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CONTENTS

WATCHTOWER EU MEMBER STATES WORLDWIDE INSTITUTIONS EPP VIEWS OUR COMPETITORS' VIEWS FROM THE BLOGOSPHERE…

UPCOMING EVENTS

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‘Watchtower’ 16 or 27, and the Return of Core Europe

Foreword by CES Head of Research

A zombie is a creature that appears in books and popular culture typically as a reanimated dead or a mindless human being. Stories of zombies originated in the African Caribbean spiritual belief system of

Voodoo..... - Wikipedia, June 2010

The Euro Crisis has led to all kinds of unhealthy side effects, as we already know. Among them were some unsavoury reflexes from the past, such as references to national clichés in the ugly spat between the media and some politicians in Greece and Germany. And in recent weeks, another creature, buried more recently, has returned to the limelight, barely disguised as an allegedly unavoidable institutional strengthening of the Eurozone of currently 16, as opposed to the whole EU of 27. Let’s face it: A Eurogroup with a powerful secretariat, possibly even a High Representative for macro-economic coordination, possibly even supervising the European Central Bank, would be a new version of that zombie from the agonising 10 years of debate and ratification of EU reform between 2000 and 2010: Core Europe – a group of countries that move ahead in several areas, with the apparent option for others to join later. And if such a group develops decision-making and administrative institutions, it could be the beginning of the end of the Union of 27. This is what lies behind the Franco-German compromise of Monday in Berlin, and the joint position during Thursday’s EU summit in Brussels: Economic governance – yes; a central economic government with institutions – no. Despite the fact that even German Chancellor Merkel now speaks of a Wirtschaftsregierung (a semantic nod to the longstanding French demand for a gouvernement économique), most EU Member States want to avoid the creation of a new authority that would directly interfere with macro-economic decision making in national capitals, notwithstanding, of course, tighter controls of budgetary discipline. This is for the simple reason that it would not only stand diametrically opposed to the principles of subsidiarity, best practice and, in the end, European competitiveness. But most of all because it would mean the return of the idea of a two tier Union with all its implications of a largely West European club which – at a decisive moment - excludes important Northern and Central European countries. Its institutions would automatically represent a Southern and Western continental philosophy on financial, economic and social policies, not taking into account the more pragmatic, dynamic and austerity-oriented economics of the North and East. If the EU is to regain competitiveness and avoid future crises such as the one we are in, it will have to do so with a maximum possible involvement of all 27 Member States. And Core Europe should rest happily in its grave, just as Voodoo should remain in the Caribbean.

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EU Member States Austria Austrians’ spending power rose strongly in ’crisis year 2009,’ as new figures have shown. Researchers KMU Forschung Austria announced people’s purchasing power jumped by 4.6 per cent year on year, adding that Austrians had around 135 billion euros of disposable income. KMU Forschung Austria however stressed that there was just a 4.1 per cent year on year rise considering the 0.5 per cent increase of inflation. As a further good news, People’s Party (ÖVP) Economy Minister Reinhold Mitterlehner claimed Austria was ’positioned to achieve sustainable growth’ as the OECD predicted a bright future was ahead for the country’s economy. The body said it expected Austria’s economy to grow by 1.4 per cent year on year in 2010, while its most recent forecast claimed the country’s economy could expect a year on year growth of just 0.9 per cent. In related news, the ÖVP remains split on the question of Austria going it alone on a tax on financial transactions. Federal Economy Chamber (WKO) President Christoph Leitl and ÖVP finance spokesman Günter Stummvoll support doing so, but party whip Karlheinz Kopf and State Secretary for Finance Reinhold Lopatka have reservations. ÖVP Economy Minister Reinhold Mitterlehner has said a go-it-alone approach should be ‘a last resort.’ He claims that such a tax would not work without the participation of core EU countries and that a unilateral approach would ‘not be ideal for Austria as a business location. ’The Social Democrats (SPÖ) remain hopeful of ÖVP support for such a tax. A European-wide tax of 0.1 per cent on financial transactions would bring in 270 billion euros annually, according to ATTAC statements. L’Association pour la Taxation des Transactions pour l'Aide aux Citoyens (ATTAC) is an organization that promotes a tax on foreign-exchange transactions.

Belgium Belgium started the search for a coalition government on 14 June after Flemish separatists won a parliamentary election, causing some unease on financial markets over the country's long-term future and its growing debt. Concerns about calls by the victorious New Flemish Alliance (N-VA) to split Belgium along linguistic lines, and the risk that long coalition talks could delay spending cuts, nudged up the premium that investors ask to hold Belgian government bonds. Jacques De Pover, an economist at Dexia, said there was no cause for immediate concern but added: ‘If in September we see that a government isn't being formed, if we see the crisis is prolonged, then we could see a market reaction at that time.’ Soon after the elections, Belgium’s central bank came out with official figures confirming that Belgium's ratio of debt to gross domestic product ratio would once again rise above 100 per cent this year as a result of the financial crisis and the bailout of the country's banks, having dipped to as low as 84.2 per cent in 2007 from a high of 133.6 per cent in 1993. The central bank also raised its forecasts for economic growth and inflation this year, but said debt-to-GDP would top 100 per cent. The economy will grow by 1.3 per cent this year, slightly more than previously forecast, and by 1.7 per cent in 2011 after contracting by 3.0 percent in 2009, Central bank governor Guy Quaden said.

