EconomicRecoveryWatch31March2010

Centre For European Studies
ECONOMIC RECOVERY WATCH

Last updated on 30/03/2010 To view full articles click on hyperlinks.

CONTENTS
WATCHTOWER

EU MEMBER STATES

WORLDWIDE

INSTITUTIONS

EPP VIEWS

OUR COMPETITORS' VIEWS

FROM THE BLOGOSPHERE…

www.thinkingeurope.eu


“Watchtower”
Eurocrisis: The Heart of the Matter
Foreword by CES Head of Research

“Madame Nein”, “Europe’s new Iron Lady” – there was no lack of ominous descriptions of Angela
Merkel in the wake of last week’s European summit, at which she is largely considered to have
unabashedly asserted German interests at the cost of European solidarity. Let’s take a closer look at
the facts.

Germany has been more self-confident about articulating its national interests in the EU for some time
already. In principle, this tendency to not always be the “model student” of European integration any
more began at the end of the Kohl era, in the second half of the 1990s: Especially in economic matters
like industrial and regional policy, German politicians and diplomats risked conflicts with their fellow-
Europeans in order to push specific national interests. This intensified with Chancellors Schröder and
Merkel. Germany’s decent economic growth after 2005 and its relatively good performance in the
global crisis since 2008 have contributed to an amazing absence of the gloom and angst which has
been the norm in postwar Germany for so long.

So far, so good. But a few weeks ago, European voices about Germany’s European behavior took on a
new tone of urgency: The Euro crisis hit home. It began with an angry spat between German and
Greek media and some politicians, in which some Germans played around with the stereotype of
Mediterranean laziness, and some Greeks conjured up memories of Germany’s brutal occupation in
the Second World War. Next, French Finance Minister Christine Lagarde openly criticized Germany’s
strength in exports and suggested that other EU countries’ growth perspectives suffered from that.
She proposed the German government should stimulate domestic demand at the expense of
monetary stability. But on the same weekend, the British weekly The Economist ran a title story with a
14-page special about “Europe’s Engine”. All in all, the article was positive about Germany’s
“Rhineland capitalism” while also claiming this was due to rather “Anglo-Saxon” reforms in the labour
market and smart corporate restructuring in recent years. And it did criticise that Germany made
insufficient use of its migrants’ potential.

In the run-up to the EU summit on 25 March, that was the background music to which Angela Merkel
seemed to clash with the rest of the EU over an emergency plan to save Greece from default – and
thus the Eurozone’s coherence and viability. Her three initial demands were to not commit to an
immediate and concrete rescue plan for Greece (not denying that this may become necessary once
Greece would be in direct danger of defaulting), to turn to the IMF instead of setting up a European
Monetary Fund, and to toughen the sanction mechanisms of the Stability Pact in order to make
default crises of individual Eurozone countries less likely in the future. In the end, the Chancellor



secured the first two of those points, whereas a rewrite of the Stability Pact (which would require
changes in the Lisbon Treaty) was excluded, at least for the moment.

While most of the other member states invoked EU solidarity as a principle, argued that turning to the
IMF was shameful for Europe and damaging to the Euro’s standing, and while some saw a dangerous
German egoism dawning, the German government argued that its proposals were not only good for
Germany, but also good for everyone, and even good for Greece. In fact, more EU members, mostly
from the North, were in agreement with this than dared to say openly. Informally, some began talking
of a North-South divide in the EU. In the end, like so often in decisive turns of EU history, a Franco-
German compromise was the precondition for a summit consensus.

There was also, without doubt, a strong domestic component in Chancellor Merkel’s line: German
public opinion is indeed strongly opposed to bailing out others with German money, as they see it.
And in seemingly opposing a majority of member states and getting most of what she wanted, she
may have avoided defeat in pivotal regional elections in North Rhine Westphalia in May. She also
quoted difficulties with Germany’s Constitutional Court in case of bailout commitments. But she
distanced herself quite clearly from the anti-Greek rhetoric of some of Germany’s media. Not only for
that reason, the talk of a new German egoism is vastly exaggerated.

In the end, a split was avoided that would have caused an earthquake in financial markets. But the
Euro crisis is far from over – it may still take a fatal turn if Greece and/or other countries actually
default. Moreover, the crucial debate about the originally French idea of a gouvernment économique,
which these days also has a lot of resonance in the Brussels bureaucracy, has only just begun. This
term was included in the first draft of the summit conclusions but in the English version it was
“economic governance” – much closer to the idea favoured in Berlin, of a stronger Stability Pact as
well as a closer coordination of fiscal policies and better macroeceonomic cooperation in the Council,
both of course outside the competences of the Commission. But can you have a monetary union
without fiscal and ultimately even economic union? The nagging question remains, and it will make for
passionate debates in the years to come.

And here we come to the heart of the matter. This is more than just a Franco-German disagreement.
This is also more than a debate about solidarity. This is about how to organize Europe’s economy in
the 21st century. In the end, it is centralism vs. subsidiarity. Seen from one particular angle, a central
economic authority makes the whole more efficient, and may prevent crises like the current one. But
there is a price to be paid, and many Europeans are rightly afraid that it is much too high.




