Bershidsky on Europe: Renzi's Bold Plan
Here's today's look at some of the top stories on markets and politics in Europe:
Renzi outlines "roadmap" for new Italian government.
After Italian President Giorgio Napolitano consulted with political parties and handed Matteo Renzi the job of forming a new coalition government, Renzi presented a broad picture of what he plans to do as prime minister. First, he aims to introduce changes to the constitution and electoral laws to make governments more stable. Then, in March, there will be new rules for the labor market to deal with high youth unemployment. In April, he'll offer up public administration reform, and in May, changes to the tax system. While Renzi is likely to find common ground with his center-left Democratic Party's coalition partners, who do not want an early general election, the 39-year-old politician's plans sound a little overambitious and idealistic. If the Italian political system were so easy to change, Renzi's potential government would not have been the fourth in less than three years. Yields on Italian bonds are going down, however: It's enough for investors to know Renzi is at least going to try something new.
German ruling coalition faces a crisis of trust.
Chancellor Angela Merkel is holding an emergency meeting today with her coalition partner, Social Democratic Party chairman Sigmar Gabriel, and the leader of her own party's Bavarian sister organization, Horst Seehofer, to try to resolve a crisis of trust in the recently-formed government. Late last week, Hans-Peter Friedrich, one of Seehofer's top allies in Bavaria, resigned as agriculture minister after admitting he had informed Gabriel late last year of a child-pornography investigation against a Social Democratic legislator. Friedrich, who was Interior Minister in the previous government, thought he was doing the Social Democrats a favor during the coalition talks so they would not consider the tainted lawmaker for a government job. A Social Democratic parliamentary leader, Thomas Opermann, then called the Federal Criminal Office to get the tip confirmed. The confidentiality of the exchange was blown to bits as prosecutors loudly complained that politicians were ruining their investigation by tipping off its subject. For the politicians, the child-porn scandal itself does not matter much, especially since the suspected lawmaker has already resigned his seat. Merkel's Christian Democrats are wondering if talking in confidence with Social Democrats represents a risk. That is a serious problem for a cabinet made up of political adversaries, and Merkel's success at crisis management is crucial to the future of the coalition.
Gazprom's market share in Europe at historic high.
Russia's state-controlled natural gas monopoly, Gazprom, reported that 2013 saw it increase market share in Europe and Turkey to 29.9 percent, a historic high. It increased gas exports to Germany by 21 percent, Italy by 68 percent and the U.K. by 53.8 percent. Gazprom benefited from the tentative economic recovery in Europe and the fact that Norwegian competitor Statoil decreased production by 3 percent. Gazprom's prices, which some East European countries consider unfairly high, are still competitive with liquefied gas prices from the Middle East and, potentially, the U.S., and Gazprom is gradually bringing them down to avoid losing market share. The strategy is working quite well so far: Gazprom only hoped for a 30 percent share by 2020. Despite the shale revolution in the U.S., Gazprom's traditional extraction methods are still efficient in Europe because of low production and pipeline transportation costs. Russia's position as the region's major energy supplier, and its resulting political clout, are secure for now.
Head of biggest oil trader calls for Brent changes.
Ian Taylor, chief executive of Vitol, the world's biggest oil trading company, called for reforming Brent, the widely used European oil price benchmark. Brent is a basket of four North Sea blends – Brent, Forties, Oseberg and Ekofisk – and their production has been on the wane in recent years. Less than 1 million barrels a day is now produced, and any disruption could lead to price spikes that would affect markets from oil refining to financial derivatives. It is also getting easier to manipulate the benchmark, something European antitrust authorities believe could already be happening because of the limited number of Brent producers. The answer to the problem, Taylor believes, is to expand the basket to include oil from West and North Africa, Kazakhstan and Russia, possibly even the U.S. It's a long-overdue move that Platts, the price reporting agency, should be in more of a hurry to make, if only to avoid another fixing scandal.
Hollande promises simplified tax regime for foreign investors.
In a meeting with foreign investors in France, President Francois Hollande said he was willing to guarantee stable tax and administrative conditions to large projects at the outset of an investment. He also promised to harmonize France's corporate tax regime with Germany's by 2020, which would mean bringing the standard tax rate from 36.9 percent to 30.2 percent. Apart from that, Hollande promises quick 5-year visas to business travelers and $34,000 grants to foreign startups if they decide to locate in France. None of this addresses what is probably the biggest problem for any investor in France, whether foreign or domestic: the high level of social contributions paid by employers. Besides, the assembled foreign business representatives had their doubts about Hollande's ability to deliver on his promises of investor friendliness and simplicity. Such promises have been made before but the problems remain, pushing France into third place in Europe, behind Germany and the U.K., as a target country for foreign investment.