Politics

Brexit: financial markets continue to anticipate a smooth outcome

UK Prime Minister May suffered another defeat last week in the House of Commons and right now we have no idea as to what happens next. What we do know is that another vote will be held in Parliament on 27 February. It is still unclear whether this will be merely a vote on another government proposal or the so-called meaningful vote; in other words, the vote on the EU exit agreement. Right now, the first seems the more likely scenario. Although there is theoretically nothing to prevent Prime Minister May from repeatedly presenting her deal to Parliament, she will, however, do her utmost to avoid another defeat. May is therefore unlikely to present her deal unless there is a realistic chance of gaining Parliament’s approval. This is only conceivable under two conditions: either a) the EU makes the concessions required by the UK Parliament or b) Parliament no longer…

Spain facing new elections

In Spain, the lower house of the Spanish parliament rejected Prime Minister Sánchez’s draft budget by a clear majority on Wednesday. The Catalonian separatist parties, on whose support Sánchez’s minority government depends, voted against the budget along with conservatives and liberals. Sánchez had previously rejected the independence parties‘ demands to oppose, among other things, legal proceedings against the separatist leaders over the Catalan independence referendum in October 2017. So, new elections are very likely – again! Sánchez plans to make a related statement after a cabinet meeting today. Possible election dates are 14 or 28 April or 26 May, when Spaniards also vote in European, regional and local elections. Based on current surveys, the Socialists would represent the strongest faction in parliament, although a parliamentary majority would remain a long way off. Even a potential coalition with the left-wing populist Unidos Podemos currently only achieves around 40%. It is to…

“Sovereign-bank nexus” a bone of contention

The problem of the “sovereign-bank nexus” has still not been resolved nine years after the European sovereign financial crisis began. Far from it: the most recent results of the EBA stress tests show exceptionally strong home bias for Europe’s banks – which is even higher in the periphery than it is in core Europe. The preferential regulatory treatment for EU government bonds in bank balance sheets as well as the liquidity ratio requirements are causing increased demand for government paper. While the share of all outstanding government bonds held by domestic banks has fallen in recent years in most countries, with the exception of Italy and Greece, this is a result of high demand from the ESCB due to the PSPP. If the ECB decides to reduce its balance sheet in the medium or longer term, there is a danger of a shortage of demand for government bonds in the…

Spain: Strong growth despite political logjam

Little seems capable of shaking the Spanish economy at the moment. With a quarter-on-quarter growth rate of 0.7% in the fourth quarter of 2018 the Spanish economy even managed to accelerate compared to the summer months (third quarter 2018: plus 0.6%). This is a respectable result bearing in mind the fact that Spain’s major trading partners such as Germany, France and Italy delivered a rather weak performance in the second half of 2018. Conspicuous here is how little the country’s ongoing political weakness has impacted its good economic performance. The incumbent social democratic government under prime minister Pedro Sánchez may be described as anything but effective. With just 84 out of 350 seats it is the smallest minority government in the whole of Europe. This makes it almost impossible for it to carve out its own independent economic and welfare policy profile. The Sánchez government is reliant on the toleration…

Italy: populist alliance on shaky ground

The populist coalition in Italy is faltering increasingly. While M5S (Five Star Movement) and Lega were singing from the same hymn sheet last autumn in the fight against the budgetary requirements laid down by Brussels, the relationship between the coalition parties is now marked mainly by dispute. The conflicts revolve on the one hand around the migrant policy, as the right-wing populist Lega favours a particularly tough stance against immigration. On the other hand, major dissent surrounds both economic and financial policy as well as transport policy. Lega is going along somewhat grudgingly with the government plans on guaranteed basic income, while the left-wing populist M5S is opposed to expensive infrastructure projects such as the rail connection between Turin and Lyon (total cost of EUR 26bn). Although both government partners have so far denied they are eyeing up a coalition, breakup, media reports state that Lega is already sounding out…

USA: Jobs being created, but consumer expectations dampened

In January, the number of employed persons in the United States rose far faster than expected, as is revealed in the latest labour-market report. The total came to 304,000 persons, and of that figure no less than 72,000 of the jobs were in manufacturing. In the service sector, almost all segments benefited, whereby the leisure-time, hospitality and healthcare sectors really stood out. This momentum is unlikely to persist in the coming months, or so the slightly cooler economic climate would suggest. Firstly the temporary shutdown of some federal agencies and secondly the updated estimate for the total population both left their mark on the jobless statistics, which are calculated separately on the basis of phone surveys. An unemployment rate of 4.0% is reported for January. Since the prior monthly data have not been recalculated, the ratio is not directly comparable with the previous month. Irrespective of these statistical adjustments, it…

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