EU Member States
Austria
In reaction to the recently announced government plans regarding a “bank solidarity tax”, Vienna
Insurance Group (VIG) chairman warned that customers would be the most affected by such a move,
as 80 per cent of the money managed by insurance companies belongs to the customers. Meanwhile,
the government is at odds over details of planned tax, while bank bosses remain rather tight-lipped,
even if a new poll has revealed wide support for the tax. On a related topic, Austrian national bank
(OeNB) Governor warned that 2010 would be a third year of economic crisis rather than the first year
of economic recovery. Although predicting that Austria would have economic growth of 1.5 per cent
this year, he added that consumer demand would stagnate and unemployment would increase at least
in the first half of 2010. The governor also doubted that the expected tax increases aimed at reducing
the budget deficit would affect the recovery very much, while mentioning that the best stimulus for
the EU’s economy would be depreciation of the “over-valued euro.” In the private banking sector,
Austrian media have been speculating for weeks about a Raiffeisenzentralbank (RZB) merger with its
sister bank Raiffeisen International (RI). Regarding the real estate sector, Immofinanz managed to
keep its turnover stable in the first three quarters of its 2009/2010 business year, after having
suffered losses of 1.754 billion euros in the first three quarters of the previous business year.

Belgium
Belgium’s recovery from a deep economic recession is likely to be slow and fragile, the International
Monetary Fund (IMF) International Monetary Fund said on 15 March; it also warned that the banking
sector in particular needed to be closely watched. In its review of Belgium’s economy, the IMF said it
was important that government liquidity support for banks was withdrawn only gradually to avoid a
credit squeeze, which would slow the recovery further. The IMF underscored the need for Belgium to
map out a “credible” medium-term adjustment to put the country’s public finances back on solid
ground and address problems of an aging population. It supported the government’s plan for a
balanced budget by 2015 and welcomed efforts to take additional actions, if needed, to reach the
deficit target for 2011 and beyond. Turning to Belgian banks, the IMF said the banking sector had
stabilised thanks to massive liquidity support by the government, but that banks remain vulnerable to
possible spillovers from mature and emerging European markets. In particular, Belgian banks are
highly exposed to France, the US, Britain and the Netherlands. Furthermore, non-performing loans
have increased rapidly from countries like Ireland and Spain, which suffered major recessions.

Bulgaria
Ivan Kostov, leader of the Democrats for a Strong Bulgaria party, has strongly opposed proposals to
increase the country’s VAT by 2 per cent for the period of one year. He believes that the results of
such an action would be opposite to triggering Bulgaria’s recovery from the crisis. The idea to raise
VAT 22 per cent was supported by the centrist party of the former king Simeon Saxe-Coburg, which




was a junior coalition member in the previous government. The party also advocates
a significant decrease in social security (by 3 percentage points). Moreover, it is said that Bulgaria will
not be able to recover from the crisis unless there is a cut of approximately 10 per cent in the state
officials’ salaries. In the current situation, the country is set not to return to economic growth in 2010.
Experts claim that 2011 is the earliest possibility for Bulgaria to join the bloc’s exchange rate
mechanism. If this is the case, the country will be able to join the eurozone no sooner than in 2014.
Currently, the country’s banking sector is in a fairly good condition, but this could quickly change if the
percentage of “bad loans” increases. There is also a serious threat that the effect of the Greek
financial crisis will spill over in Bulgaria, as Greek banks hold 28 per cent of the country’s market. The
Bulgarian lev is linked to the euro at 1.9558 rates.

Cyprus
Members of the government of Cyprus have voluntarily accepted the reduction of their earnings by 10
per cent, in a gesture aimed at boosting the economy of Cyprus, by trimming state spending. The
decision was announced by the Cypriot President Demetris Christofias, who gave a press conference
on the two years of administration. Christofias said that the 10 per cent reduction in annual earnings
would be applicable to the President, the cabinet, the Undersecretary to the President, the
Government Spokesman, the Presidential Commissioner and the President’s Office Director.
Christofias noted that the government implemented a series of measures to reduce the repercussions
of the crisis on time, and is ready to take more measures. He said that these measures would amount
to 500 million euro and would be targeted at maintaining the growth of the economy and had to do
mainly with constructions’ and tourism sector. The President said that Cyprus has lost a billion euro
due to the drop in tourist numbers and in consumption. Christofias mentioned that Cyprus’s public
debt of 55 per cent of GDP and its external debt are among the lowest in the eurozone. In the
meantime, a fully revised and upgraded Cyprus Shipping Taxation System, which had been submitted
for official approval in January 2010, was approved by the European
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CzechcRepublic
To fulfill the Czech Social Democrats´ (CSSD) promises ahead of the end-May general election would
cost 650 billion crowns over the four-year term and result in state bankruptcy, Petr Necas, ODS deputy
chairman and election leader said. He replaced party chairman Mirek Topolanek as ODS election
leader last week when Topolanek stepped down over the controversial statements he made for the
gay magazine LUI about Jews, homosexuals and the church. Daily Hospodarske Noviny also wrote that
the cost of the CSSD promises would amount to 47 billion crowns. However, the daily paper estimated
the cost is lower than the ODS. Necas also rejected a post-election grand coalition government with
the CSSD, saying that the CSSD rejects reforms and the need to fight against the state debt. The ODS
says the CSSD´s most costly plans include the return of maternity benefits to last year´s level,
guarantees for pensions at the level of 55 percent of net pay, the payment of a one-off sum of 2400
crowns (about a quarter of the average pension) to pensioners, changes in social insurance and
payment of health fees in state hospitals. On the other hand, the Czech Civic Democrats (ODS) have