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Bulgaria Bulgaria’s GDP lowered to the level of 3.6 per cent on an annual basis in the first quarter of 2010. It is a 2.3 per cent drop in comparison to the previous quarters. It is one of the most significant falls in GDP among the EU Member States. Moreover, due to the increase in spending for social payments and decrease in revenue, the country’s budget deficit reached 1.67 billion BGN at the end of March 2010 and grew by 270 million BGN in that month alone. The government pledged to maintain a tight fiscal policy and a deficit level below 3 per cent by the end of the year. In related news, the European Commission will investigate the possibility of Bulgaria’s faulty statistics methodology or manipulation of country’s macro-economic data. The EU was alarmed by significant revisions in the country’s budget perspective and a change from balance budget to a deficit of 3.7 per cent in 2010. The EC decision came as no surprise for the Bulgarian Ministry of Finance and Prime Minister Boyko Borisov blames the previous Socialist-led administration for this situation. Brussels’ concerns over Bulgaria’s statistical performance caused the country’s credit default swap (CDS) spreads to widen to the highest level in the last 11 months – 376.5 points. Although this level is lower than the one from the peak of the global economic crisis, it is a clear sign that the country is generally considered to be risky.

Cyprus On 15 June, the European Commission concluded on the existence of excessive deficits in Cyprus, Denmark and Finland and recommended deadlines to the Council for their correction. In particular, Cyprus should reduce the 2010 deficit to below 6.0 per cent of GDP and ensure an annual structural adjustment of 1.75 per cent of GDP over the period 2010-2012. In a press release, the Commission notes that, according to data submitted by the Cypriot authorities in April 2010, the general government deficit in Cyprus reached 6.1 per cent of GDP in 2009, while the government debt is expected to reach 62 per cent of GDP in 2010, thus breaching the 60 per cent reference value of the Stability and Growth Pact. The next day the Cypriot government approved a series of bills, which finalise the fiscal consolidation package. The finalised package provides for the reduction in the number of state employees and containment of operational expenditures, social solidarity and cohesion, the targeting of social benefits and increasing public revenues. Referring to the reduction of the public sector personnel, Stavrakis said Cyprus for the first time in its history has set the target of reducing the number of state employees by 1,000 persons. Moreover, the Cypriot economy is expected to contract by 0.5 per cent in 2010 but rebound in 2011 with growth of 1.3 per cent. In its semi-annual report, the Central Bank said its latest forecasts were in line with an expected drop-off in domestic demand, and a slowdown in construction and tourism this year.

CzechcRepublic The three parties that are negotiating the formation of a Czech centre-right coalition government, can be expected to agree on lowering the public finance deficit, simplifying the tax system, introducing pension reform and reforming the welfare system, according to experts CTK has surveyed. A problem may arise around the Public Affairs (VV) party´s proposal to raise taxes, which the Civic Democrats (ODS) and TOP 09 are opposed to. The VV proposes to raise corporate tax to 20 per cent from the

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Last updated on 17/06/2010 To view full articles click on hyperlinks. current 19, and to introduce a higher income tax on higher tax brackets. Neither the ODS nor TOP 09 plan such steps. Petr Necas, Civic Democrat (ODS) leader and possible future Czech prime minister, wants to discuss the Czech pension reform also with the rival Social Democrats and to launch the reform in 2012. Commentator Julie Hrstkova discusses which of the outgoing Finance Minister’s financial package is worth implementing and what the government should rather refrain from doing. Undoubtedly positive are Minister’s Janota pragmatic draft measures reducing state expenditures and raising the revenues. The raising of the prices of cigarettes and alcohol is prepared as well, along with the pro-environment tax, Hrstkova writes. However, measures such as the raising of the income tax for the rich, the selected raising of insurance contributions and a reduction of tax deduction opportunities for the self-employed are but sheer populism. Quite illogical is Janota´s proposal to abolish the state subsidies to employers who employ disabled people. As a result of the abolition, the disabled could become unemployed, which would cost the state much more, Hrstkova points out.

Denmark After the latest public expenditure figures for 2009 were published by Statistics Denmark, Steen Bocian, the chief economist at Danske Bank, says that public sector costs are unsustainable. In a statement made to national broadcaster DR, Bocian said the growth in public consumption was about one percentage point higher than it appeared in the national audit, which he added, was a very significant difference. According to Statistics Denmark, the national deficit was 47 billion kroner last year - which was expected. However, public spending reached an unprecedented 496 billion kroner in 2009. Bocian added that the growth in public spending underlined the need for economic reforms. Moreover, higher unemployment will be a necessary result of the government’s restructuring plan. The national bank’s latest quarterly report on the economy backs up the government’s plan to cut 24 billion kroner from the budget over the next three years, saying a stronger economy is more important than short-term job losses. According to the bank’s quarterly report, the government’s plan to cut public expenditure will result in a 0.2 per cent dip in GDP and an increase in unemployment by a total of 5,000 people in 2011, followed by a further 6,000 job losses in 2012.

Estonia According to a statement prepared for the Brussels summit, Bloomberg reports that EU leaders will put Estonia on track to become the 17th euro nation on 1 January 2011 thanks to ‘the convergence it has achieved, based on sound economic and financial policies.’ Estonia gained wider support to adopt the euro in 2011 when a European Parliament committee endorsed the step, highlighting Europe’s push to restore confidence in the single currency amid the debt crisis. The draft statement made no reference to a non-binding ECB opinion that Estonia risks higher inflation. Instead, the statement welcomes its fulfillment of all the convergence criteria. The rate at which Estonia’s kroon will be converted to the euro will be set by finance ministers on 13 July. Standard & Poor’s raised its long-term foreign and local currency sovereign credit ratings on Estonia to A, the sixth-highest investment grade from A-. Last but not least, Estonia joined the OECD and will become a full member after the accession treaty is ratified by the Estonian Parliament.

