The European Central Bank has announced a shake-up of responsibilities
among its executive board, putting new arrival Yves Mersch - formerly governor
of Luxembourg's central bank - jointly in charge of heading up plans for the
eurozone banking union alongside vice president Vitor Constancio.
Hungary's central bank has cut its interest rate - the highest in the
EU - for the fifth time in as many months. The Magyar Nemzeti Bank lowered the
two-week deposit rate to 5.75pc from 6pc, continuing a trend of lowering the
rate by a quarter point every month. The bank's president is due to appear at a
news conference this afternoon to explain the decision, which is perceived as
risky in the face of high inflation of 5.2pc.
Bloomberg reports that central bank chiefs from across the world are
set to meet as early as January 6 to revisit the terms of the Basel III rules
drafted in 2010. At the heart of discussion will be requirements on how much
liquid capital banks must hold as a proportion of their total balance sheet,
which the regulations say should be enough to survive a 30-day credit squeeze.
Central bankers, including ECB President Mario Draghi, say could drag down
interbank lending, and slow economic recovery.
EU lawmakers have admitted they will fail to meet the globally-agreed
January deadline for the implementation of tougher capital requirements on
banks. A meeting planned for today to thrash out the final details of a deal
after talks last week stopped short of full agreement has been postponed. The
move sees the EU join the US in delaying the introduction of the regulation,
known as the Basel III rules, which are widely expected to come into force one
year later than planned, in January 2014.
Spanish economy minister Luis de Guindos has revealed plans to fully
compensate those who lost investments by purchasing complex financial
instruments they did not understand. His plans will give the hundreds of
thousands of Spaniards misleadingly sold high-risk instruments a chance to claim
compensation for the losses which followed the banks' €37bn bail-out.
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Fresh data from the OECD show that Spain has narrowed the gap in “unit labour costs” with Germany by 5.5pc over the past year alone. It has clawed back 4.6pc against France and 6.6pc against Austria since late 2011, as it slashes pay and pursues a scorched-earth policy of “internal devaluation”.
Luis Maria Linde, the Bank of Spain’s governor, says that within two years the country will have recovered “almost all” the ground lost during the first disastrous years of euro membership. The total gain in competitiveness against the EMU bloc since 2008 has been 10pc.
Yet economists say it is far from clear whether Spain is chasing the right target or even whether it can recover within EMU. Deflation has pushed the numbers out of work to 26.2pc, with 55.9pc youth unemployment.
“This has come at a massive cost. If you put a whole generation out of work, you damage your trend growth rate for a long time,” said Marchel Alexandrovich from Jefferies Fixed Income.
“There will be more and more calls for drastic solutions if this drags on, with people asking whether the euro is fundamentally the right currency for Spain.”
Doubts remain over Spain's austerity miracle
Spain has made dramatic strides in cutting labour costs and reviving exports since the debt crisis erupted, turning the country into the new poster-child of Europe’s austerity regime.
Spain's austerity began in earnest with a 5pc cut in public sector salaries in 2010 Photo: AP
By Ambrose Evans-Pritchard
8:15PM GMT 20 Dec 2012
113 Comments
Fresh data from the OECD show that Spain has narrowed the gap in “unit labour costs” with Germany by 5.5pc over the past year alone. It has clawed back 4.6pc against France and 6.6pc against Austria since late 2011, as it slashes pay and pursues a scorched-earth policy of “internal devaluation”.
Luis Maria Linde, the Bank of Spain’s governor, says that within two years the country will have recovered “almost all” the ground lost during the first disastrous years of euro membership. The total gain in competitiveness against the EMU bloc since 2008 has been 10pc.
Yet economists say it is far from clear whether Spain is chasing the right target or even whether it can recover within EMU. Deflation has pushed the numbers out of work to 26.2pc, with 55.9pc youth unemployment.
“This has come at a massive cost. If you put a whole generation out of work, you damage your trend growth rate for a long time,” said Marchel Alexandrovich from Jefferies Fixed Income.
“There will be more and more calls for drastic solutions if this drags on, with people asking whether the euro is fundamentally the right currency for Spain.”
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Professor Charles Wyplosz from Geneva University said the strategy imposed by Germany and Brussels is misguided. “There is a pervasive view that lack of competitiveness in the South is the cause of the crisis, but these imbalances are just a symptom,” he said.
“Spain’s real problem was a housing bubble but it is an enormous waste of people’s talent – and a waste of money – to bring this to an end so brutally.”
Prof Wyplosz said the contractionary policies across the eurozone are making the task much harder. “There may be a miracle but it is more likely that Europe’s recession will continue through 2013 and 2014 and who knows how long after that,” he said.
Spain’s austerity began in earnest with a 5pc cut in public sector salaries in 2010. It deepened last July with the suspension of a “14th month” bonus, equal to a further 7.1pc cut. Even King Juan Carlos took a haircut.
The contrast with Italy is striking. The OECD data show that Italy’s labour costs have continued to ratchet up despite perma-slump and drastic fiscal tightening, falling even further behind Germany over the past two years.
“The picture for Italy is horrible. They are going in the opposite direction from everybody else,” said Raoul Ruparel from Open Europe. “Mario Monti never really made any progress on labour reform.” Mr Monti’s technocrat government failed to tackle the issue that has bedevilled Italy for 60 years, the rigid structure that mandates equal pay for workers in the cutting-edge Lombardy with the sleepy Mezzogiorno.
The reforms were watered down by the Left in parliament and ended in a compromise that gives judges the last say on who can be fired, and pleases no one.
Spain has at least followed the script written in Brussels, starting to clear away the clutter of restrictive practices dating back to the Franco era. The reforms are undoubtedly needed.
The country scores 44th on the World Bank’s ease of doing business, dropping to 136th for starting a firm, 100th for protecting investors, 70th for obtaining electricity and 64th for enforcing contracts.
Pockets of the Spanish economy are dynamic. Exports have grown at a blistering pace, driven by high-tech goods from the industrial hubs of the Basque country and Navarre. Shipments have risen 27pc since 2009 – comparable to Germany and far ahead of France.
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