03 February, 2013

Coming this month

The euro seems safe for the moment, and, although a critic, I am not going to say otherwise. Mario Draghi's 'whatever it takes' statement, coupled with the long-term refinancing programme, seems to have taken away the immediate financial downside. The euro is riding high on the FX markets and sovereign borrowing costs are dramatically lower.

I just want to point to a couple of risks. In Spain Mario Rajoy's government is facing a grave corruption scandal. It has been suggested by the respectable El Pais newspaper that several senior members of the government have been receiving illegal payments - sobresueldos - from the Partido Popular, and that these include Rajoy. Spain is going through a particularly bad patch, with unemployment over 25% and youth unemployment over 50% and people are disgusted that the ruling class is in receipt of bungs. Campaigners outside parliament have been waving envelopes. The payments appear to have been made by construction magnates and people know it is the construction boom which has caused much of Spain's hardship. It is Rajoy's government which has towed the German line and introduced the unpopular austerity measures.

The second worry is Italy. Within a week or so opinion polls will become illegal over the election period. The country goes into this phase with Berlusconi doing well, within 5% of Bersani. Berlusconi unveiled today a raft of proposed tax cuts, including reductions in the unpopular IMU property tax introduced by Monti, the bulk of which has gone to bail out a bank run by the socialists.

If Europe wakes up at the end of February to the news that Rajoy has had to resign or that Berlusconi is in power in Italy - or both - things could look rather different.  

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