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Finland On 16 June the share price of the world’s largest company, Nokia, plummeted by roughly 9 per cent. The factors negatively impacting the company’s business include the competitive environment, particularly at the high end of the market, and shifts in product mix towards somewhat lower gross margin products. Nokia also announced that in addition to the weak sales of high-end smartphones, the recent depreciation of the euro has affected Nokia's cost, operating expenses, and global pricing tactics. On a more positive note, the number of new entrepreneurs applying for grants for business start-ups from the Employment and Economic Development Office has been higher than a year ago, despite the financial situation remaining unstable. The Ministry of Employment and the Economy reports that over the first three months of the current year, more than 3,000 decisions were made to provide grants for business start-ups. Compared with last year, the figure shows an increase of some 150 start-ups. According to figures released by Statistics Finland, the value of new orders in manufacturing was up by 22.1 per cent in April compared with the situation one year previously. In the period from January to April of this year, the increase on 2009 was 12.6 per cent. The most powerful growth was registered in orders for the manufacture of paper. On the other hand, Statistics Finland reported that overall output continued to decline in the first three months of this year. This means that GDP went down for a second consecutive quarter, which means that technically, Finland is still in an economic recession.

France According to l’Institut national de la statistique et des études économiques (INSEE), the official statistics body of the French government, unemployment in France remains high but stable in the first quarter of 2010. Statistics reveal that unemployment is hovering at 9.5 per cent in metropolitan France or 9.9 per cent if overseas territories are included. In the 15-24 age group, unemployment has dropped to 23 per cent from 24.2 per cent in the last quarter of 2009. For methodological reasons, INSEE does not publish monthly unemployment statistics; however Eurostat, the European Commission’s statistics service placed France’s April unemployment at 10.1 per cent in April 2010, overseas territories included. The French government is also doing its part to reduce its expenditure. French Prime Minister François Fillion stated earlier in May that his government intended to reduce public spending by 10 per cent between 2011 and 2013. In addition, he intends to freeze all spending including pensions. All this is being done in attempt to ensure that France’s sovereign debt rating remains at AAA. Finally, rating company Standard and Poors has downgraded the debt rating of publicly-owned railway company SNCF, from AAA to AA+. This downgrade was a result of fears to company’s bottom line brought on by liberalisation of the European rail transport industry. This fear was compounded by the European Commission’s suspicion that the company’s ability to take on nearly unlimited debt due to its legal status could constitute a form of illegal state aid.

Germany

Like many of its European neighbours, Germany has recently passed an austerity package to help the country weather the current economic storm. On 7 June 2010, German Chancellor Angela Merkel received approval to implement an austerity package that would, amongst other measures, reduce the deficit by 80 billion euros by 2014, reduce the budget deficit from its projected 5 per cent this year

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Last updated on 17/06/2010 To view full articles click on hyperlinks. and place 15,000 public sector jobs on the chopping block. Further cuts include a reduction in the number of police officers and soldiers and postponement of the reconstruction of the Berliner Stadtschloß. As Germany is the single largest contributor to the Greek debt bailout, these austerity measures have caused controversy. In publicly-traded securities, German stocks have recently dipped in value on news that exports declined in April. According to the Federal Statistics Office, exports decreased by 5.9 per cent from a month earlier, which saw an increase in exports of over 10 per cent. In addition, imports decreased by 7.3 per cent over the month. Stocks in utility companies fell slightly on the news that nuclear energy would be taxed by the German government, notably the profits earned from nuclear reactors that continued to operate past scheduled shut-down dates. Finally, shared in Deutsche Lufthansa AG were down on the news that the recently passed austerity measures include a new tax on air travel. Lufthansa is seen as being in a particularly disadvantageous financial situation because stiff European competition precludes raising ticket prices to make up shortfalls in revenue.

Greece The first effects of the austerity measures imposed by the Socialist government in accordance with the EU-IMF-ECB security mechanism were felt in Greece during the months of May and June. The economy was visibly affected by the curbing of public and private spending, as it shrank by 2.5 per cent in the first quarter of 2010. GDP is forecast to drop by 4 per cent altogether at the end of the year. At the same time, shares on the Athens Stock Exchange are at their lowest level in 12 years, mostly affected by negative rumours and speculation concerning Greece’s ability to abide by public-deficit reduction measures and stay in the Eurozone. But even greater concern was caused by the steep rise of inflation, which, at 5.4 per cent annual increase in May, recorded its highest rate in 13 years. That increase was mostly due to rising higher costs of alcohol and tobacco consumption and higher costs of transportation. These higher costs in turn reflect higher VAT and consumption taxes. The Ministry of Finance announced that the budget deficit shrank by 38.8 per cent on a yearly basis in May versus a 35.1 per cent targeted decrease. But tax revenues were lower than expected, thus making it more difficult for the government to reach its public deficit goal of 8.1 per cent at the end of 2010. More than that, international observers are still nurturing significant doubts as to whether the Greek government has the political will to implement all of the needed reforms. The disagreement between the Labour Minister and the international inspectors over the new social security bill in May was an example of this. A survey of global investors by Bloomberg published on 9 June showed that 73 per cent of them still thought that a Greek debt default was likely and 40 per cent of them thought it likely that Greece would abandon the euro. On June 14, Moody’s downgraded Greece’s credit rating to junk status and estimated the possibility of a Greek default at 7 per cent. Nevertheless the Greek government tried to downplay the significance of this development. Experts from the IMF, the ECB and the Commission were in Greece to evaluate the implementation record of the government, ahead of the approval of the next installment of 9 billion euros from the rescue package which is due on the end of June. Amid revelations by a Sunday newspaper that the IMF had warned the previous Conservative government already in spring of 2009 about the country’s dire state of public finances, speculation as to government reshuffle or early elections in fall soared, thus adding a high degree of political uncertainty to the already volatile landscape of the Greek economy.