pledged to support part-time work, work from home, jobs for school-leavers and elderly people in its
package of measures against unemployment. The package also promises support to the unemployed
who wish to open a business. The promised measures would create 170,000 new job opportunities in
the private sector without burdening the state budget, the ODS says. Unemployed people who would
start business would be allowed to keep their full unemployment allowances. However, an
unemployed person would be able to use this measure only once in ten years. It promises an annual
social insurance relief worth 7,200 crowns to companies for each part-time job they provide to a
parent with children and to people aged over 55, school-leavers, disabled people and students. The
ODS is considering restricting subsidies to the people who leave a job on their own. The ODS does not
plan to increase either taxes or people´s contributions to social insurance. In the upcoming weeks, the
ODS plans to disclose its proposals for a more just welfare system, for running businesses and for
tackling debt.

Denmark
According to the financial daily Børsen, Danish banks have taken advantage of both the state’s bank
packages and their private customers last year. A total of 88 billion kroner was raised through interest
rate income for financial institutions during 2009 – 5.4 billion more than in 2008. Many economic
commentators are now strongly criticising the banks which – at a time when Denmark is in its worst
financial crisis since World War II – have managed to make significant gains. On the other hand, the
paper also reports that the cost of borrowing is at an all-time low, and actual interest rates are now so
low that it is in essence free to obtain a one-year variable mortgage loan. Real interest rates currently
sit at minus 0.5 percent, while payments to mortgage credit institutions are around 0.5 percent – the
two figures offsetting each other at nil. Børsen also reports that losses for bankrupt financial
institution EBH Bank and its EBH fund will total around 6 billion kroner. At the same time, the
Financial Supervisory Authority said that the bank had been reported to police for manipulation of its
stock values in the period up to the bank’s collapse in autumn of 2008. A total of around 300 million
kroner was made through the illegal purchase of EBH Bank shares, according to the FSA. Police and the
Public Prosecutor for Serious Economic Crime will now determine whether charges can be upheld
against EBH Bank and also against Dexia Bank, which allegedly aided EBH executives in the purported
fraud.

Estonia
An IMF team visited Tallinn from 23-29 March to jointly review with the authorities the economic
situation and assess policies, especially in the fiscal area. The mission concluded that the Estonian
economy is emerging from a severe recession. After a cumulative output decline of almost 20 per cent
in 2008-09, they project the resumption of modest growth in 2010. According to the IMF, thanks to an
extraordinary effort at all levels of government, especially in the last months of the year, the 2009
fiscal deficit was contained well below the Maastricht limit. Estonia is moving closer to winning
approval to adopt the euro, undeterred by the Greek debt crisis that is continuing in the region,
European Commission President Jose Manuel Barroso said. Barroso also said that Estonia will be
judged on the basis of its own performance and the recent developments in other euro-area member
states will not influence the commission’s assessment. A commission recommendation is scheduled




for May 12, with a final decision by EU government leaders in June. Rebounding from last year’s 14.1
per cent slump in economic output, Estonia says it met the euro’s debt, deficit and inflation targets in
2009 and will remain within the limits in 2010. Prime Minister Ansip cut the budget by 9 per cent of
gross domestic product last year, leaving the deficit at an estimated 1.7 per cent of GDP, below the 3
per cent limit for euro users. Estonia is aiming for a 2.2 percent deficit in 2010. The commission
warned on 17 March that possible revenue shortfalls put that target in jeopardy. According to
Statistics Estonia, in January 2010 exports of goods grew by 11 per cent and imports declined by 3 per
cent compared to the same month of 2009. The increase in exports was mainly influenced by the
steep growth in the dispatches of oil products and fuel oils. Credit rating agency Fitch was also
positive about Estonia and put Estonia’s BBB+ rating, three notches above non-investment grade to a
positive watch, and raised the rating outlook to stable last month.

Finland
The Governor of the Bank of Finland, Erkki Liikanen, says that the Finnish economy is recovering more
quickly than the bank had previously predicted. This year, Finnish GDP is growing 1.6 per cent,
according to a survey on prospects for the Finnish economy. The recovery stems from an
improvement in the world economy. GDP will not reach the 2008 level even at the end of the forecast
period, 2012. The central bank expects the employment situation to remain largely unchanged in the
coming years, with an average unemployment rate of 9.1 per cent for the years 2010 to 2012.
Although recovery has set in, the state debt is expected to reach EUR 77.7 billion by the end of the
year. The Finnish government plans to restore the tax on sweets and to increase the tax on soft
drinks. The idea is now to introduce the tax bill to Parliament in September with the new taxes coming
into force in 2011 at the earliest. In addition to sweets, the proposals call for tax to be levied on ice
cream as well.

