Merkel Won but Reforms Failed

The German election – actually the most important EU election – ended in Angela Merkel’s victory. On the other hand, the election ended in the defeat of a strong right-wing policy. It seems that Merkel is willing to create a big and strong coalition with German socialists and, as it is in politics, it means a lot of compromises in the field of economy, austerity measures and social policy. This can slow down or prevent any reforms which are needed in Germany, as much as in any European country. It means that we will still see great involvement of taxpayers’ money in saving the Euro and periphery countries. What is interesting is the outcome of the so-called Germany’s Eurosceptic Alternative for Germany (AfD) party, which finally is not in parliament, but which stole voters especially from Christian Democrats (230 000 from CDU) and  Free Democrats (330 000 from FDP).

Plik 12-03-06-cebit-eroeffnung-angela-merkel-21.jpg znajduje się w Wikimedia Commons – repozytorium wolnych zasobów.

We definitely need a strong Germany. Especially, if there are so many problems within the EU. Italy is still in the political crisis mode because of Berlusconi. Any political weakness could trigger big problems for the serving of the country’s debt. The Italian prime minister said that “Italy is a reliable country with a budget and debt under control” but I do not think that anybody believes him. The country has a plan to continue fiscal consolidation and maintain the deficit under control, and the government is also working on the country’s labor market reform to encourage companies to start hiring. But as usual there are more words and promises, but there is not much action.

Allegedly, France has announced unprecedented cuts in public spending for 2014. The only problem is that it is worth only 15 billion euros. It is not much if you realize that it represents approximately 3.3 % of all the spending of the central government. So, calling it unprecedented is a little bit strong. 80 % of these savings will come from ministries of defense, finance and environment. Only 20 % of the savings will come from tax increases. State spending, which will reach 57.1 % of GDP this year, is expected to drop to 56.7 % in 2014. On the other hand, public debt will reach a record 95.1 % of GDP in 2014 because of smaller GDP growth.

And, as is customary with Greece, the Troika once again has doubts about Greek projections for the primary surplus this year and the next one, which will be either minimal or nothing. The same is true for Greek projections for the primary surplus of 1.5 % of GDP at the end of next year. But do not worry. It is just a matter of time and everything will change because 4 % growth is coming. Once again. And once again next year.

The financial crisis has turned almost one in ten of the UK’s 2.5 million companies into the so-called “zombie” companies which face insolvency. Zombie businesses have soared by 108 % in the last five years, to 227,000. These companies are able to produce at their very best only enough cash to service their bank and supplier debts; they have liabilities far in excess of their assets and yet collectively employ around 500,000 people. And this is also one of the reasons why the Bank of England cannot increase interest rates. Once this happens, all of these companies will go bankrupt faster than you will be able to count to three. Unemployment and the damage to healthier companies, which are their business partners, could be even worse.

China’s economy is probably growing at an annual rate of 4 %, said Marc Faber. He continued: “I said to an economist: I think China is growing at 4 % per annum, and he said: do you mean minus 4 %?” It is probably exaggerated but there are still more and more investors who are very skeptical about numbers from China which declares economy growth by 7.7 % last year and the outlook for this year is targeted at 7.5 %. And it is interesting that we are not the only ones who see the currency wars. Surprisingly, there exist politicians who claim the same. 60 US senators signed the letter to protest against Japanese currency manipulation. The only mystery for me is why they forget that it is not only the Bank of Japan, but also the US via their massive quantitative easing policies and monthly bond purchases that manipulate the currency.

The US Federal Housing Administration will likely need a cash infusion from the U.S. Treasury. The agency that offers private mortgage lenders guarantees against homeowner default is predicted to face a shortfall of $943 million for the fiscal year that ends on Monday. But the biggest issue in the US is the debt limit problem. Treasury Secretary Jacob Lew said that the government has time only till 17th October, leaving the United States just $30 billion cash on hand to pay its bills. It means that the US will be unable to pay all of its bills. The US reached its $16.7 trillion debt limit in May this year. Since then, it has been using the so-called “extraordinary measures”, which consist of suspending U.S. investments in federal employee trust funds ($300 billion), just to give an example. So, we will probably see an interesting quarrel between Democrats and Republicans, which, at least in my opinion, will end in increasing the debt limit. But who knows. Maybe we will see the shutdown of the most powerful government of the world. This, however, is not very likely.

Matus Posvanc