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Hungary Hungary's prime minister proposed a new fiscal plan, including an overhaul of the tax system and cuts to the public sector, to reassure jittery markets that it can handle its debt. In a speech to parliament, Viktor Orban said the 29-point plan will introduce a six-year tax for financial institutions and reduce red tape for investors. He also suggested it would cut public sector wages and eliminate benefits such as free cars and cell phones. Orban presented the plan after a three-day Cabinet meeting and is being closely watched internationally after some officials recently suggested the country's economic situation is similar to that of Greece. The comments shocked global markets and dragged down both the euro and the Hungarian forint on Friday and Monday. Hungary has since tried to backpedal, with Economy Minister Gyorgy Matolcsy saying that his government would strive to meet the 2010 budget deficit target of 3.8 per cent of GDP set by the previous administration. Orban pledged to create one million new jobs over the next decade and said the ‘time has come to replace the country's old economic system with a new one.’ International Monetary Fund chief Dominique Strauss-Kahn has said he sees ‘no reason to be concerned’ about the current situation in the Central European state. In fact, International Monetary Fund completed its fifth review in Hungary and made $1.1 billion available.

Ireland According to the Standard & Poor’s latest report, the country’s increasing debt is said to have been caused by reckless borrowing by Irish banks. Therefore, the origins of Irish economic problems are different than those faced by southern Europe. High labour costs are also a significant problem for Ireland – it had been increasing faster than in any other Eurozone country between 2000 and 2007 when inflation and a series of national agreements pushed up wages. Costs increased by approximately 27 per cent in that period. At the same time it fell by 0.3 per cent in Germany and rose by 17 per cent average across the Eurozone. Ireland’s properties market does poorly already and the estate agents foresee that even more distressed properties will come to the market in the second quarter of 2010 than in any other country. In the first quarter of 2010 the largest increase in distressed listings was noted in the US and Ireland. In such countries as India, Hong Kong, Australia or China this number is dropping.

Italy Economic recovery in Italy is very much a mixed picture. Istat, the official statistics agency of the Italian government has released figures showing that real wages in Italy are on the rise. In the first quarter of 2010, wages were 3.6 per cent higher than they were in same quarter last year, and 0.7 per cent higher than in the last quarter of 2009. Despite increasing wages and productivity, unemployment has increased slightly. The number of unemployed Italians was at 8.9 per cent in April, up from 8.8 per cent in March. Though on the increase, it is quite favourable when compared to the averages for the G7 (9.7 per cent) and the Eurozone (10.1 per cent). According to Unicredit, the Italian government must do more to shore its financial position. Though Italy has been largely unaffected by the sovereign debt crisis, the Italian government must speed up its structural and spending reforms. Despite its high public debt, Italy has yet to go the way of Greece and Portugal. However, special

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Last updated on 17/06/2010 To view full articles click on hyperlinks. attention must be paid because Italy is the largest EU Member State in such a precarious financial situation. This is on the heels of recently released figures that show that Italian GDP grew at a slower pace than originally forecast. Fourth quarter growth was at 0.4 per cent, lower than the estimated 0.5 per cent. Though the figures for the first quarter of 2010 have yet to be released, there is widespread belief that Italian exports increased due to the devalued euro. Furthermore, the international markets have been allayed by the actions of the Berlusconi government which introduced an austerity package aimed at lowering budget deficits to below 3 per cent by 2010.

Latvia The government on 3 June unanimously supported the need to strengthen the country’s fiscal discipline standards by approving mid-term budget conditions, tightly restricting an increase to the national debt and the possibility for budget amendments. The International Monetary Fund (IMF) and the European Commission have not changed their position, and continue to support Latvia’s chosen economic programme based on preserving the current valuation of the national currency and working on gaining entry to the Eurozone. On a different note, Latvia’s most political parties will be financed from the state budget from 2012. Each party which wins at least 2 per cent of votes in the parliamentary elections will receive 0.5 lats (0.71 euros) for each supporter every year until the next elections. Political party dependence on powerful oligarch’s money is one of the biggest of Latvia’s problems. The only income parties can receive, according to the legislation, are donations from a member or any supporter. Meanwhile, parties need to finance election campaigns, to cover office rent, to arrange party congresses, to support their youth organisations, etc. If the measure was implemented this year, the state would spend 427,500 lats to support the parties. The exact amount for the next four years will be calculated after the parliamentary elections in October. Lithuania Lithuania needs to cut its budget by about 4.5 billion litai ($1.63 billion) in the next two years to achieve a deficit of 3 per cent of gross domestic product, Lithuanian finance minister Ingrida Simonyte said in Vilnius. On the same subject, IMF said this week that Lithuania needs a fiscal adjustment of 5.5 per cent of gross domestic product by the end of 2012. The economic decline slowed to an annual 2.9 percent in the first quarter from 12.1 percent in the final three months on 2009. Lithuania’s annual industrial production rose the most in 19 months in April, driven by recovering export demand, according to a Bloomberg report. An industrial rebound after 16 months of decline is boosting optimism about an economic recovery. Lithuania relies on export-led growth to offset a weakness in domestic demand after wage cuts and rising unemployment. Lithuania’s unemployment rate rose in the first quarter to the highest in at least 12 years as the economy struggled to recover from a recession. The jobless rate jumped to 18.1 per cent from 15.6 per cent in the final three months of 2009. The rate was 11.9 percent in the same period last year.

