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The euro zone now has a budget — but no agreement on how to fund it

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BRUSSELS, BELGIUM – MAY 24: French Minister of the Economy Bruno Le Maire (L) is talking with the Dutch Minister of Finance, Wopke Hoekstra (R) prior an Eurogroup Ministers meeting in the Europa, the European Union Council headquarter, on May 24, 2018 in Brussels, Belgium. 

Thierry Monasse | Getty Images News | Getty Images

Euro zone finance ministers have managed a few more steps in their quest for a common budget, but have yet to decide how to fund it and by how much.

In 2017, a wide-ranging and pro-EU speech from French President Emmanuel Macron argued that the euro zone needed its own budget. The idea was to have a pool of money worth several percentage points of euro zone’s growth available to help countries to weather economic shocks.

Since then, the euro area has seen an intense battle of words between two main camps: One led by France supportive of a common budget with direct contributions from member states, and a second , led by the Netherlands who have strong doubts on giving money to other nations without really knowing for what purpose.

What has been the compromise?

The 19 finance ministers agreed, after a marathon meeting that ran into the early hours of Friday morning last week, that the euro zone should have its own budget to help with structural reforms and public investment.

European Commission Vice President Valdis Dombrovskis told CNBC in Luxembourg: “It has been a long night, and indeed we made progress on several important euro zone reforms.”

One economist described the decision on the euro area budget as an “important step into the right direction.” “The euro zone budget is historic as five years ago no one would ever have thought of such a thing. True, it’s only symbolic, only a small foot in the door. However, it could become an important instrument in the future,” Carsten Brzeski, chief economist at ING, told CNBC via email.

Why does this matter?

This is another step in wider efforts to bring the different euro zone economies together, making the entire region more resilient against financial shocks. This is often a criticism and is seen as a disadvantage for those countries that share the single currency who have the same monetary policy but different fiscal realities.

Ricardo Garcia, a euro zone economist at UBS, told CNBC: “The euro zone budget is being structured in quite a growth supportive manner as any grants are linked to reforms or infrastructure projects, which makes sense from a European perspective.”

“The co-financing element further ensures alignment of interest and mitigates the risk of misallocation of funds,” he added.

At some point in time, Germany and the Hanseatic league will have to make up their minds: Do they opt for looser fiscal policies … or a bigger euro zone budget to keep the stability rules alive, or looser monetary policies.

Carsten Brzeski

Chief economist at ING

But what about the funding?

This is likely to be resolved only at a later date. There is disagreement over whether the funding should come entirely from the wider EU budget – the pool of money that all the 28 member states of the EU contribute to. This would prevent euro zone countries from having to put aside much more money than what they already do.

However, the EU has yet to negotiate its own budget for the next seven-year period. Other countries believe there should be additional contributions from the euro zone countries to boost the euro area’s budget.

The EU budget is a combination of contributions from all 28 countries and is used to help with a range of activities across them, such as infrastructure projects, development of rural area, border protection and promotion of human rights. On the other hand, a euro area budget is only meant to be used by the 19 members that share the euro and only with the purpose of supporting structural reforms and public investment.

“The aim is to make the euro zone budget part of the EU budget. The EU budget in turn will depend on what happens with Brexit in October and more importantly, on the result of the German coalition review this year. Therefore again, this is the best we could hope for at this stage,” Garcia said.

This suggests that it will take some time until the European Union approves its next spending plan. Only once that’s achieved, will the euro zone will be able to finish the details for its own budget.

“At some point in time, Germany and the Hanseatic league (a smaller group within the euro zone who are stricter on fiscal prudence) will have to make up their minds: Do they opt for looser fiscal policies — either more flexible rules of the Stability Pact (which determines countries should not have a deficit higher than 3 of growth and public debt above 60% of growth) or a bigger euro zone budget to keep the stability rules alive – or looser monetary policies, ” Brzeski said.

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First-half adjusted net profit slumps

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A sign sits on a wall outside the offices of Julius Baer Group Ltd. in Geneva, Switzerland.

Valentin Flauraud | Bloomberg | Getty Images

Swiss private bank Julius Baer posted a 19% decline in adjusted net profit in the first six months of 2019 as tepid trading continued from its wealthy clients, a dip it nonetheless hailed as a pick-up from challenging conditions late last year.

Switzerland’s third-largest listed bank has recently contended with negative interest rates, choppy markets, and risk-averse clients, as well as lackluster growth from its Italian subsidiary Kairos, which saw outflows in the first six months related to a decline in fund performance last year.

Julius Baer’s adjusted net profit was at 391 million Swiss francs ($397.52 million) in the first half of 2019 – a 19% drop on the year but an 18% increase compared with the second half of 2018.

“Profitability has markedly improved compared to the second half of 2018, as we saw client activity and asset valuations recover substantially,” outgoing chief executive Bernhard Hodler said.

“The cost-reduction program we initiated earlier this year is on track, and we will see its effects materialize in the coming months and throughout 2020, as targeted,” he added.

