Bershidsky on Europe: Flat Payroll Tax in Spain
Here's today's look at some of the top stories on markets and politics in Europe.
U.S. report accuses Credit Suisse of helping tax evaders.
The U.S. Senate Permanent Subcommittee on Investigations issued a 175-page report on the alleged practices of Credit Suisse, accusing the Swiss bank of "cloak and dagger tactics" in the service of U.S. tax evaders. The most colorful charges included handing statements to a client folded into a Sports Illustrated magazine and transacting secret business in elevators. The more mundane accusations ranged from breaking down transactions into below-radar installments of less than $10,000 to setting up tax-evading offshore entities. The subcommittee said 1,800 Credit Suisse bankers were involved in schemes to aid more than 22,000 customers whose assets peaked at $12 billion. The purpose of the report is to spur on a Department of Justice investigation into Credit Suisse, in which only 73 of the bank's clients and 35 employees have been charged so far. The U.S. is getting more aggressive in pursuing Swiss banks, and the $332 million Credit Suisse has put aside for a possible settlement with the U.S. authorities is probably not going to be enough. UBS, which paid the U.S. $780 million, is a bigger bank, but that does not mean Credit Suisse will necessarily get away with paying much less.
Spanish government cuts labor taxes to boost employment.
Spanish Prime Minister Mariano Rajoy announced radical new measures to combat Spain's biggest problem, 26 percent unemployment. The package includes an unusual measure: an employer hiring new staff for at least three years will be allowed to pay a flat $137 per month in social contributions for the employees for 24 months. Rajoy also promised unspecified income tax cuts for middle and low brackets and said incomes up to $16,500 a year, up from $7,100, would be tax-exempt. The income tax cuts will concern 12 million people, according to Rajoy. His government has used tough austerity measures to engineer an economic recovery that pleased the markets and brought Spain's borrowing costs to pre-crisis levels, despite a debt burden of about 100 percent gross domestic product. With general elections looming in 2015, it is time for the government to think about the people, who bore much of the cost or Spain's return to growth. The proposed measures are unlikely to increase Spain's budget deficit: Improved collection will make up for any loss of revenue. If unemployment drops considerably ahead of the elections, Rajoy will earn a mention in the textbooks for his crisis management skills.
Renzi wins confidence vote in parliament.
Matteo Renzi has jumped the final hurdle on his way to becoming Italian prime minister: the lower house of parliament approved his cabinet in a 378-220 vote of confidence. The Senate had also approved the handover of power from Enrico Letta to Renzi, albeit by a narrower margin. As he passed through the parliamentary filters, Renzi shed some light on the details of his plans to reform everything from electoral law to the tax system. He let slip, for example, that he plans about $13.7 billion in payroll tax cuts in a single year. In both senate and lower house, he also pledged to repay all public administration arrears. The little Renzi has revealed about his economic program suggests he intends to imitate the Spanish government's successful moves. To be able to do that, Renzi will have to consolidate his backing in the senate, which Italian analysts say is not strong enough now for the new prime minister's ambitious agenda.
European Commission predicts slow growth through 2015.
The European Commission issued a fresh set of forecasts for the euro area, saying its economy will expand 1.2 percent this year and 1.8 percent in 2015 after two consecutive years of contraction. The broader EU is expected to grow 1.5 percent and 2 percent, respectively, largely thanks to strong forecasts for the U.K. That said the Commission's forecasters are worried about the still-high debt levels and the slow price growth, which could quickly turn into deflation. The official inflation forecast for the euro area is 1 percent in 2014 and 1.3 percent next year. That may be overoptimistic: so far, inflation is running at a 0.8 percent annualized rate. The EC also doesn't see much change in euro area unemployment, predicted to hover around the 12 percent mark this year, and drop to 11.7 percent in 2015. The word "stagnation" is conspicuously absent from the official forecasts - "slow growth" sounds less scary - but that is what they mean.
New Ukrainian leaders promise to propose a cabinet late today.
As paramilitaries shot and wounded a close associate of former president Viktor Yanukovych and a crowd of protesters remained in Kiev's central square, Ukrainian politicians bargained frantically for government posts. Baktivshina, now the strongest party in the parliament, promised to present a cabinet to the assembly in the square tonight. One of its leaders, Arseniy Yatsenyuk, is likely to be named prime minister, while other parties that opposed Yanukovych will get their quotas of ministerial posts. Since Yanukovych fled Kiev last Friday, Ukraine has not really been governed in any regular sense, the former opposition engaged in horse-trading and the politics of revenge. These led to Andrei Klyuyev, Yanukovych's former chief of staff, being shot in the leg by unknown assailants as he tried to make his way back to Kiev on Tuesday. If protesters approve the new cabinet, its first job will be to negotiate for foreign aid, which is likely to be contingent on austerity and cuts to social programs. So far, however, the economy appears to be the furthest thing from politicians' minds. That will have to change quickly, otherwise Ukraine faces an economic collapse in a matter of weeks.
(Leonid Bershidsky writes on Russia, Europe and technology for Bloomberg View. Follow him on Twitter at @Bershidsky.)
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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