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Netherlands Caretaker finance minister Jan Kees de Jager has said that the new cabinet emerging after the general elections will have little influence on the budget. He stated that even if VVD leader Mark Rutte manages to put a new coalition government together before 1 July, it will still only be able to have a very limited effect on spending plans for next year. Speaking after the weekly cabinet meeting, De Jager said the preparations for next year's budget are already under way, ahead of their formal presentation on the third Tuesday in September. Rutte wants a speedy cabinet formation process because of the need for tough economic measures. Last year, the outgoing cabinet agreed to delay taking decisions on economic reform until this September. But those plans too were abandoned after the cabinet collapsed in February. The Dutch budget deficit has risen to 6.6 per cent, slightly higher than forecast, according to the finance ministry's spring statement. Just before the elections, a number of prominent Christian Democrat economists have criticised party leader Jan Peter Balkenende for stating that the CDA will refuse to be part of a coalition government which wants to make changes to mortgage tax relief. The Liberal party VVD is also opposed to changes to the system but has not made it a crucial issue in the formation of a new government. Labour leader Job Cohen has called on the CDA and two Liberal parties VVD and D66 to support the pension age increase deal reached between unions and employers. It emerged earlier on Thursday the two groups are nearing completion of an agreement backing an increase in the state pension age from 65 to 66 in 2020.

Poland Poland is no longer attractive for foreign investors. Ernst & Young’s report says that more often they tend to locate their money in the Central European markets. The number of jobs created thanks to the foreign investments decreased by 50 per cent in 2009 – from 15,500 in 2008 to 7,500 thousand in 2009. Industry was most affected by this trend. The Polish share in establishing new industry jobs decreased from 12 to 6 per cent. The service sector does much better as the number of newly created jobs decreased from 6 to 5 per cent. Last year Poland was second in the ranking of creating new jobs. Currently, the country is in fifth position behind Great Britain, France, Russia and Turkey. Additionally, the number of new investment projects decreased by more than 30 per cent. Poland’s competitors from Central Europe are in a much better position, such as in Slovakia where the number of projects increased by 44 per cent. Experts think that the Polish government is doing little to convince foreign investors that Poland is an attractive place to do business in. On another note, Polish pensions will not be decreased but can be frozen if the ratio of the public debt towards GDP reaches 55 per cent. According to the law, it would mean that there will be no annual increase in pensions. Last year that increase was the highest in Europe and reached 4.62 per cent. The 2009 public debt reached 50 per cent of the country’s GDP.

Portugal On 2 June, Olli Rehn, European Commissioner for Economic and Monetary Affairs, applauded the austerity plans in Portugal. Rehn said that the cuts went in the right direction and that the first assessment is that the new targets for Portugal and Spain are indeed appropriate for the current situation and they are as well a substantial improvement compared to the original path of adjustment.

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Last updated on 17/06/2010 To view full articles click on hyperlinks. This approbation from Brussels was followed up by the passage of austerity legislation on 9 June. Though the ability of the socialist Socrates government to pass the bill was in doubt when the austerity plans were first announced in May, the bill did make it through the Portuguese parliament with the support of the centre-right Social Democrats. The aim of the austerity plan is to reduce the ballooning budget deficit to 4.6 per cent of GDP by 2011 from a high of 7.3 per cent in 2009. Despite the fears that Portugal would be following in the steps of Greece, Portugal’s sovereign debt rating has remained firm. Standard and Poor’s dropped Portugal’s debt rating to A- in early May 2010 with a negative outlook. Though it may be too early to say, the recent passage of austerity measures could spell and end to spiralling debt ratings.

Romania Romania's government has survived a vote of no confidence on 15 June by just eight votes. Many lawmakers from the ruling Democrat Liberal party PDL said they voted for the motion because they personally do not accept pensions and salaries being cut. But having survived by a slim majority the government will now press ahead with its austerity plans, including cutting pensions by 15 per cent and public sector salaries by 25 per cent. Prior to this, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn has said that the IMF told Romanian authorities to hike taxes, especially on the rich, instead of cutting public sector salaries and pensions. The Romanian president has hit back at these allegations, saying that it was the IMF that proposed the hike in VAT from 19 per cent to 24 per cent, the hike in tax on profit from 16 per cent to 20 per cent and the cut in public sector salaries by 20 per cent. Basescu also warned that if cuts in public sector spending were not taken now, Romania would be forced to take a new loan in March 2011 of 27-30 billion Euros. Basescu added that the measures proposed by the IMF mission were rejected because the hike in VAT would have triggered a hike of inflation, up to 10 per cent, which is double the inflation target now of 4.5 per cent. In related news, the European Bank for Reconstruction and Development (EBRD) expects zero economic growth for Romania in 2010, down from the previous forecast of 1.3 per cent. For 2011, EBRD estimates Romania will have 3 per cent economic growth. The EBRD said the internal demand will be limited after the austerity measures envisaged by the government in order to cut budget expenses.

Slovakia Slovakia’s central bank, the National Bank of Slovakia (NBS), has expressed increased optimism about the country’s prospects for economic recovery this year. In its medium-term prognosis presented on 15 June, the NBS predicted growth of 3.7 per cent in 2010, up from the 3.2 per cent forecast three months ago. According to the NBS, the economy should strengthen thanks to improvements in foreign demand. Slovakia's GDP, hit by the global economic crisis and falls in foreign demand, shrank by 4.7 per cent in 2009. As regards the labour market, the central bank expects the unfavourable situation to persist this year, with the employment rate predicted to fall by 1.9 per cent. According to Slovakia’s Statistics Office, the volume of new industrial orders in Slovakia increased by 35.9 per cent in April and the dominant industrial branches in particular were new orders in metal production and processing. On a political note, the final results of the parliamentary elections show that Smer, social

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Last updated on 17/06/2010 To view full articles click on hyperlinks. democratic party, was the most popular party with 34.8 per cent of the vote. However, the overall election result has given hope to the centre-right parties that they will be able to form the next government as Fico’s party will not be able to rely on the support of Movement for a Democratic Slovakia (HZDS), whose support fell below 5 per cent, meaning it will not be represented in the new parliament. On 15 June, Slovak Democratic and Christian Union (SDKÚ), Freedom and Solidarity (SaS), Christian Democratic Movement (KDH) and Most-Híd Béla Bugár signed a declaration on political co-operation that should result in them forming a new government in the days ahead. They jointly declared that as future coalition that they want to address the problems stemming from the global crisis and the consequences of irresponsible policies introduced by Robert Fico's government.