France
On 25 March, France and Germany agreed on a standby aid plan for Greece, with a French official
saying the deal opened the way for bilateral loans to be made available under a system mainly
involving the eurozone, but also using IMF money. Last month Sarkozy and Merkel had pledged to
reinforce their alliance and boost economic governance in the wake of the financial crisis, but soon
after some of French Economy Minister Christine Lagarde’s remarks revealed the gap between the
two countries over how best to tackle the Greek crisis and other strains in the eurozone. Lagarde
urged Germany to expand domestic demand because its large trade surplus threatened the
competitiveness of other eurozone economies. Regarding plans about European Monetary Fund
(EMF), the French Economy Minister has not ruled out this option, but said it could take years to set it
up and that it was not a priority. Lagarde also supports an EU plan for closer inspection of credit
default swaps on sovereign debt, while mentioning that although she had no evidence of manipulation
using these instruments being behind Greece’s problems, she still found the “rapidity of the
movements intriguing.” In the field of domestic politics, Prime Minister Francois Fillon has declared
that the French government remains completely committed to cutting the swollen public deficit, even
after the severe defeat for the centre-right in regional elections last weekend. Finally, French lenders




have said that France’s economic recovery is unlikely to bring a renewed appetite for consumer loans
this year, as rising unemployment and an easing of government support heighten French tendencies
to save rather than spend.

Germany
Speaking ahead of the EU summit on 25 March, Chancellor Angela Merkel urged EU leaders to agree
that IMF and bilateral European aid could be used as a “last resort” for Greece if it reached the brink
of insolvency. Merkel said Germany was prepared to sanction a mix of the two measures to bail out a
country if it could no longer fund itself on capital markets. Germany and its European partners have
been clashing over financial support for Greece, with EC President Barroso asking Merkel to rise
above domestic politics and agree on a financial safety net for Athens, noting the Euro’s stability was
in Germany’s interest, something that the Deutsche Bank Chief Executive had also agreed with
previously. On a related topic, the head of the think tank Ifo told Reuters that a European Monetary
Fund risks skewing the incentives of debt-ridden eurozone countries, thereby endangering the stability
of the euro. In the lending sector, Germany’s state backed lenders LBBW and Hypo Real Estate
remained deep in the red in 2009, hit by heavy loan losses, signaling a long slog before a return to
health can take place. Credit rating agency Fitch said earlier this month that it expected mainly the
state sector banks and maybe one or two other lands banks to turn to run-off institutions or “bad
banks” to restructure their toxic assets. Having learned from cases such as Hypo Estate and others,
Germany plans to introduce a levy on bank assets to fund future bailouts and hopes it will raise about
1 billion euros per year, as coalition sources declared to Reuters; however, analysts doubt the fund will
be big enough to stabilize the banking sector in a future crisis. Finance Minister Wolfgang Schäuble
said the charge would be a “kind of insurance” but should not affect banks’ performance. The move
raises the chances of the G20 agreeing on levies at a summit in June, but also marks the final nail in
the coffin for a Tobin tax on financial transactions which has been rejected by the US and Canada.

Greece
Greece is going to take advantage of last week’s favorable developments at the European Union
leaders’ summit to raise billions of euros in order to fund its sizable borrowing needs this week,
although it is likely to pay the punitive interest rates it was trying to avoid. However, its success in
borrowing at much better terms in the future clearly depends on its ability to jump-start the economy,
and the signs are not good. The aid package is likely to convince potential buyers of Greek bonds that
the country can count on financial backing and therefore that they will not risk losing their money
should the country default, at least in the foreseeable future. But it is not based on concessions and is
only available under certain conditions, putting pressure on the government to meet its deficit targets.
As part of the scheme, one third of the funds would be supplied by the Washington-based
International Monetary Fund. The fund’s exact role in the scheme has yet to be publicly clarified. The
involvement of the IMF has prompted questions as to whether PASOK would be asked to bring in
more public spending cuts and tax hikes. However, Greece to date has not asked for money and many
cabinet members are reportedly vehemently opposed to IMF involvement. Prime Minister George
Papandreou avoided reference to IMF aid in a 22 March parliamentary debate on the economy. There,



Papandreou suggested that Greece is not a “beggar” and can weather the crisis under its own steam.
Miranda Xafa, a former International IMF board member, said Greece will have to implement even
tougher measures, with or without IMF involvement, as the tax hikes and cuts to public sector
remuneration enacted by the government so far will not be enough.

Hungary
The International Monetary Fund has completed its fifth review in Hungary, and made $1.1 billion
available. Hungary has made progress by prudent fiscal policies that have helped strengthen investor
confidence, the IMF said, adding that this could also contribute to a further cut in the key rate from
the current 5.75 per cent. A Reuters poll conducted between 22 and 25 March showed that the
market has raised its deficit forecast for 2010 for the sixth month in a row. According to the consensus
forecast of analysts, the central bank (NBH) will continue its rate cut cycle, with only three of the 27
respondents projecting unchanged rates. Industrial production was up 3.4 per cent year-on-year in
January and by 5.7 per cent according to working-day adjusted figures, the Central Statistics Office
announced. The increase from December was 8.8 per cent. The rebound in production was boosted by
improving export sales, which rose an unadjusted 13.4 per cent from a low base.

