Europe/Middle East

Probably Not The Best British Budget

After a rollercoaster week for Britain’s chancellor, his eighth budget has been approved. George Osborne will be breathing a sigh of relief. After proudly announcing his budget on March 16, things began to unravel just 48 hours later, thanks in part to the shock resignation of the work and pensions secretary, Iain Duncan Smith.

The furor over plans to cut disability benefits brought about a farcical backtrack on the issue and an effective rewrite of large parts of the Budget. This script could have easily formed part of an episode of the political satire The Thick of It.

The Brexit Club

An ill-conceived strategy undermined by mismanagement and bad fortune is increasing the risks that the UK votes to leave the EU in June.  Nearly everything that could go wrong has gone wrong for UK Prime Minister Cameron.   

Europe Looks for Answers

Today, Europe is struggling with a series of old and new challenges. Hard choices can no longer be deferred.  For half a decade, Europe has struggled with excessive debt (which remains excessively high), fiscal adjustment (which has failed to revive the continent), systemic banking vulnerabilities (which have not been nullified), and competitiveness challenges (which are worsening due to R&D cuts across the core economies).

EU Unanimity Gives Way to a Qualified Majority

The EU leaders’ summit on refugees begins tomorrow.   A conclusive agreement will likely be elusive.   There are three main obstacles.  First, the effort to reinforce the external borders to allow free internal movement requires Turkey's cooperation, but it will not be represented.  Second, that is important because Cyprus is demanding more concessions by Turkey.  Third, others such as Spain are concerned that the strategy contravenes EU and international law by abridging the right to asylum. 

Are Higher Taxes Lurking in the U.K.'s Plan to Balance the Budget?

If UK Chancellor of the Exchequer Osborne wants to position himself to be the next Prime Minister, the budget to be unveiled tomorrow may not be particularly helpful.  There is little room to relax fiscal policy, given the self-imposed constraints. 

The deficit for the current fiscal year was projected to be GBP73.5 bln, but through January, the deficit has been GBP66.5 bln.  This suggests the deficit will be closer to GBP80 bln.  The budget deficit was 4.4% of GDP last year, down from 5.5% in 2014 and 10.4% in 2009.

The Model Bailout

Cyprus will successfully exit its bailout programme this month after three years. The country has come a long way since 2013 when its banking sector was on the verge of collapse.

The Cypriot economy went through heavy reforms and recovered using just €7.25 billion of its €10 billion rescue package. The banking sector was stabilised, a budget surplus was achieved (down from a 5.5% deficit in 2013) and the current account nearly brought into balance. However, this is just the beginning.

Here is Your Brexit Primer

What is the issue?  The UK has long had a strained relationship with the EU and has never been comfortable with the ever-increasing drive for greater integration and harmonization of rules and regulations coming from Brussels.  As the EU has grown, more decisions are made by a qualified majority.  Previously decision required unanimity.  The shift weakens the power of a UK veto.  The UK Prime Minister has called for a national referendum on continued UK membership of the EU.

Is Germany Doing Pensions Right?

Germany often encourages much jealous muttering. The country found an easier path than most through the global financial crisis and it is now even touted as the world’s best nation (at least according to one survey). Besides stellar engineering and economic efficiency, the German model also stands for social equity. This “social market economy”, however, is increasingly put into question by the looming spectre of old age poverty.

British Public Opinion About Face on Privatization

When Labour party leader Jeremy Corbyn flagged up the potential re-nationalisation of British railways, and later made similar comments about the energy industry, his ideas were dismissed as a return to the past.

However, the evidence is that the public has bought into it. YouGov polls show that a majority of British people now support the nationalisation of the railways (66%) and energy sector (68%).

Using Portugal as an Explainer for Europe

Portugal's 10-year bond yield is up almost 120 bp this year.  It is one of the few Eurozone members that still pay to borrow two-year money.  There are two set of drivers.  One set is country specific.  These may matter only to current or prospective investors.  The other set of considerations may have broader applicability.  This means that even those without direct exposure may want to take note of developments in Portugal. 

A few country-specific considerations are worrisome.