Bershidsky on Europe: Peugeot in a Pinch

Leonid Bershidsky's take on political, economic, financial and social events in Europe today.

Here's today's look at some of the top stories on markets and politics in Europe:

Ukraine government approvedEU treaty

The Ukrainian cabinet approved a draft EU-Ukraine association agreement, which, when ratified by parliament, will remove some trade barriers between Europe and the former Soviet nation of 46 million people. The agreement has the potential to pull Ukraine out of the Russian sphere of influence. Moscow has insisted that Kiev drop its attempts at European integration and join the Customs Union, which includes Russia, Belarus and Kazakhstan. In August, Russia even waged a customs war against Ukraine, slowing down imports with exhaustive border checks, to show what will happen once Ukraine ratifies the EU association agreement. The Ukrainian government's refusal to bend to pressure from the Kremlin signifies a political choice of partner that could have far-reaching economic consequences for the region.

Peugeot considers capital alliancewith China's Dongfeng

French carmaker PSA Peugeot Citroen has mandated two banks to look into the possibility of a closer alliance with Chinese partner Dongfeng. One of the options is for Dongfeng to take a direct stake in Peugeot, another is a joint venture with the Chinese company to focus on emerging markets. The French company is playing a risky game: General Motors, its second-biggest shareholder after the founding family with a 7 percent stake, has an option to abandon its commitments to Peugeot if another partner takes a 10 percent stake in the company. Peugeot is in a fix. Its European sales are falling and the alliance with GM is expected to help recapture some of the lost market share at home. On the other hand, international expansion spearheaded by budget models has worked well as a strategy for arch-rival Renault, and a deal with Dongfeng would help PSA move in that direction. A separate joint venture with the Chinese carmaker might be the best option for the French company, giving it the cash necessary for an emerging markets push while not jeopardizing the tie-up with GM.

Italian court finesBerlusconi company $660 million

Italy's Supreme Court ruled that former prime minister Silvio Berlusconi's family company, Fininvest, is to pay $660 million in damages to media company CIR for wrongfully gaining control of publishing house Mondadori in 1991. To wrest control of Mondadori from CIR founder Carlo De Benedetti, Fininvest bribed a judge. The ruling, ending a 22-year-long court battle, comes as Berlusconi awaits the outcome of a Senate committee vote that may oust him from the Italian Senate because of a recent tax fraud conviction. Italian courts seem determined to crush Il Cavaliere, weakening his political position as he threatens to break up the governing coalition and bring down Enrico Letta's government. The continuing instability is driving up Italian bond yields and slowing down the country's economic recovery. Meanwhile, it is getting difficult to see how Berlusconi can hope for a final victory in the face of so many defeats. Italy will probably be better off when he is finally driven from the political arena.

Inditex beatsexpectations with earnings increase

Inditex, the company that made Amancio Ortega the richest man in Europe, reported better-than-expected results for the first half of 2013, increasing net income by 1 percent to $1.3 billion. The company, which owns such brands as Zara, Bershka, Massimo Dutti and Pull&Bear, appeared to be immune to each and every kind of global economic malaise, opening 95 new stores in 40 countries and creating 10,111 new jobs. With almost no debt and healthy cash flow, the company that started as a fashion label outsourcing work to individual seamstresses in Galicia now seems magical to investors. The magic, however, is factored into its share price: Inditex trades at 24.7 times the forecast 2013 earnings, compared to Swedish rival H&M's multiple of 23. Despite the unquestionable success of Inditex's business model, it no longer looks like a good investment.

French public spending to set new record

In 2013, France's government spending will reach 57.1 percent of gross national product. In Europe, that figure is second only to Denmark's 57.9 percent. At the same time, the French government is driving up the country's national debt, which will reach 95.1 percent of GDP in 2014. There is much talk in Paris about a "fiscal pause" in 2014 as the ruling Socialists realize that they have nearly taxed the economy to death, but the actual proposals so far amount to a tax hike of 0.15 percent GDP. The growth France showed in the second quarter of 2013 and President Francois Hollande's ambitious new industrial policy are mere smokescreens for a dysfunctional, state-dominated economy that is unlikely to turn into a growth machine overnight. Since January, 190 factories have closed in France while only 71 opened.

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