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Tuesday 28/10/2014

According to budgets they published this month, France and Italy are failing to meet the Euro area requirements for reducing Government debts and deficits to sustainable levels. Italy has given an indication that it will meet the European Commission half way and make some  further adjustment, but France is taking a harder line.

If France, as a big country making up 20% of the Euro area’s  GDP, were to be exempted from the EU debt and deficit rules, in ways that were not open to smaller  euro area countries, this would do great damage to the credibility of the euro, and  could drive up to the interest rate euro area governments must pay to borrow. It is thus very important to all EU states that France overcomes it’s problems.

In recent years, France has lost competitiveness, and  is  running a balance of payments deficit. In other words its people are spending more abroad, that than they are earning from abroad.

The French economy is projected to grow by only 1% in 2015, as against a projected growth of 2% in Germany and Spain, 2.7% in the UK, and almost 3% in Greece and Sweden.

The loss of competitiveness of France is due to several factors

Thursday 23/10/2014

Germany runs a current account (trade) surplus which is almost twice that of China. (The actual figures are USD 278.7 bln USD for Germany and 164.8 bln USD for China according to latest official data). Although this may be viewed as a sign of growth and competitiveness of the German economy, one should go beyond the headline reading and look at both the causes of this performance and its long term implications.

In very simple terms, a trade surplus is defined as the difference between a country's exports and imports - in other words, it is the difference between consumption of the country's goods and services by citizens of other countries less the consumption by citizens of the country of imported goods and services.

Monday 20/10/2014

I  have been in Hangzhou in the past week attending a Global Investment Conference organised by Euromoney. Hangzhou was for a time the capital of China and the biggest city in the world. It is about 200 km from Shanghai, or an hour’s journey on the high speed train, a trip that I was told costs only 10 euros. Hangzhou was a centre of the silk business and was visited by Marco Polo. Silk from Hangzhou went along the ancient Silk Road all the way to Europe, thereby making Hangzhou one of world’s first globalised economies.

I spoke in Hangzhou just as the Asia Europe Economic Meeting (ASEM) of heads of Government was taking place in Milan. As the President of the European Council, I attended the first ever ASEM meeting in Bangkok in 1996. I met the Mayor  of Hangzhou and key commercial and political figures.

Since 2010 there has been a huge surge in outward investment from China in the rest of the world, jumping from 6.1 billion euros to 27 billion euros in just three years. This investment is going into  buying high tech companies, companies with globally known brands, and tourist resorts (like Fota in Cork). Just as China’s export drive enabled it, not only to gain income but also to gain market knowledge, this wave of investment is also designed to strengthen China’s global competitiveness and sophistication.

Sunday 12/10/2014

Bond markets are notoriously fickle. They often seem to be driven by sentiment rather than deep analysis. The experience of 2006-2008 shows that they are not infallible. They are not a good guide to long term economic prospects. Rating agencies seem to follow sentiment rather than lead it. They are like a bus driver who is looking out the back window of the bus rather that at the road in front.

This is the context in which France and Italy should be assessing the wisdom of submitting draft budgets this month to the European Commission, in accordance with the Stability and Growth Pact,  that go back on commitments they had previously given to reduce their budget deficits to below 3% of GDP.

The low rate of interest at which most European governments can borrow at the moment can be explained by two factors, which are not necessarily permanent:

Friday 10/10/2014

This week’s developments regarding the allegations of fraud and money laundering against Lukoil’s operations in Romania are an excellent case-study of EU politicians’ positions towards Russia. It highlights the difference between the EPP-affiliated, pro-European President Traian Basescu, and the Socialist, pro-Russian Prime Minister, Victor Ponta. We now see who walks the walk and who just talks the talk. It also shows a powerful Russian company trying to threaten and blackmail an EU member state; it just happens that in this case, the company’s position is very weak.

On 6 October 2014 Romanian prosecutors seized assets of a Lukoil refinery in Romania for allegations of fraud and money laundering amounting to 230 mil EUR. The Russian oil giant reacted by threatening to close down its operations in Romania and lay off 3500 people. Centre-left Prime Minister Ponta reacted by threatening prosecutors for jeopardizing the Romanian economy.

Centre-right President Traian Basescu explained in clear words that the Russian company has to respect Romanian laws and EU standards, if it wants to operate in Romania. He said that “Putin-style laws” do not apply in Romania; the Russian company should leave for Moscow, if it wants to operate according to “Putin-style laws”. “Leave the country, if you are not ready to obey Romanian law”, he said.

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