Ireland
The Irish State is to take control of AIB. Brian Lenihan, Irish minister of finance, says that 16 billion
euros of tax revenue will have to be redirected in order to keep the banks afloat. It is an addition to
the 11 billion euros spent to help Anglo Irish Bank and Bank of Ireland in 2009. The bank’s executives
still do not support the minister’s plan, even if Mr Lenihan is not planning to nationalise AIB
completely. Lenihan has becomes less patient with them in his statements recently, stating that “if
executives cannot live with a government stake of more than 70 per cent, they have the option to
move on”. It is a clear sign of the government’s concern over the amount of time it is taking to tackle
the crisis in the Irish banking sector, the cost of which is expected to be much higher than estimated in
September 2009. The real consequences of minister Lenihan’s solution will be known no sooner than
around 2020.

Italy
Even if 2010 is set to be a difficult year for the company, the Italian car manufacturer Fiat is expected
to reach the targets set for it, as sectors of the Italian economy improve and return to normality. The
group is set to earn approximately 50 billion euros, and trading profit will amount to 1.1-1.2 billion
euros. However, if any industrial debt rises above the level of 5 billion euros, net profit will be
minimal. The company is expected to achieve its best results in the automotive and component
departments. In response to the political and trade union attacks on Fiat for its decision to go abroad,
the group’s CEO has said that it was made in order to strengthen the company’s position on the
market by expanding its base operations, and not in an effort to go against Italian interests.

Latvia
Latvia’s trade deficit was the widest in five months in January as the recession damped demand and
exports fell. Bloomberg quoted Statistics Latvia saying that the shortfall totaled 76.8 million lats,
compared with 69.7 million lats in December. Exports fell 14.7 per cent from the previous month,




while households and businesses are purchasing fewer imports as they adjust to shrinking incomes
and rising joblessness. The unemployment rate hit 19.7 per cent in final three months of last year.
Gross domestic product shrank 16.9 per cent in the fourth quarter, the slowest pace of decline last
year, as exports and manufacturing begin to recover. Exports increased 4.7 per cent on an annual
basis, the statistics office said.

Netherlands
The Netherlands’ contribution to an eventual EU loan to Greece would be 800 million to 1 billion
euros, the Volkskrant newspaper reported after the deal reached during the latest EU summit. Prime
Minister Jan Peter Balkenende said the agreement was “totally justifiable” and that he would defend it
vigorously in parliament, knowing that a majority of Dutch MPs are opposed to giving emergency
bilateral loans. In other news coming from Brussels, the EC has told the Netherlands to come up with
measures to get its budget deficit and national debt back under control. Regarding Dutch reactions to
Brussels developments, Central Bank President Nout Wellink has declared that there needs to be an
independent investigation into all the steps taken by EU competition commissioner Neelie Kroes
against banks which have been bailed out by governments. On a related topic, Central Bank board
member Lex Hoogduin warned that politicians should leave the current mortgage interest tax break
system intact because of the difficult position facing the housing market. If politicians are still
determined to press ahead with reform even after the elections in June, Hoogduin suggested that they
should wait until the housing market is healthier and take a long transition period. Last, but not least,
MPs from across the political spectrum have asked caretaker Finance Minister Jan Kees de Jager to
comment on revelations that ING is avoiding paying value added tax by diverting contracts through
Switzerland.

Poland
The National Bank of Poland (NBP) claims that Poland does not need money from the International
Monetary Fund. The Ministry of Finance does not agree with this line, as the funds from the IMF
would increase the official currency reserves that reached 62.6 billion euros at the end of February
2010. NBP’s Management is convinced that Poland’s situation is good enough for the country to leave
the group of countries supported by the IMF and join those countries that help others overcome the
effects of the global crisis through the IMF. In order to proceed with such a move, agreement between
the Polish government and NBP is necessary. However, the Ministry of Finance claims that the
situation of the world economy is far from stable and the IMF’s flexible credit line (FCL) is a stabilising
factor which makes Poland more credible for foreign investors. Other news is that Polish consumers
will have to pay more for books and food, and residential real estate will be more expensive from 1
January 2011. Consequently, an average family of four will have to increase its expenses by 10-15 per
cent. This increase will be the result of a VAT to 22 per cent, raising the VAT rate for food and housing
from 3 per cent and 7 per cent respectively – an agreement reached at the time of Poland’s accession
to the EU. The original deadline for this increase was 2007, which was later on postponed to 2011. It is
possible that Poland may apply for a further extension.