Slovenia The Slovenian government adopted amendments to bankruptcy and debt recovery legislation to address the problem of late payments and improve the efficiency of debt recovery proceedings. The government has also decided to adopt three key labour laws even though social partners failed to reach consensus on key provisions at the latest round of talks hosted by Prime Minister Borut Pahor on 15 June. Prior to this, it adopted a bill that provides the basis for Slovenia to participate in the 80 billion euro Eurozone bailout package for Greece. Slovenia is to provide up to 387.8 million euro loan to Greece in the coming three years. The European Commission assessed that Slovenia's measures to consolidate its budget were efficient, in accordance with recommendations and in line with the plan envisaging expenditure savings of around 1.25 per cent of GDP in 2010. According to the International Monetary Fund, Slovenia needs to implement far-reaching pension reform and hold back wage growth. Slovenia was officially handed an invitation to join the Organisation for Economic Cooperation and Development (OECD) and is expected to become a member within two months. As regards Slovenian trade, Slovenia exported 1.45 billion euro worth of goods in April, up 11.9 per cent year-on-year, with imports topping 1.56 billion euro, a 12.2 per cent increase compared to the same period last year, according to provisional data from the Statistics Office.

Spain German Chancellor Angela Merkel has said Eurozone states, including Spain, are free to call on the block's rescue fund whenever needed. The German leader refused to comment on whether a Spanish bail-out application was imminent, however. Several leading German newspapers have recently suggested that EU and Member State officials are quietly preparing to release funds to Madrid from the euro area's 750 billion euro rescue mechanism that was agreed last month. Commission chief José Manuel Barroso, together with a string of national politicians, strongly denied this was the case on Monday 14 June. Other reports have surfaced that the EU, the IMF and the US treasury are drawing up an emergency liquidity plan for Spain that includes a credit line of up to 250 euro billion, Spanish daily El Economista reported on Wednesday (16 June) that the plan was discussed at a special IMF board directors meeting and was aimed at avoiding some of the harsher components of Greece's recent bail-out. The reports follow after a day of protest against Spanish austerity measures drew fewer than 4,000 to an evening march in central Madrid on 8 June. Tuesday's one-day work stoppage and marches across the country were called after the government forced through a plan to shave 15 billion

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Last updated on 17/06/2010 To view full articles click on hyperlinks. euros off the budget with public sector savings including wage cuts. Two weeks prior to this, Fitch had cut Spain's credit rating by one notch, sending markets lower and capping a horrible week for a government struggling to convince investors it can solve its economic woes and avoid a Greek-style debt crisis. Similar concerns were voiced by the International Monetary Fund which said Spain must make far-reaching, comprehensive reforms, including labour market reforms, and that its economic recovery remains fragile

UnitedcKingdom The UK still has much to fear from the euro crisis both politically and economically as it has not yet contributed to a 440 euro billion fund set up by the Eurozone countries to support the common currency. Even though the crisis is most serious in Greece where French and German banks have the most at stake, the lack of a UK payment will be reluctantly tolerated by others. The UK will be under pressure to pay especially as Spain is paying its share. Moreover, there is a possibility of establishing fiscal coordination across the EU in order to protect the euro. The UK is generally against such solutions but there is a high probability that the 16 Eurozone Member States will go ahead with such a plan regardless of the Brits. It would result in severe political problems within the EU. As regards the UK’s trade, the UK exports fell by 0.6 per cent for the first time in a quarter and outpaced the 0.4 per cent decrease in imports. Therefore the country’s trade deficit failed to narrow in April and remains on a record high level. The Bank of England counts on net trade to trigger economic growth. As demand in the Eurozone – UK’s largest trading partner - is weak, the country’s trade deficit with the whole EU increased by 100 million pounds and reached the level of 3.3 billion pounds in April. At the same time the gap with non-EU states remained at 4 billion pounds.

WORLDWIDE

Canada This month Canada became the first G8 country to raise its interest rate. On 1 June 2010, the Bank of Canada raised its key lending rate by 0.5 per cent, to 0.75 per cent. The current economic situation in Canada is improving at a steady pace, helped by the fact that the Canadian economy was not as severely affected by the financial crisis as compared with the other members of the G8. Overall, the economy grew by 6.1 per cent in the first quarter, propelled by housing and consumer spending. According to the Bank of Canada, this growth was as expected; however, the housing sector is expected to cool as the year progresses and any growth will be dependent on other sectors of the economy. Meanwhile, the Jim Flaherty, the Minister of Finance, is pleased that the global bank tax has been quashed by a meeting of G20 finance minister. The Canadian government is vehemently opposed to the tax, proposed by the International Monetary Fund, as the federal finance minister believes that it is unnecessary for the Canadian financial system. During the economic crisis, no

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Last updated on 17/06/2010 To view full articles click on hyperlinks. Canadian bank required or received any form of financial assistance to maintain liquidity. Finally, the Canadian dollar has maintained its position just under parity with the American dollar (CDN$1 = US$0.9685). The Canadian economy has been buoyed by high commodity prices, notably petroleum products and minerals, which have maintained a highly-valued currency.

