

While this won’t be old-style tax-and-spend socialism, it will be a tax-based retrenchment.

The message that Mr Hollande seems to want to convey is that if he’s forced to undertake deeper austerity measures, then it will be mainly through soak-the-rich policies. France is committing itself to austerity with a strongly socialist flavour. There’s a sharp break, politically and to a lesser extent economically, with Mr Sarkozy’s more business-friendly fiscal policies.

We believe that, politically speaking, Mr Hollande is better placed to implement austerity in France. However, in terms of reforms and competitiveness, France is moving in the opposite direction to Spain and Italy.

As long as there’s no pressure on France’s bond market, the government is unlikely to pursue the kind of product and labour market reforms which France requires in order to address its “peripheral” weaknesses and become more competitive vis-à-vis Germany.

Indeed, French 10-year bonds are trading at a yield of 2.5% today, offering less than half the return on the equivalent Italian bond.

11.47am: The French government has announced €7.2bn of new taxes this morning, as part of François Hollande’s plans to lower France’s deficit.

Around half of the revenue come from windfall taxes on large French companies, and higher income tax on the richest.

With French GDP expected to grow below target in 2012, Hollande’s revised budget – presented to parliament today – includes €1.1bn of taxes on large banks and on energy firms. Another €2.3bn will come from French citizens who have a net weath of €1.3m.

Without the tax rises, France will fail to cut its budget deficit to 4.5% this year (from 5.2% in 2011), admitted finance minister Pierre Moscovici. He told journalists in Paris that:

For several months the new government has been preparing to confront an extremely difficult economic, financial and social situation.

Hollande’s socialist administration says it is planning to make spending cuts in next year’s budget too. It is aiming to eliminate its budget deficit by 2017, with the national debt peaking at 90.6% of GDP next year before falling back as economic growth picks up.

11.21am: Germany and the UK both sold five-year bonds without any problem this morning, as the two AAA-rated countries continues to find plenty of buyers for their debt.

The Bundesbank raised almost €3.3bn though its sale of bunds maturing in 2017, at yields of just 0.52%. Bond traders said the auction was very strong.

Britain’s Debt Management Agency sold £4.5bn of five-year gilts at an average yield of 0.942%, and received orders for another £2.25bn of bonds.

Low borrowing costs do reflect concern that the wider economy is in weak shape, as well as the risk that other countries could default. In the case of Britain, yields have also been pulled down by the Bank of England’s quantitative easing programme*

* – critics of QE have taken to comparing it to the Libor scandal (which kicks off at 2pm today when MPs begin quizzing Bob Diamond). It’s a curious idea – QE is hardly a secret. It’s true that savers and those buying annuities suffer from such low yeilds, but it’s also fair to think that the UK economy would be in even worse shape without QE.

11.08am: Gloom in Ireland – the jobless rate has risen again.

Data released in the last few minutes showed that another 2,700 people signed on in June. That pushed the total of benefit claimants up to 446,000, raising the unemployment rate to 14.9% (from 14.7% in May).

This is much higher than the eurozone average of 11.1%.

10.58am: The euro just hit its lowest level in 11 and a half years against the Swedish krona, after Sweden’s central bank (the Riksbank) voted to leave interest rates unchanged.

The euro’s also fallen against the dollar this morning, to $1.257, as currency traders anticipate an interest rate cut from the European Central Bank tomorrow.

10.29am: Speaking of Cyprus (see also 10.16am), there are reports this morning that a €10bn bailout may be needed just to repair its banks.

Daily newspaper Phileleftheros says the provisional figure (more than half Cyprus’s annual GDP of nearly €16bn) was calculated by IMF officials, and relayed to the Cypriot cental bank yesterday.

Reuters has more details.

10.16am: As a troika visit also gets underway in crisis-hit Cyprus, our correspondent Helena Smith says president Demetris Christofias is unveiling the island’s policy priorities in a hotly awaited speech before the European Parliament in Strasbourg.

Helena writes:

The veteran communist is telling the European parliament that during its six-month stint in the EU presidency hot-seat, Cyprus will focus on creating “a better Europe.”

Christofias told MPs that Nicosia will seek to contribute with all its powers towards the construction of a Better Europe, with social cohesion, prosperity, security and growth, with more visible benefits for the prosperity of European Citizens.

The leader who has been a vocal opponent of the “neo-liberal” fiscal policies meted out to bailed out countries by the EU and IMF insisted that “produced wealth should be distributed in a more fair way. More Social Europe, that is what we need.”

Cyprus has also produced a policy paper, arguing that the European Union needs to emerge stronger from the current economic crisis and reinstate its place in the international scene. Here is a flavour:

Austerity measures are important in order to restore the confidence of the markets and to ensure stability; but in parallel it is imperative to take active measures in order to promote inclusive growth and job creation. The Union needs to be closer to its citizens and communicate a message of hope and solidarity to them, with social sensitivity … the driving force for the essential reforms should be the fundamental principles and values of the Union.

Christofias’s priorities include completing a “fair and effective” EU budget to “support growth and enhance employment opportunities”, during a presidency that coincides with the 20th anniversary of the Single Market. The policy paper also argues for a deeper internal market, calling it “an important element for stimulating economic growth and advancing the European economy.”

10.02am: Pensioners are demonstrating today outside the Barcelona stock exchange, and protesting that they were deceived by the Spanish banking sector into buying dud stocks.

Barnaby Phillips of Al Jazeera has tweeted a picture from the scene:

Spanish investors have suffered badly in the crisis, with shares hitting a nine-year low. The Bankia crisis (the bank was partially nationalised less than a year after flotation), has added to the anger.