Portugal
Fitch ratings cut Portugal's sovereign credit rating by one notch to AA- on 24 March, citing budgetary
underperformance in 2009, and warned that a similar outcome this year and next could cause another
downgrade. The change highlighted concerns that the debt troubles that have affected Greece will
move to other of the euro zone’s weaker economies, although the agency did mention the
government’s long-term budget austerity plan was broadly credible and it did not expect political
instability to upset the passage of the necessary legislation. After the decision, the finance ministry
urged the opposition to support the government’s austerity plan to send a clear signal to calm jittery
investors about the country’s public finances. Portugal’s largest opposition party PDS has promised to
abstain in a vote on a resolution of support for the budget, which would allow the ruling Socialists to
pass the document in parliament. Fitch’s AA- rating is now comparable with Moody’s Aa2 rating and
both are above S&P’s A+ and, as one bond analyst expert from Credit Agricole in London emphasized,
Fitch’s ratings were in the middle of Moody’s and S&P’s, so the downgrading should have minimal
material impact. Nevertheless, the move triggered the euro to fall to fresh 10-month lows against the
dollar, with European stocks turning negative.

Romania
Ratings agency S&P has revised Romania's credit outlook to stable; Romania’s previous outlook was
negative, and the change comes after government measures to comply with international loan
agreements with the IMF and the EC. The news comes amidst several positive results released by the
National Statistics Institute and Eurostat, ranging from a decreasing inflation rate (down to 4.49 per
cent in February from 5.2 per cent in January), to increases in industrial output (6.8 per cent in
January year on year), as well as growing exports (19.8 per cent year in year to 2.3 billion Euros in
January). Nevertheless, Romania's GDP dropped in the last three months of 2009 by 6.5 per cent
compared to the same period, while a new poll released by GfK shows that sixty per cent of
Romanians say their families’ financial situation was worse in February than a year earlier and nine in
ten Romanians fear unemployment will rise this year. However, some of the unemployment fears
seem unfounded, as another poll, this time by recruiting company Manpower, shows that one in ten
employers in the country expects to hire new employees in the second quarter.

Slovakia
The year-on-year growth of consumer prices remains at historically low levels. According to data from
the Slovak Statistics Office, inflation in February was 0.4 per cent on an annual basis, which is the same
figure as in January. Consumer prices did not change in monthly terms. The output of Slovak
construction companies continues its decline. After consecutive shrinkage throughout all months of
2009, except in August when output increased by a mere 0.1 per cent year-on-year, the downward
trend continued in January 2010 with construction output recorded as 8.1 per cent less than January
2009, the Slovak Statistics Office reported. The poor development is ascribed to low demand for
almost all kinds of construction projects, financing limitations and unfavourable weather conditions, as
well as other persisting effects of the financial crisis. Slovakia’s unemployment rate rose to a five-year
high of 12.97 per cent in February 2010, the Labour, Social Affairs and Family Centre reported on 19




March. The number of beneficiaries eligible for unemployment benefits in Slovakia rose in February
after going down for five consecutive months. However, the good news is that Slovakia might win six
new foreign investors from the engineering and electrical engineering sectors, the Hospodárske
Noviny economic daily wrote on Monday, March 15, with the main one being an Indian firm producing
electric cars which should create around 1,000 jobs in western Slovakia. Furthermore, the Chinese
company Guangzhou Echom Science & Technology plans to build a new production plant in the
western Slovak town of Nové Mesto nad Váhom. The investment should cost about 29 million euros
and should create 500 jobs. The new plant is to produce pressed plastic parts for TV sets.

Spain
Bank of Spain Governor Miguel Angel Fernandez Ordonez said before the EU summit he hoped for a
deal to resolve Greece’s financing crisis. Ordonez, who is a member of the ECB’s governing council,
said he thought the Greek government’s austerity plan was serious and tough, but that the Greeks
would need help implementing it. Earlier, Spanish bank BBVA Chairman said that Spain will be one of
the few economies to shrink in 2010 and its exit from the crisis will be difficult due to an
unsustainable public deficit, the explosive growth in public debt and the deterioration of a large part
of the financial system. Some economists worry Spain’s poor economic prospects could eventually
lead it to suffer Greek-style financing problems, only on a much larger scale given that the Spanish
economy is the eurozone’s fourth-largest. Some key factors to watch in the following months include
more banks failing, deficit cuts falling short of meeting their targets, unions blocking labour reforms or
a loss of confidence in the government.

UnitedvKingdom
With general elections expected on 6 May, many are saying that Alistair Darling’s budget is more of a
political manifesto than a business plan. The UK budget deficit is currently at 11.8 per cent GDP. The
government’s goal is to reduce it to 50 per cent within 4 years, on condition that GDP growth will
increase by over 3 per cent starting from 2011. Mr Darling has attempted to rescue UK finances and
manage the economic recovery without allowing citizens to be affected by the poor economic
situation. Since the banking sector is seen as responsible for the crisis, Darling has already imposed a
one-off tax on banks on discretionary bonuses above £25,000, which should generate an additional £2
billion at the end of 2009. The next step, among others, will be the introduction of an annual tax
proportionate to the size of a bank’s balance sheet, which will collect £5 billion more. He also intends
to force RBS and Lloyds Banking Group – where the government has significant shares – to raise the
budget for business lending by £94 billion. These and other solutions may pay off politically, but their
economic impact may not be enough, as the recession will more than likely be followed by a weak and
drawn-out recovery, especially since Britain has suffered from the crisis much more than many other
rich countries all over the world. The UK economy has decreased by 5 per cent in 2009 - the largest
fall since the Great Depression. This fall was smaller than in Japan, Germany or Italy, but it lasted
longer than in any other G7 member.