China According to analysts, China’s economy is growing faster than expected. Figures released for May show that exports rose 48.5 per cent over May 2009. Statistics also show that imports increased by 48.3 per cent. This rapid growth in the trade surplus has increased calls from many camps that the Chinese government allows the yuan to appreciate. Beijing pegged the yuan to the American dollar in 2008 in response to the economic crisis, and combined with the recent statistics, there have been accusations from the American Federal Reserve that the Chinese government is a currency manipulator. The rapid recovery has also caused a small side-effect: a rise in inflation. Figures show that consumer price inflation rose to 3.1 per cent in May, slightly above the government’s target of 3.0 per cent. Given that factory output in May grew at a slower rate than in April, the government is now in the tough position of whether or not to raise interest rates to curb inflationary pressure. Despite inflation, the Conference Board’s Leading Economic Indicator has placed China at the top of the list in economic recovery. Even with this good news, the continued debt crisis in Europe is hampering global recovery and there is reason to believe that exports from China to Europe could slow China’s economic recovery in the short term.

NewcZealand To avoid inflation, New Zealand’s central bank raised its interest rate - from record-low 2.5 per cent to 2.75 per cent - for the first time in 3 years. Reserve Bank governor Alan Bollard had kept the official cash rate (OCR) at a record-low 2.5 per cent since April 2009. In his ninth scheduled review of monetary policy since then, he said that the economy has entered its second year of recovery with growth becoming more broad-based. Bollard rejected calls to keep the interest rate down, as labour unions, manufacturers and farmers argued that the recovery was still too fragile.

Philippines

The Philippines may reduce budget deficit goals for this year and the economic planning team is aiming at raising the low end of its economic growth for this year to 3.6 (current estimate being 2.6-3.6 per cent). According to Augusto Santos, acting Economic Planning Secretary and a member of Monetary Board of the Philippine central bank, growth should be sustained thanks to rising consumption, exports and business-process-outsourcing industry. All in line with President-elect Benigno Aquino’s campaign - no higher taxes, no new levies, more jobs, more investments, bigger incomes and general growth. The government predicts that the budget deficit will narrow to 285 billion pesos ($6.1 billion) in 2011 from 293 billion pesos this year. The government is still considering a growth target of 5.9-6.9 per cent. The Philippine central bank’s accommodative policy stance could last, due to ‘benign inflation outlook until 2012.’

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SouthcKorea South Korean Deputy Minister of Finance stated that the country will decrease the limit of capital flow in order to reduce the volatility of the currency market and will not increase interest rates unless there is clear evidence of a sustainable recovery of the economy. The measures introduced by the government will be aimed mainly at preventing foreign investors to drop out from the market. By favouring policies supporting growth and maintaining stability, South Korea’s policy makers are attempting to avert the impact of the financial crisis. There is a strong probability that the country’s currency will weaken from the current level of 1.248 to 1.280 per dollar. As Asia’s fourth-largest economy, South Korea still expands at a faster rate than expected. Economic growth reached 2.1 per cent in the first quarter of 2010 and the May unemployment rate fell to the lowest level since October 2008. South Korea’s good economic situation is triggered by exports boosting almost by 42 per cent in May. Nevertheless, the Bank of Korea will probably keep the benchmark interest rate at a record low level of 2 per cent. Asia’s central banks are calculating the need to avert overheating their economies by increasing interest rates from the world recession levels and ignore the potential impact of European debt crisis on the global recovery. While China and Indonesia share South Korea’s viewpoint, Malaysia and India are forecasted to keep increasing the borrowing costs as has been happening for several months now.

UnitedcStates The true cost of the public bailout of Fannie Mae and Freddie Mac has been released. The two mortgage guaranteeing companies have now drawn a total of $145 billion from an unlimited line of credit set up by the federal government. Through the various bailouts, both Fannie Mae and Freddie Mac are now 80 per cennt owned by American taxpayers. Though the amount is rather high, the increasing number of mortgage defaults has led some to claim that the bailout of the two companies might reach $1 trillion. In other news, the US trade deficit has widened to a 16-month high. According to statistics released by the Commerce Department, the monthly deficit for April stood at $40.3 billion, with exports and imports down 0.7 per cent and 0.4 per cent respectively compared to February. Furthermore, the trade deficit with China increased 14 per cent to $19.3 billion. Despite these numbers, imports and exports have steadily increased, but have yet to return to pre-crisis levels. According to the Bureau of Labor Statistics, unemployment is decreasing. Numbers released in early June show that the United States added 431,000 jobs in May, bring down the overall unemployment rate to 9.7 per cent. Private sector employment changed little and most of the job growth can be attributed to manufacturing and the creation of part-time positions in the service industry. Mark Zandi, the chief economist at Moody’s analytics said that while we will see a period of job growth, it is going to take a long time to get back the jobs we lost in the recession. He estimates that it will not be until 2013 that unemployment in the US will return to pre-crisis levels.

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INSTITUTIONS

European Union: All European Union Member States will publish the results of stress tests on their banks in the second half of July at the latest to boost investor confidence in the financial sector. European Commission President José Manuel Barroso wants the disclosure of the results of ongoing stress tests on a bank-by-bank basis. He asked the Council for a firm commitment on this.

