The focus was on Cyprus in March, but issues in the euro-zone are far and wide. Here is a review.
* This article is part of the April 2013 monthly forex report. You can download the full report by joining the newsletter in the form below.
Italy
The February 24-25 elections left Italy with a political deadlock. Center-left leader Bersani was given the mandate to form a government, but as expected, he failed to reach an agreement with center right leader Berlusconi, nor with the alternative candidate Grillo.
The next step would have been calling new elections, but this cannot happen in the current situation: according to Italian laws, the president cannot dissolve the parliament in his last 6 months in office. President Giorgio Napolitano ends his term in May 15th. He clearly stated that he will not continue.
According to reports in the Italian press, Napolitano considered tendering his resignation, but changed his mind due to a telephone call from ECB president Mario Draghi.
The reports say that Draghi urged the president not to resign in order to maintain stability in these troubled times. The pro-EU prime minister Mario Monti continues to govern until a new government is formed, and reforms continue on “auto pilot”. Monti’s center party performed quite poorly in the Italian elections.
We don’t know for sure what happened there, but we do know that Napolitano eventually appointed two groups of experts to try and find a solution. Some of the experts are from the mainstream center left and center right parties. The alternative party of Grillo is not represented there.
Will Bersnai and Berlusconi find a formula that would enable a grand coalition with a limited mandate to make reforms? Given the differences, this option seems remote, and it seems that Italy will eventually head to the polls once again.
As long as Italian politicians are busy finding solutions, the political situation in the euro-zone’s third largest economy will remain on the backburner. But it is important to remember that nothing has been solved.
Germany and France, Spain and Slovenia
The core countries continue to decouple: the number of unemployed people in France is rising. Germany’s exports to China already surpassed exports to France.
Yet also Germany isn’t doing so well: Europe’s largest economy contracted in Q4, b 0.6%. This was seen as a one-time event and many still expect Germany to return to growth in Q1 2013. But not all the figures point in that direction.
The number of unemployed people rose and PMIs are down from the highs. Even if Germany returned to decent growth, how long can the locomotive pull everybody on its own?
Spain’s unemployment rate remains at sky high levels. There are also doubts about the deficit figures published by the government: 6.7%. This figure doesn’t include the aid to banks.
Apart from the horrible unemployment, Spanish banks remain problematic. The events in Cyprus could weigh on the banks in the zone’s fourth largest economy.
Slovenia: the small country of 2 million people has its own banking issues and it put off bond auctions due to the crisis in Cyprus. Has it lost market access? There aren’t too many similarities to Cyprus, but rather similarities to Spain and Ireland.
Nobody thought that decisions about Cyprus would have an impact on the euro-zone, but the decisions set precedents. Slovenia has a new government since March 20th. The new PM and finance minister already sent calming messages, but the governor of the central bank, an ECB member, thinks differently.
Here is more about Slovenia and the debt crisis.
If Slovenia needs help, the decisions made there will be a test to European solidarity, regardless of the size of the bailout.