WORLDWIDE

Brazil
Policy makers at Brazil’s central bank have said that they are ready to raise rates in order to curb
inflation pressure in light of data highlighting the strength of the country’s economic rebound. Job
figures released last week appeared to confirm this rebound, with an increase in unemployment that
was less than analysts had predicted. The central bank has predicted growth of 5.5 er cent in 2010,
even if inflation expectations have been rapidly on the rise.

China
China’s increasing influence in the Asian region is silencing Asian governments from applying pressure
on it to strengthen its currency, as they fear damaging repercussions if they challenge the world’s
fastest growing economy, Reuters reports. China has stressed that a decision to unshackle the Yuan
would depend on conditions at home, despite increasing pressure from Washington and the IMF for it
to take the necessary measures. The Yuan has been at a flat rate against the dollar since mid 2008
despite its economic recovery in 2009, which has granted it an edge over export competitors and
greatly limited their room for maneuver. And it appears that Europe too is unlikely to join any vocal
chorus against on China, as amidst talks on the Greek crisis and financial concerns closer to home
there seems to be little appetite to get overly involved in the issue. Unlike the U.S., however, which is
said to be preparing a report due to appear in April branding China a “currency manipulator.

India
Indian shares reached a 25-month high, as sentiments were boosted by earning optimism and firm
global equities. Experts were divided on future Indian market prospects, however, with some pointing
to eurozone concerns that could potentially cause problems for the market in the future. In other
news, analysts have forecast a 10.6 per cent rise in pay for India this year, led, for the most part, by
companies supplying domestic markets as opposed to those relying on exports as in the past.
However, it is unlikely that the benefits will be felt by all, as prices, particularly food prices, continue to
soar. Inflation has increased almost seven-fold since last October, with the food inflation rate for
February alone at 17.8 per cent. Some experts have therefore advised companies to be cautious with
their wage increases, as these could in the long-run serve to exacerbate the situation.

USA
More optimistic prospects on the horizon for Greece following the deal struck in Europe at the end of
last week have contributed towards a fall in U.S. government debt prices. As a result, Wall Street was
set for a higher open for the day, with Greece preparing to launch a sovereign bond issue. In other
news, U.S. consumer spending rose during the month of February for the fifth month in a row, even if
this did not take analysts – who for the most part had been expecting the 0.3 per cent increase – by
surprise. However, even if it failed to make a major impact on U.S. financial markets, it is still a positive




sign for the U.S. economy, commentators maintain. Elsewhere, stagnant U.S. incomes have
contributed towards pushing saving levels down to an annual rate of $340 billion, their lowest level
since October 2008.

INSTITUTIONS
European Parliament: A majority of MEPs now believe that the financial sector should be obliged
to pay its debt back to society by contributing towards the costs of the economic recovery, possibly in
the form of a financial transaction tax. On the 10 March 536 MEPs succeeded in having a resolution
on this passed, and called on the Commission to explore what the impact of implementing such a tax
would be. On March 17, the Parliament’s Employment Committee also discussed the potential impact
of introducing minimum incomes in Member States, ahead of a report to be published by Portuguese
leftist MEP Ilda Figueiredo (GUE/NGL). Figueiredo has said that "poverty is an infringement of human
rights", and has recommended that a minimum income directive be introduced in Europe. A discussion
of the report will be held on the 27 April, and the Committee will vote on it in June.

European Commission: At the first formal meeting of representatives of EU Member States on the
EU2020 strategy that the Commission unveiled last month, European leaders agreed to increase
cooperation on economic policy in an effort to boost growth over the coming years, with an increased
supervisory role for the Commission envisaged. Greater cooperation on the part of Member States
would be necessary, they agreed, in order to tackle the long-term challenges of the economic crisis, as
well as to confront those of the ageing population, climate change and globalisation. Quantitative
targets for increasing employment, boosting R&D investment and meeting environmental challenges
were decided upon, and it was agreed, on the recommendation of the Commission, that different
national targets for each country should be set. These targets will then be analysed in June in order to
determine if they are capable of reaching the overall goals, although disagreements on the targets to
be set for education and poverty still persist. The EU will be monitoring the development and
performance of these ‘national reform programmes’, with detailed plans to be submitted by each
Member State. The Commission has also been charged by the Council with developing suggestions as
to how best to improve economic coordination between three Eurozone Member States. Commission
President Barroso also expressed his satisfaction at the agreement reached on Greece by EU Heads of
State during the European Council last week. Referring to the plan developed to rescue the
Mediterranean country as a “historical” one, he stressed that it was a success both for Greece and for
the financial stability of the eurozone as a whole. He appealed to G-20 leaders not to “water down
their ambitions" ahead of their next summit, and stressed that "fresh ideas" will still be the essential
to project’s success.