9.42am: More downbeat service sector data, this time from the UK, where the monthly PMI came in at 51.3 in June – the slowest level of growth in eight months.

Better than the rest of the eurozone (see 9.02am), but another sign of a wide service sector slowdown last month.

Brian Hilliard of Societe Generale pointed out that the Diamond Jubilee Bank Holiday may have hit activity, but believes the underlying picture is still weak.

The data makes it even more likely that the Bank of England will announce new stimulus measures tomorrow, after its monthly meeting on monetary policy.

Howard Archer of IHS Global Insight believes that the data suggests the UK economy kept shrinking in the last three months, by 0.1%. That would mean the recession had lasted for three quarters. He added:

The survey gives a further late prod to the Bank of England’s Monetary Policy Committee to go for some more Quantitative Easing on Thursday and we expect them to announce a £50 billion extension.

9.24am: Mario Monti has insisted that he is still committed to “budget stability”, in what could be an attempt to calm German jitters before this today’s meeting with Angela Merkel in Rome.

In an interview (in German) with business newspaper Frankfurter Allgemeine Zeitung, Monti denied that the agreements made at last week’s summit meant he had triumphed over Merkel (as Italy did over Germany in the Euro 2012 football. tournament)

Instead, Monti argued, the message is that:

Angela plus Mario equals a step forward for European economic policy.

Monti also called the Summit package a “compelling package”, and insisted that he was a dedicated supporter of budget stability, adding:

Not for nothing I’m personally often viewed as “very German” in Italy.

9.02am: Some rather poor economic news from Germany was just released, with the service sector contracting slightly last month.

The German services PMI came in at 49.9, down on May’s 51.8, and just into contraction territory for the first time since last September, according to Markit.

That suggests that the core of the eurozone is now feeling the full impact of the crisis.

France’s service sector suffered a deeper decline with a PMI of 47.3, which was however an improvement on May’s 44.6 (and better than Spain – see 8.21am).

Despite Germany’s decline, the overall eurozone service sector PMI improved slightly to 47.1 (from 46.7 in May).

As this graph shows, the eurozone composite PMI (the measure of activity across services, manufacturing and construction), nudged a little higher last month to 46.4, from 46.0 in May. That’s still a contraction, of course.

8.45am: European stock markets are generally down this morning, a reversal after several ‘up days’.

FTSE 100: down 14 points at 5673, – 0.25%
German DAX: down 18 points at 6559, – 0.28%
French CAC: down 17 points at 3253, -0.55%
Spanish IBEX: down 39 points at 7180, -0.54%
Italian IBEX: down 137 points at 14357, -0.94%

Traders have returned to worrying about the state of the European economy, rather than taking too much optimism from last week’s Summit.

8.21am: Spain’s service sector has shrunk for the 12th month in a row, as the Spanish recession deepens.

Data just released by Markit showed that its services PMI (a measure of activity in the sector), came in at just 43.4 in June. That’s well below the 50 point mark that separates expansion from contraction, showing another fall in activity.

On the upside, it’s an improvement on May’s 41.8. But as this graph of composite PMI (including manufacturing and construction) shows, such a sharp decline means that Spanish GDP must still be shrinking….

… and that makes it even harder for the Madrid government to address its debt crisis.

Update: But as jamesmitch flags up in the comments below, there was one piece of good news for Spain yesterday: the unemployment total fell by almost 100,000 in June. Many of the new jobs were probably short-term (related to tourism), and economy minister Luis de Guindos advised against getting too carried away. But it’s a welcome sign.

8.14am: Christine Lagarde has already raised the tension ahead of today’s talks in Athens, by saying she is not considering renegotiating the terms of Greece’s bailout agreement.

Interviewed last night, the managing director of the International Monetary Fund said the Troika is in Athens to check on Greece’s progress, not to offer more concessions.

Lagarde told CNBC that:

I’m not in a negotiations or renegotiations mood at all. We are in a fact-finding mood. I’m sure they will have excellent numbers to show in various directions.

I’m very interested in seeing what has been done in the last few months, in terms of complying with the programme.

The fear, though, is that Athens has fallen behind the plan agreed back in March, when its second aid package was agreed.

There’s a full transcript of Lagarde’s interview here.

8.06am: Here’s today’s agenda:

The Troika talks in Athens will begin with a meeting with finance minister designate Yannis Stournaras – 9am BST, or 11am EEST
Greek PM Antonis Samaras meets with coalition partners Evangelos Venizelos and Fotis Kouvelis at 11am BST, or 1pm EEST

Angela Merkel and Mario Monti meet in Rome: press conference expected around 3.30pm BST.

On the economics front:

• Eurozone service sector PMI – 9am BST
• UK Services PMI – 9.30am BST
• Eurozone retail sales for May: 10am BST

Bond sales this morning:

• UK sells £4.5bn of five-year gilts
• Germany sells €4bn of five-year gilts

8.00am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.

Coming up today … officials from the IMF, European Central Bank and the European commission are beginning talks with Greece’s officials today, as their visit to Athens gets officially under way.

While the Troika will be assessing what progress Athens has made in implementing its second international bailout, the new Greek government will probably be pushing for some concessions. We’ll be tracking developments as the two sides meet.

Elsewhere, Angela Merkel and Mario Monti will hold talks in Rome this afternoon – the first time they’ve met since the EU summit (where Italy’s prime minister wrung some serious concessions out of the German chancellor).

Another Troika visit is taking place in Cyprus today over its planned rescue.

We also have new economic data from Europe’s service sectors to look forward to, and bond auctions from the UK and Germany.

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