EU Summit: On 17 June, the EU leaders met in Brussels and adopted the following conclusions. They

agreed that the emphasis must now be on the implementation of the ’Europe 2020’ strategy. The EU leaders reaffirmed their collective determination to ensure fiscal sustainability, including accelerating plans for fiscal consolidation where warranted. Moreover, they confirmed their commitment to ensuring financial stability by addressing the gaps in regulation and supervision of financial markets, both at the level of the EU and at the G20. Finally, they agreed on first orientations as regards the Stability and Growth Pact and budgetary surveillance as well as broader macroeconomic surveillance. The Task force on economic governance is supposed to deliver the final report in October 2010. The Van Rompuy Task Force will look at whether withholding EU funds might be an option for punishing errant governments, while an earlier Franco-German proposal to suspend countries' voting rights has met with a cold response from other member states. There have been ongoing concerns among diplomats about the practicalities of imposing sanctions, with some fearing that financial penalties would exacerbate economic problems. At the insistence of German Chancellor Angela Merkel, Sarkozy dropped his earlier suggestion that the EU's economic government should be dealt with only among the 16 members of the Eurozone. UK Prime Minister David Cameron secured an opt-out on closer economic integration. Nicolas Sarkozy and Angela Merkel also won EU support for a tax on financial transactions, even though the idea has found little traction at global level. In spite of global skepticism, the German and French leaders pushed for the issue to be put back on the agenda of a G20 summit on 26-27 June in Toronto.

European Parliament: The state of Europe's economy and how to fight growing unemployment were the main topics in the discussion of the leaders of Parliament's four largest blocs on 10 June. They were joined by the President of the European Parliament, NGOs, business leaders and leaders of civil society. The uncertainty over the euro, taxes and the state of Europe's pensions systems were also debated. On 1 June, the European Parliament's Economic and Monetary Affairs Committee debated the report on remuneration of directors of listed companies and remuneration policies in the financial services sector. It will be voted upon on 22 June and in plenary in July. The report says that leading managers of financial institutions were encouraged to engage in excessive and imprudent risk-taking, because the size of their pay checks depended on such behaviour. The reports states that every financial institution and listed company should have a remuneration committee which determines the remuneration policy; members of the committee should not hold executive functions, their pay should be fixed, not based on performance of the businesses they supervise; firms should allow shareholders

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Last updated on 17/06/2010 To view full articles click on hyperlinks. to have information on pay packages and have their say; and there should be an appropriate balance between fixed and variable compensation, the latter not making more than 50 per cent of the total.

European Commission: In its latest Communication, the European Commission put forward

concrete, broad-based initiatives to strengthen economic policy coordination in the wake of the Greek sovereign debt crisis. The Commission proposes to reinforce decisively the economic governance in the European Union. The aim of the Communication is to strengthen the functioning of the Stability and Growth Pact and extend surveillance to macro-economic imbalances. It proposes to align national budget and policy planning through the establishment of a ‘European Semester’ for economic policy coordination, so that Member States would benefit from early coordination at European level as they prepare their national budgets and national reform programmes. Finally, the Commission considers it to be a priority to ensure that the European stabilisation mechanism approved by ECOFIN on 9 May becomes fully operational. Based on this experience, the Commission intends in the medium-to-long term make a proposal for a permanent crisis resolution mechanism.

European Council: The Task force on economic governance, at its first meeting, agreed on the four

main objectives: strengthening budgetary discipline through the Stability Pact; reducing divergences in competitiveness between the Member States; ensuring an effective financial crisis mechanism; and improving economic governance and coordination. At the second meeting of the Task force President of the European Council, Herman Van Rompuy, concluded that on the Stability Pact, they made progress on a number of elements. The first is the so-called ‘European semester.’ In the spring, national budgetary plans would be presented to the Commission and EU Member States. They will also improve the Pact by creating more sanctions earlier on in the process of scrutiny. Sanctions could already kick in before the 3 per cent threshold for the annual deficit is exceeded, for instance, if warnings have been neglected, or if the level of debt rises too quickly. As regards the level of public debt, so far the focus has been almost exclusively on the maximum annual deficit, the 3 per cent of GDP. Much less attention has been paid to the level of public debt, the 60 per cent. This needs to be corrected. Member States also supported ensuring the independence of national statistical offices for data provision, free from political influence. On the competitiveness surveillance, the Task force agreed that macro-economic surveillance should function next to the budget surveillance of the Pact.

EPP Views In a measure to fight the crisis and unemployment Barbara Matera, MEP for the European People’s Party and rapporteur for the Globalisation Adjustment Fund, states that the funds decision to approve two requests from Spain and one from Ireland is a clear message to European citizens how the EU can help tackle the economic downturn. On 10 June , political leaders in the European Parliament stressed that they strongly supported the Chairman of the Eurogroup, Jean-Claude Juncker to be responsible for the oversight of economic governance together with the European Commission and the European Central Bank. Several MEPs stressed the need for new financial rules and need to focus on how derivates have the ability to destabilize financial markets.

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OUR COMPETITORS’ VIEWS S&D As a member of the Development Committee, Michael Cashman from the S&D heavily criticised the outcome of the revision of the Cotonou Agreement with the ACP. He stated that ‘development is not just about fighting poverty, the growth of freedoms and the respect for fundamental rights are an essential part of it.’ He specifically mentioned the issue of readmission of illegal immigrants and the lack of a more sustainable political dialogue as critical points. On another note, the S&D MEPs welcomed the EU finance ministers’ final agreement on a stabilisation fund for the Eurozone but called for a permanent Eurozone stabilisation fund. Silvia Costa, S&Ds shadow rapporteur on the EU Youth Strategy, fears that the youth are the ones that will have to pay for the crisis if the EU does not reform its policies.

FROM THE BLOGOSPHERE… Does Japan really have a public debt problem? Martin Wolf elaborates on Japan’s unmanageable

public debt problem.

Unemployment Hurts More Than Inflation: David G. Blanchflower argues that inflation is a smaller

threat for today’s world.

Why Retail Sales Are Stronger Than the Headlines Suggest: Christina Cheddar Berk forecasts that the

weaker spending may have only been temporary.

UPCOMING EVENTS Event: G-20 Summit Date: 26-27 June 2010, Toronto

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