Hodler is due to be replaced by the bank’s current head of intermediaries and global custody, Philipp Rickenbacher, in September.

While Baer’s overall inflows have picked up since late 2018, margins have been under pressure.

In February the bank scaled back growth targets and announced large-scale cost cuts after a tough end to 2018 caused it to miss its goals.

It said on Monday the program, which aims to save around 100 million Swiss francs by cutting its workforce by around 2% and moving out of less attractive markets, was on track.

It is aiming to hit an adjusted cost-income ratio below 68% by 2020, an improvement on the 71.0% posted through June.

It brought in 6.2 billion Swiss francs in net new money, a 3.2% growth rate that was below its 4-6% target.

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Analysts on Shanghai’s new Nasdaq-style STAR tech board

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People take pictures during an opening ceremony of the Shanghai Stock Exchange’s Sci-Tech Innovation Board in Shanghai on July 22, 2019.

STR | AFP | Getty Images

The first tranche of companies on China’s new Nasdaq-style tech board started trading on Monday, with all the stocks seeing gains on their public debut.

Still, some are cautioning against jumping quickly into the action.

“I think this market, it needs to … basically take a little bit of patience to develop,” Eugene Qian, president of UBS Securities, told CNBC’s “Squawk Box” on Monday.

“For anything new in China, there is a tendency for retail-oriented markets like China to overly speculate,” Qian said, adding that this would contribute to a “short-term bubble” that may not be sustainable.

The new technology board — the Science and Technology Innovation Board, or “STAR Market,” which is operated by the Shanghai Stock Exchange — comes as China attempts to address investor concerns about market volatility and the lack of governance.

It’s easier for firms to go public in the new STAR Market tech board, compared to listing on the Shanghai A-share market, as companies need to go through a registration instead of waiting for regulatory approval which could take longer.

“I think a lot of people are going to really be behind this,” Gareth Nicholson, head of fixed income at Bank of Singapore, told CNBC on Monday. “This is gonna be pretty wild.”

‘Focus on individual companies’

Prior to their public debut, initial public offerings on the STAR Market saw an average over-subscription of about 1,700 times among retail investors, Reuters reported. In the first five days of a company’s listing, no daily price limits will be placed. But after that period, a stock will be allowed to trade within a 20% range.

In comparison, listings elsewhere in China are subjected to a gain cap of 44% on their debut and limited to a 10% gain or loss thereafter.

J.P. Morgan’s Chief China Economist and Head of China Equity Strategy, Haibin Zhu, urged investors to “focus on individual companies.”

“You need to focus on the sector and the company itself, and make sure that they have decent or stable earnings outlook,” Zhu told CNBC’s “Street Signs” on Monday.

With the new stock board primarily aimed at domestic investors, opportunities for foreign participation will be minimal for now.

UBS Securities’ Qian said foreign investors are likely to watch “with a lot of interest” but will likely “wait a little bit out.”

Many of the stocks listed on the new tech board are similar to those on the Chinext in Shenzhen, which is already included by MSCI in its indexes, Qian said.

“I think there will be opportunities for long-term, value-driven … international investors later on,” he said.

Looking ahead, the Shanghai Stock Exchange said an index tracking the STAR Market will be launched on the 11th trading day following the debut of the 30th company on the board.

— CNBC’s Evelyn Cheng, Yen Nee Lee and Reuters contributed to this report.

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Australia grounds Mahindra’s GA8 planes after Swedish crash

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The Airvan 8 utility aircraft manufactured by Mahindra Aerospace stands on display in front of the company’s booth in Geelong, Australia, on Tuesday, Feb. 24, 2015.

Mark Dadswell | Bloomberg | Getty Images

Australia’s air safety regulator has grounded operations of a small aircraft manufactured by Mahindra Aerospace for up to 15 days following a crash in Sweden that killed nine people earlier this month.

The Civil Aviation Safety Authority (CASA) said it had suspended operations of all GippsAero GA8 planes in Australia and all Australian-registered GA8 planes flying overseas from July 20 through Aug 3.

The GA8 single-engine aircraft, built in Australia by GippsAero, is typically used for skydiving, tourism, air patrols, medical evacuations and humanitarian missions in remote locations, according to Mahindra Aerospace’s website.

There are 228 GA8 planes worldwide, 63 of which are registered in Australia, CASA said.

Mahindra Aerospace, a unit of India’s Mahindra and Mahindra Ltd, said CASA’s move was precautionary during the preliminary investigation in Sweden, with which GippsAero was cooperating.

“The preliminary investigation has not identified the root cause of the incident,” GippsAero Chief Executive Keith Douglas said in an emailed statement.

Nine Swedes were killed when a GA8, dubbed the Airvan 8, crashed during a skydiving trip near Umea in northern Sweden on July 14.

CASA said it has been working closely with Swedish authorities and the European Union Aviation Safety Agency (EASA), which has also issued an emergency directive to European GA8 aircraft owners and operators to suspend operations except for ferry flights.

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