The ceasefire in Ukraine seems to be holding, but optimism on the overcoming of tensions between the EU and Russia should be kept on hold…..
Intesa Sanpaolo – Research Department – For professional investors and advisers only
The crucial phase is now opening for the definition of 2015 budgets in the euro area. Several countries will attempt to garner a margin of flexibility in exchange for the reforms requested by the Commission in June. A more accommodative fiscal policy would be desirable in Germany, also for love of a more symmetrical rebalancing strategy, but there are still no tangible signals in this direction.
The Russia-Ukraine crisis has taken on a slightly more encouraging slant in recent weeks, although its negative consequences risk proving lasting in any case. The good news is that the agreement on a ceasefire and for a de-escalation of the conflict seems to be working, to the point that NATO has acknowledged that Russia has effectively pulled back part of its troops from across the border. This should prevent a new round of sanctions and trade retorts.
However, the crisis cannot in any way be considered as solved, and seems set to weigh at length on economic relations between Europe and Russia. Firstly, Russia is still determined to block the trade integration treaty between the European Union and Ukraine, suspended for 15 months following pressures exerted by Russia. Despite the costs implied by this policy, Russia has shown no intention of receding from its will to maintain Ukraine under its political and economic control, whereas the new Ukrainian government and the EU are pushing in the opposite direction. Second, Russia is still keeping an aggressive attitude towards the states that support the new Ukrainian government, expressed by means of provocative actions by its air force against neighbouring countries and reductions in natural gas supplies. Nor is the situation made any easier by the emphasise placed by Putin on the concept of a “Russian World” which includes the Russian-speaking populations beyond the border, which for instance represent a hefty 26% share of Latvia, a state that is a member of NATO, of the EU, and of the euro area. The most optimistic interpretation is that this is an instrumental approach to manage the Ukrainian crisis, and not indicative of the true intention to expand control ambitions; however, the effect will simply be to push towards a slackening of the economic ties with Russia. And Russia will pay the highest price: GDP is forecast to contract marginally this year, and to stagnate in 2015, held back by the contraction in domestic demand (investments in particular). However, the prospect of the drop in exports to East Europe not being rapidly reabsorbed is further bad news for the weak economies of the euro area.
On this regard, as the ECB prepares to implement another portion of the June package of measures, ABS purchases, the euro area is engaged in defining budgets for 2015, which will have to be submitted to the European Commission by 15 October. It seems evident that several countries facing hardships are preparing not to proceed to the fiscal consolidation required by the Stability and Growth Pact next year, a choice which strikes as being seems entirely appropriate in the current weak domestic demand phase. In exchange, an acceleration should be promised of the reforms requested by the European Commission in its June recommendations. The truth of the matter is that a significant easing of fiscal policy would be even more desirable in Germany, also for love of a more symmetrical strategy geared to curing imbalances within the euro area. The more so, now that it is becoming evident that Germany is not immune from the slowdown affecting other Eurozone countries. A few days ago, Chancellor Merkel called for greater propensity to invest, without which growth will be impossible. For the time being, however, there are no tangible signs of an intention to correct a growth model that is still based on the compression of wage growth, on exports, and on the reinvestment abroad of the trade surplus.
Source: BONDWorld.ch
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