Bershidsky on Europe: Italy Cuts Taxes
Here's today's look at some of the top stories on markets and politics in Europe.
Renzi confirms tax wedge cut, lowers GDP forecast.
The Italian government released its economic policy statement for 2014, confirming an annual cut of $13.7 billion in the tax wedge (all taxes paid on salaries) which, prorated, comes to $9.2 billion for this year. The measure will add $110 to the pay checks of low-income workers, and the government will compensate by cutting spending, raising VAT revenues and imposing a tax on income gained from the revaluation of banks' shareholdings in the Bank of Italy - an inventive way to shake them down. Italian banks do not need more taxes right now - they have been slow to restructure and are only now returning to profitability - but generally Renzi's plan does not hurt business and the extra consumer spending potential should be good for growth. Despite this, Renzi lowered this year's gross domestic product growth forecast to 0.8 percent from his predecessor Enrico Letta's 1.1 percent. The government believes the effect of its reforms will be more pronounced in 2015, leading to growth of 1.3 percent. It also expects unemployment to rise in 2014 before it starts declining. Renzi, known as a populist, is being conservative and careful not to promise too much, which will only work until Italians begin to wonder if he's any better than his predecessors.
Spanish parliament bans Catalonia sovereignty vote.
The Spanish parliament voted 299 to 47 to ban a consultative vote in Catalonia, Spain's wealthiest region, on whether it should seek independence. This is an expected outcome: Prime Minister Mariano Rajoy insists that such a vote is impossible without changing the constitution, which postulates national unity. Rajoy reminded Catalans that they had backed the constitution overwhelmingly. Now, however, 80 percent of them want a sovereignty referendum, according to polls, and Catalan leader Artur Mas says the parliament's decision is "not the end point": he will look at different legal frameworks "to give a voice to the people so they could decide their future." So far, the situation looks like an impasse: Catalan sovereignty has too little support in the rest of Spain for the bid to succeed in any shape or form. The fact that slightly less than half of the region's population wants secession, however, could lead to a radicalization of the movement.
Italian and Spanish debt yields approach that of U.S. Treasurys.
Spanish and Italian bonds maturing in 10 years now yield 3.2 percent - just 0.5 percent more than U.S. Treasuries. The shrinking spreads are largely due to a strengthening euro, which increases dollar yields on Italian and Spanish bonds, and, in part, to expectations that the European Central Bank will buy up sovereign debt if it decides to boost liquidity. With both countries' economies still shaky and political stability less than assured, the ultra-low borrowing costs are beginning to seem ridiculous to some investors. BlackRock has been selling down its Spanish and Italian bond holdings. The low yields have little basis in economic reality and there are countries in the euro area that are faring only slightly worse but providing better yields, such as Portugal and Slovenia.
Valls wins confidence vote with pro-business program.
French Prime Minister Manual Valls won a confidence vote in parliament after presenting a generally pro-business program. It promises a $13.7 billion annual drop in labor costs by 2016 and a reduction of the corporate tax rate to 28 percent by 2020 from the current 33.33 percent "with first steps in 2017." Valls also talked about eliminating "many small, inefficient taxes." Left-wing lawmakers were placated by Valls' promise to cut the social contributions of minimum-wage workers, boosting their take-home pay by some $690 a year, almost a thirteenth salary. Though the plan was enough to give Valls a confident majority -- 306 votes to 239 - it is not ambitious enough: many of the measures will only take effect in two or three years, and what French voters expect is some immediate improvement. Valls' own description of the current situation - "too much suffering and not enough hope" - means quick action would be better received than more promises.
Russia predicts slower growth in next three years.
Russia's economics ministry lowered its official economic growth forecasts for the next three years, predicting the country's gross domestic product will increase 0.5 percent rather than 2.5 percent in 2014, 2.4 percent (down from 3.1 percent) in 2015 and 2.2 percent (down from 3.3 percent) in 2016. Given annual inflation between 4 and 5 percent, real growth will be negative. The ministry predicts little real income growth this year and a capital flight of $100 billion, which should come down to $50 billion in 2015. Deputy economics minister Andrei Klepach says it is time to "use anti-crisis tools," by which he means boosting government spending by increasing the budget deficit from 1 percent to 1.5 percent. Public spending and a weak ruble are the Russian economy's only hopes when investment is tumbling and capital is fleeing. Even the current predictions of weak growth will fall apart, however, if oil prices drop well below $100 per barrel.
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Leonid Bershidsky writes on Russia, Europe and technology for Bloomberg View. Follow him on Twitter at @Bershidsky.
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