Merkel won but reforms failed

German elections – actually the most important EU election – ended by the victory of Angela Merkel. On the other hand the election ended with the defeat of strong right wing policy. It seems that Merkel is willing to create a strong big coalition with German socialist and as it is in politics it means many compromises in the field of economy, austerity measures, social policy and it can slow down or prevent to make any reform which is needed in Germany as in any European country. It means that we will still see a great involvement of taxpayers’ money in saving the Euro and periphery countries. What was interesting is the outcome of so called Germany’s euroskeptic Alternative for Germany (AfD) party which is not finally in the parliament but it stole voters especially from Christian Democrats (230 000 from CDU) and  Free Democrats (330 000 from FDP).merkel

We definitely need strong Germany. Especially, if there are so many problems within the EU. Italy is still in the political crisis mode because of Berlusconi. Any political weakness could trigger big problems for the serving of the debt of the country. Italy´s prime minister said that “Italy is a trustable country with a budget and debt under control” but I do not think that anybody believes him. The country has a plan to continue fiscal consolidation and maintaining the deficit under control and the government is also working to reform the country’s labor market to encourage companies to start hiring. But as usually more words, promises and not so much actions.

Allegedly unprecedented cuts in public spending for 2014 announced France. The only problem is that it is worth only 15 billion euros. It is not too much if you realize that it represents approximately 3.3 % of all spending of central government. So called it unprecedented is a little bit strong. 80 percent of these savings will come from ministries of defense, finance and environment. Only 20 percent of the savings will come from tax increases. State spending, which will reach 57.1 percent of GDP this year, is expected to drop to 56.7 percent in 2014. On the other hand public debt will reach a record 95.1 percent of GDP in 2014 because of smaller GDP growth.

And as we are accustomed so many times with Greece the troika has once again doubts about Greek projections for a primary surplus this year and the next one which will be either minimal or noting. The same is true about Greek projections for a primary surplus of 1.5 percent of GDP at the end of next year. But do not worry. It is a just a matter of time once everything changes because 4 % growth is coming. Once again. And once again the next year.

The financial crisis has turned almost one in ten of the UK’s 2.5 million companies into so called “zombies” companies which face a insolvency. So-called zombie businesses have soared by 108 per cent in the last five years, to 227,000. These companies are able to produce at their very best only enough cash to service their bank and supplier debts, have liabilities far in excess of their assets and yet collectively employ around 500,000 people. And this is also one of the reasons why Bank of England cannot increase interest rates. Once this happens all of these companies will bankrupt faster than you count three. Unemployment and the damage to healthier companies which are their business partners could be even worse.

China’s economy is probably growing at an annual rate of 4 percent, said Marc Faber. He stated that “I said to an economist I think China is growing at 4 percent per annum and he said do you mean minus 4 percent? It is probably exaggerated but there are still more and more investors who are very skeptical about numbers from China which declares economy growth by 7.7 percent last year and the outlook for this year is targeted to 7.5 percent. And it is interesting that not only we see the currency wars. There surprisingly exist politicians who claim the same. 60 US senators signed letter to protest against the Japanese currency manipulation. The only mystery for me is why they forget that it is not only Bank of Japan but also US via their massive quantitative easing policies and monthly bond purchases who manipulate with the currency.

The US Federal Housing Administration will likely need a cash infusion from the U.S. Treasury. The agency offers private mortgage lenders guarantees against homeowner default would face a shortfall of $943 million for the fiscal year that ends on Monday. But the biggest issue in the US is the debt limit problem. Treasury Secretary Jacob Lew said that the government has time only till Oct. 17, leaving the United States just $30 billion cash on hand to pay its bills. It means that the US will be unable to pay all of its bills. The US reached its $16.7 trillion debt limit in May this year. Since then, it has been using so called “extraordinary measures” which consist of for example suspending U.S. investments in federal employee trust funds ($300 billion). So we will very probably see interesting quarrel between Democrats and Republicans which at least in my opinion ends by increasing of debt limit. But who know. Maybe we will see the shutdown of the most powerful government of the world. But it is not very likely.

Matúš Pošvanc

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