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Ever since European central bank president Mario Draghi said the ECB will “do whatever it takes to preserve the euro”, market expectations have been raised for its meeting tomorrow.Now Alastair Newton, Nomura’s senior political analyst writes that even if the eurozone gets through August, September is the month that will be extremely challenging for policymakers.
After all September will see the Troika’s – the European Central Bank, the European Comission, and the IMF – report on Greece, the German constitutional court’s ruling on the ratification of the European Stability Mechanism and fiscal compact and so on.
The German constitutional court will rule on the ESM and fiscal compact in September. Till then Merkel is just trying to buy time
Merkel's long-term plan is unchanged and she is still trying to transfer sovereignty to Brussels with the goal of forming a fiscal union. Yet Germany's constitutional court could be the biggest threat to such a fiscal union.
The court's ruling on the fiscal compact and the ratification of the European Stability Mechanism are expected on September 12. While Newton expects the court to ratify the ESM, he expects challenges to the fiscal compact.
'We anticipate that the court might well find itself petitioned yet again in September, this time over the constitutional legality of the proposed pan- eurozone bank supervisor. The problem here stems from the need to ensure democratic accountability and legitimacy for the ECB in adopting such a role, which Mr Draghi told the European Parliament's Economic and Monetary Affairs Committee on 2 July should be vested in the European Parliament itself.'
Newton also thinks that Germany could support a banking licence for the ESM but not before September 12.
The Troika is releasing its next report on Greece in September. There is growing acceptance in Berlin of a Greek exit from the eurozone. 'Indeed, we believe that the German finance ministry's main focus now may be not on how to prevent a Greek exit but on how one could be exploited to shore up support for the Merkel game plan, both domestically and across the wider eurozone,' according to Newton.
In keeping with Merkel's plan for buying time Berlin could postpone certain deadlines for Greece but is unlikely to allow any more aid.
Political uncertainty in Italy is rising, Berlusconi looks set to take over as leader of PdL in September, threatening Monti's government
In Italy disagreements between the left and right in the ruling coalition have increased over reforms to the 2005 electoral law.
Moreover, is seems likely that former prime minister Silvio Berlusconi is set to take over as leader of main right-of-centre Il Popolo della Libertà (PdL) in September.
Italy's budget process is expected to be even more contentious than usual and could cause an early election. The only silver lining is that it might prompt Germany to 'cut Italy some slack' and keep Monti in power till April.
September elections in Netherlands are likely to result in an uncertain government that could challenge Merkel's game plan
Netherlands' September 12 election is likely to see the ruling, right-of-centre Volkspartij voor Vrijheid en Democratie (VVD) of Mark Rutte to win about 35 out of 150 seats. But coalition negotiations are likely to see a left-of-centre minority government led by Partij van de Arbeid (PvdA).
This basically means with different parties supporting different issues, political instability is set to rise in the country. Eurosceptic Socialistische Partij (SP) is gaining favour and this is likely to make solutions to the euro crisis, especially regarding support for peripheral nations, even more challenging.
What's more this could cause a domino effect and cause Finland and Austria to follow suit and making Merkel's game plan for a fiscal union even more challenging.
Portugal is likely to try and re-negotiate the terms of their bailout in the run up to its budget proposals in October
Things in Portugal are getting worse, after the country's constitutional court struck down a critical austerity measure leaving the government to find €1 billion savings in 2013. And this comes at a time when Portugal is already missing its fiscal targets.
The country doesn't seem likely to return to bond markets in 2013 and is likely to try and re-negotiate the terms of its bailout before the parliament's 2013 budget proposals are introduced in October.
'Although to date Portugal has been attracting positive headlines under its programme, thanks to consistent praise of its progress by the Troika, budgetary slippage and increased political uncertainty look likely to be casting the country in a somewhat different and -- for markets, especially -- more worrisome light within the next few weeks.'
Investors and voters are beginning to question political leadership in Spain after the last round of austerity measures. The government faces three main challenges 'which look likely to come to a head imminently':
- Anti-austerity protests are likely to gather steam after summer.
- Spain has committed to publish the bank audits by September, though they could be out as early as this week, and this will be closely watched by markets.
- Relations between the central government and Spain's regions is likely to worsen as more of the regions seek aif from a €18 billion austerity fund.
So, while Germany has contingency plans in place for a bailout for Spain, Germany and Spain are likely to try and avoid this.
Cyprus has been in negotiations with the Troika for a bailout since June 25, while Slovenia insists that it doesn't need aid but failed to pass legislation to assure markets that it wouldn't create problems for the eurozone.
Deterioration in either economies will however pique market concerns and add to the troubles of European policymakers.
After European Central Bank president Mario Draghi's pledge to 'do whatever it takes to preserve the euro', markets expect the ECB to step up and act. Newton sees two reasons for a shift in behaviour by the ECB:
- There is a growing probability that Spain could shut itself out of sovereign bond markets and that Italy could soon follow.
- The troika -- the European Central Bank, the European Comission, and the IMF -- report on Greece expected in early September is likely to be negative and could prompt a Greek exit from the eurozone.
And Draghi's statement has been backed by German chancellor Angela Merkel and finance minister Wolfgang Schauble
Given that German chancellor Angela Merkel typically avoids making public comments on the ECB's actions, it was surprising to see her and finance minister Wolfgang Schauble back Draghi's pledge. From Newton:
'This latest development supports our view that the ECB is preparing to step back into the sovereign bond market alongside EFSF (initially, pending ratification of ESM), and that Germany's political leaders are looking to minimise the risk of a related backlash from -- if not to actually secure the support of -- the Bundesbank.'
Any Bundesbank opposition would question the ECB's credibility in markets and could push the eurozone into a deeper crisis. Newton believes the an open statement from Germany showing such support would be 'politically explosive' so markets will continue to face uncertainty. But German government backing could extend to ECB purchases of sovereign debt and to quantitative easing.