International Monetary Fund (IMF): The head of the IMF Dominique Strauss-Kahn has said that
better coordination of economic policy is key to strengthening Europe’s common currency. At a
debate in Warsaw, Strauss-Kahn and other experts agreed that the financial crisis has exposed the
weaknesses of the European policy framework that have existed since the introduction of the euro,
and recommended that economic governance in the eurozone be strengthened. He stressed the
necessity of correct implementation of the Lisbon agenda on the part of all Member States, as well as
the importance for Europe of looking outwards and ahead. The IMF Head said he remains positive on
the whole about Europe’s long-term prospects, and urged policy makers to turn the current challenge
into an opportunity. In other news, the IMF has announced that it will increase the availability of
financial sector data, in line with the growing consensus that gaps in data have majorly contributed to
the global economic crisis. It will do this by modifying and broadening the data included in the Special
Data Dissemination Standard (SDDS), a tool developed in the 1990s to further the dissemination of
financial data across member countries.

EPP Views
Leader of the EPP Group in the European Parliament Joseph Daul has commended EU Member States
for allowing solidarity to prevail over national interest in relation to the Greek crisis, congratulating
them on the “brave solution” that they have come up with after last week’s negotiations in Brussels.
He said that the European states had come together to tackle the issue “like a family”, and welcomed
the renewed European commitment to greater economic coordination that has been made. He
stressed that the most important lesson for Europe is that it must be prepared to change its attitudes
when called upon to do so, and to take responsibility upon itself when needed. Daul expressed his
support of Member States’ renewed commitment to reinforcing budgetary supervision, and indirectly,
therefore, of easier imposition of sanctions on negligent countries in the future. Prior to this, after the
European Parliament adopted its 2009 Annual Report on the eurozone and public finances on the 25th
of March, Sophie Auconie, MEP and EPP Group Rapporteur, called again for greater European
economic coordination. The benefits of a common currency and the actions of the European Central
Bank have already proven their worth in this crisis, she stated, but major economic and social
imbalances in Europe persist. Coordination of European budgets is needed to tackle this, as well as
permanent and political economic governance.

On the same day, José Manuel Fernandes, MEP and EPP Group Spokesman on the Resolution on
'Priorities for the 2011 budget procedure, other sections', explained that the priority of the EPP Group
is to secure “a sustainable budgetary policy and a detailed justification for each expenditure" in the
upcoming budget, and that it therefore proposes “the abolishment of the purely incremental
budgetary model” and the implementation of “a zero-base budget that enables efficiency and
savings". MEPs have also voted overwhelmingly to adopt a report by EPP MEP Sidonia Jędrzejewska
stressing the importance of issues of youth and education, support for young workers and
entrepreneurs, innovation, equal opportunities and regional development, among other things.




OUR COMPETITORS’ VIEWS
S&D
Prior to developments at the end of last week, Head of the Socialists and Democrats in the European
Parliament Martin Schulz declared that EU leaders should show more solidarity towards Greece.
According to him, Greece has “done its job” by developing and implementing its austerity programme
– something which, according to him, other European Heads of State have not. He pointed in
particular to German Chancellor Angela Merkel, declaring her to be chief amongst those failing to keep
their promises. He expressed his belief that recourse to the IMF should not be pursued, and that a
solution should instead be sought within the eurozone itself. This came after praise from S&D
quarters earlier in the month for the measures undertaken by Greece to tackle its financial crisis.
Support for Greek Prime Minister Papandreou was strong after what was described by S&D members
as an “impressive performance” at a European Parliamentary hearing in March, with Stephen Hughes,
vice-president in charge of economic and social affairs. In other news, the S&D Group succeeded in
having a report urging EU Member States to fulfill their Official Development Aid (ODA) commitments
to developing countries passed by a margin of 5 votes. The report, which was drafted by Spanish S&D
MEP Enrique Guerrero, proposes the establishment of a tax on financial transactions, as well as debt
cancellation for the poorest countries, among other things. Earlier in the month S&D MEPs expressed
dissatisfaction at the EU2020’s project to create jobs and boost economic recovery, criticising it for
lack of precision and concrete proposals.

ALDE
ALDE welcomed the deal struck by EU leaders on a solution to the Greek crisis during their two-day
meeting last week, saying that it has finally put an end to a “dangerous uncertainty” existing in
Europe. However, ALDE continues to stress the short-term nature of this solution, stating that Europe
will have to develop a longer-term crisis response as well. According to the party, this would
necessarily include the establishment of a European Monetary Fund, as well as the creation of a
common market for bonds. Of fundamental importance too would be the strengthening of the EU
2020 strategy, which, according to ALDE, is currently too loosely coordinated to achieve its long-term
goals.




FROM THE BLOGOSPHERE…

Not a great leap forwards, but not a bust up either: the Charlemagne columnist comments on the
rescue to the Greek crisis

The euro's big fat failed wedding: Gideon Rachman elaborates on the situation of the euro currency
nowadays.

With the marginalised Brits in Brussels: Gideon Rachman comments on the increasingly marginal role
played by Britain in the European Union.

Are Spain and Italy next in line?: Edin Mujagic asks what European states are next in line for major
economic difficulties.

Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff
Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Additional Assistance: Diana Wasilewska, Ioana Lung, Patricia Murrayvvvvvvvvvvvvvvvvvvvvvvv ,,,,,,,,,,,
Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Questions and comments: briefs@thinkingeurope.eu


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