KEY EVENTS THIS WEEK:
President gives green-light to populist coalition government
The political turmoil that has rocked Italy and the global financial markets appears to have come to an end after the Italian President Sergio Mattarella formally gave his seal of approval to the populist government coalition between the anti-establishment Five Star Movement and the far-right Northern League. The alliance’s chosen prime minister, Giuseppe Conte, presented his list of ministers to the President late last night which was accepted meaning that a new government is set to be sworn in this afternoon.
The populist party alliance was almost formed earlier this week before President Mattarella rejected the coalition’s original candidate to be the country’s finance minister. Paola Savona, an 81-year-old academic, had been vetoed amid fears of his radical Eurosceptic views such as his labelling of the euro as a ‘’German Cage’’. The rejection of Mr. Savona as finance minister led to threats of fresh elections and severe criticism of the President by the Five-Star and the League. The prospect of elections spooked investors and hit markets hard as another vote would have been seen as a de-facto referendum on the euro.
Yesterday’s late-night approval from the President of the new coalition pact between the populist parties brought Italy back from the brink of further political and economic turmoil. The role of Finance Minister will now be handed over to Giovanni Tria, a professor of political economy, while bizarrely the controversial and known eurosceptic Paola Savona will become the minister for EU affairs. This fresh agreement brings to an end to what has been a chaotic three months in Italy since the election and marks a remarkable rise for Italy’s populist parties.
Brussels unveils fund plan for crisis-hit eurozone countries
A €30bn loan plan to support eurozone member states hit by economic shocks was proposed yesterday by the European Commission in a bid to meet the repeated demands made by French President Emmanuel Macron for some sort of emergency budget. Known as the European Investment Stabilisation Fund, the loan pot of €30bn will be made available to the eurozone bloc but no one country would be allowed to receive more than 30 per cent.
Although the overall scheme does not go as far as President Macron envisaged with his original plan, the European Commission pointed to current differences among eurozone governments and EU budgetary constraints which prevented it from embarking on more ambitious plans. The fund will be made available to both current and aspiring members of the eurozone who are also part of the European exchange rate mechanism.
Concerned by the political tension that surrounds an emergency eurozone fund, the European Commission was careful in striking a delicate balance between the demands being made by Paris for a full-scale budget and the objections of northern member states who feared that it would entail permanent transfers between eurozone states. Brussels was adamant that such transfers would not occur and that governments will only be eligible to seek help if they have met core EU budget rules for the preceding two years.
Acknowledging that the creation of a eurozone budget sought by President Macron would require ‘’strong political will and consensus’’ that just does not currently exist in the bloc, Brussel’s proposal will allow for future upgrades and is considered as a ‘’first step in the development over time of a fully-fledged insurance mechanism to cater for macroeconomic stabilisation’’. The scheme will now require approval from EU capitals and the European Parliament before being implemented in full.
Budget reforms shifts funds from eastern to southern Europe
The European Commission made a series of proposals to its planned 2021-2027 Multiannual Financial Framework (MFF) this week, the most controversial of which is its plan to shift more than €30bn of its funding from the central and eastern European states to southern countries. The shift in allocation is part of Brussel’s reforms of its massive €330bn cohesion policy which is designed to promote catch-up growth in some of the poorest part of the bloc.
Eastern European states such as Poland, Hungary, the Czech Republic and others are set to be the biggest losers, suffering a 10 per cent real-term cut in their cohesion programme funding. However, further revision to the criteria by which Brussels measures the allocation of funds will mean that such central and eastern states will face far bigger losses than indicated. In contrast, southern countries which suffered severe hardships following the financial crisis will have their funding either frozen or even slightly increased. Greece and Spain will be particularly compensated with Madrid’s allocation being boosted by 5 per cent and Athens by 8 per cent.
As part of its range of reforms unveiled by Brussels, the European Commission also announced plans of a reformed delivery program which is designed to incentivise structural reforms in EU countries. This new incentivised approach means that member states who commit to serious reforms and meet significant milestones will be issued funds from the limited €25bn pot of money that has been made available.
EU – US RELATIONSHIP
Transatlantic fallout over Trump tariffs and EU’s new data rules
The United States formally announced yesterday that from today, the 1st of June, Washington will impose additional duties of 25 per cent and 10 per cent on imports of steel and aluminium from the EU. Reacting to the news, the president of the EU Commission Jean-Claude Juncker said that the move left the EU with ‘’no choice but to proceed with a WTO dispute settlement case and the imposition of additional duties on a number of US imports’’.
While the incoming tariffs will prove to be a blow to the bloc, it had been expected as ek Brussels had been pre-emptively issuing warnings to member states to expect punitive trade obstacles. In a last-ditch effort to seek a permanent exemption, the EU’s trade Commissioner met her US counterpart Wilbur Ross in Paris on Wednesday to try to resolve the trade dispute. However, no compromise could be found and the Trump administration bluntly announced it would being imposing tariffs on European imports from the 1st of June.
Although there had been intense lobbying by Brussels for an exemption, Mr. Ross rebuffed all efforts and highlighted his country’s negotiations with China as an example of how it was possible to engage with the US while being subject to tariffs. Talks between Beijing and Washington arose following similar trade disputes and such discussions led to China agreeing to long-term contracts for agriculture and energy purchases that may in fact hurt EU exporters in the long-term.
Washington has pressed Brussels for similar negotiations and to cede to demands such as lowering a 10 per cent car tariff in exchange for an exemption from the steel tariffs. European concessions are unlikely however, as the French and German economy ministers firmly stated that they will be ‘’firm and united’’ against such threats. The war of words and threats that erupted between the transatlantic powers this week heightened even further with the US commerce secretary penning a damning article against the EU’s new GDPR rules. In it, Mr. Ross warned that the strict data rule will ‘’significantly interrupt transatlantic co-operation’’.
Prime Minister Rajoy concedes defeat ahead of confidence vote
Mariano Rajoy’s seven-year reign as the country’s Prime Minister looks almost certain to come to an end later today after the opposition Socialist Party secured enough support to pass a motion of no-confidence in Mr. Rajoy. Although pressure had been intensifying in the past few days on the Prime Minister leading up today’s parliamentary vote, it had not been clear whether or not the Socialist’s would secure enough votes to oust the Mr. Rajoy.
However, that changed yesterday when it became clear that the Socialist’s had won the support from the far-left Podemos Group, the Basque Nationalists, as well as some Catalan separatists. Mr. Rajoy is now expected to deliver a short speech later today in parliament where he will concede defeat and step down from his position as head of government. His departure means that the role of Prime Minister will now fall to the leader of the Socialist Party, Pedro Sanchez, who has the backing from opposition parties.
Today’s exit of the Prime Minister comes after a Spanish court handed down a series of damning fines and prison sentences on politicians of Mr. Rajoy’s ruling Popular Party (PP) over a number of illegal contract schemes during the country’s decade-long construction boom in the 2000’s. The fallout from the court ruling earlier this week led to the Socialist’s calling for a motion of confidence in the Prime Minister and set the ball rolling for what would eventually be Mr. Rajoy’s departure later today.