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Week Ahead (28 August)

Later today several tech firms, including online platforms and search engines, designated as Very Large Online Platforms (VLOPs) will submit their reports to the European Commission summarising the main systemic risks they pose to users under the Digital Services Act (DSA) and presenting their respective plans to address these risks. Last Friday, the DSA entered into force for the 19 tech firms designated by the European Commision as VLOPs, defined as services with more than 45 million active users in the European Union area. The Act introduces obligations for categories of companies, defined according to the size of their user base, with particularly stringent requirements placed on VLOPs. On 25 April, the European Commission designated 19 tech firms, including Google Search, Facebook, and LinkedIn as VLOPs.

The DSA will inter alia impose fines of up to 6% of global turnover on companies found to have violated the rules, while multiple breaches could lead to companies being banned from operating in Europe. The DSA aims to force tech companies to increase advertising transparency, take more responsibility for illegal content on their platforms, and improve data access while it also outlaws advertising which is targeted at users on the basis of their race, gender, politics or religion, as well as any advertising aimed at children. The practice of using so-called "dark patterns", by which internet users are misled into providing their personal data to online companies is also banned under the DSA. The scale of the monitoring operations will be considerable; to that end, the act also imposes an annual fee of up to 0.05% of a company's worldwide revenue to cover the costs involved in monitoring compliance. 0.05% is a ceiling and the costs will be reviewed each year.

Nevertheless, concerns have arisen regarding the transparency and accuracy of these self-evaluations. It remains to be seen whether the reports submitted by VLOPs today will reveal enough information for meaningful discussion with the Commission or will opt to safeguard their strategic interests. Additionally, the specific criteria for the external auditing of these reports are currently under development, introducing a level of complexity to the situation. As for the general public, these self-assessing risk reports will be made public after undergoing auditing. However, the timing of their release is expected between February and December 2024.

This week, the leader of the conservative People's Party in Spain, Alberto Núñez Feijóo, will continue efforts to form a government after King Felipe VI tasked him last Tuesday with the mission of forming a government capable of securing a parliamentary majority on lawmaker vote scheduled on 27 September.

As a reminder, the centre-right Partido Popular (PP) won the most seats (137) with Prime Minister Pedro Sánchez’s PSOE securing 121 seats. Despite coming first, PP underperformed expectations and its path to power was further complicated by the poor performance of Vox, its most likely partner in a right-wing coalition, which lost 19 seats to finish with 33. With 176 seats required for a majority, there is no clear pathway to power, although Sánchez looks more likely to be able to secure the support of MPs from regional and secessionist parties. PP leader Alberto Núñez Feijóo has already attempted to secure a path to power, writing to Sánchez on 30 July to request forming a ‘’grand coalition’’ between the two main parties. However, the Spanish Prime Minister responded by reminding Feijóo of Article 99 of the Constitution stipulating that the candidate who receives the necessary support in parliament, rather than via the popular vote, governs. Instead, Sánchez opted for the current process where the King proposes a candidate to become Prime Minister.

Given that no candidate obtained an outright majority or clear coalition path, tradition dictates that the candidate of the party with the most votes gets the first attempt. If Feijóo fails to win the first vote with an absolute majority on 27 September, a second vote occurs 48 hours later, requiring a simple majority. If this first attempt to form a government fails, a two-month period starts, during which other party leaders, including current Prime Minister Pedro Sánchez, will try to form a government coalition.

Sánchez will almost certainly need to secure votes from the Catalan pro-independence Junts’ 7 MPs. To that end, he will need to open negotiations with Junts party leader Carles Puidgemont who remains in exile in Belgium as he is wanted by the Spanish legal system for his party in the 2017 independence referendum. In exchange, Puigdemont is likely to demand at a minimum an amnesty for all those involved in that referendum plus a pathway towards a fresh independence poll. The latter in particular is likely to be a bridge too far even for the left leaning Sánchez.

With no clear pathway to government formation, another election remains a distinct possibility. If no candidate secures sufficient votes, a new election could be scheduled for 47 days later.

On Wednesday, the Electoral Commission will publish a report based on a public consultation with relevant stakeholders (elected representatives, political parties, academics, sports and community groups and interested individuals) that will make recommendations on Ireland’s electoral constituencies and the number of its elected representatives.

Ireland has a population today of 5 million people and has undergone significant demographic change since the 19th century, with the latest census figures showing an 8% increase in Ireland’s population since 2016. It is expected that Ireland's elected representatives in the 34th Dáil will increase from the existing 160 seats to 171-181, which impacts the numbers needed to form a government, which currently requires 81 members and may rise to 91.

Counties in the province of Leinster (Longford (+14%), Meath (+13%), Fingal (+11%), Kildare (+11%), Wexford (9%) and Carlow (9%)) have experienced significant population growth over the years and therefore will likely be allocated more seats in the future. Some of the counties are split into different constituencies such as Kildare North/South and Meath West/East, while others are merged such as Longford-Westmeath, and Carlow-Kilkenny. The Commission should shed light on how these constituencies will be redrawn for future elections, making political parties reconsider the number of candidates they decide to run in each constituency.

Regardless of the findings, it is likely that Sinn Fein will run more candidates in the next election given how they performed in the previous election and in recent polling. Meanwhile, government parties such as Fine Gael and Fianna Fail may reduce the number of candidates that run in each constituency in order to consolidate their votes. Currently, five members from Fine Gael have announced that they will be standing down and will not be seeking re-election.

The independent Electoral Commission will also have to examine constituencies for the upcoming European Parliament elections, as it was confirmed that Ireland would be allocated an extra MEP. Moreover, the commission will also consider recommendations on election posters, bye-elections, and reducing the required voting age, which is currently 18.

On Thursday, Eurostat will publish the Eurozone’s flash inflation data for August. In July, Eurozone headline inflation was 5.3%, down from 5.5% the previous month, after peaking at 10.6% in October 2022. This was also the lowest euro-area year-over-year inflation rate since the beginning of 2022. However, an acceleration in services inflation offset the decrease in overall inflation, with core inflation remaining unchanged from June at 5.5%.

In June, the ECB raised its inflation forecasts for the next two years, projecting that the headline rate will run at 5.4% in 2023, falling to 3% in 2024 and 2.2% in 2025. Against this backdrop, the European Central Bank (ECB) decided last month to once again raise interest rates by 25 basis points to 3.75%.

With inflation still being significantly above the ECB’s medium-term target of 2%, the release of inflation estimate figures this week may indicate whether core inflation has finally peaked. With bank lending and PMI data weakening, further hikes will increase the prospects of economic recession in the Eurozone.

Thursday, 31 August – ECB to release minutes of July meeting

Meanwhile, also on Thursday, the ECB will release the minutes of its July meeting, indicating the level of support for the governing council’s decision to increase interest rates by 25 basis points.

While a 25-basis point hike had been priced in, markets will be watching closely for indications of how the ECB intends to proceed at its next meeting in September, for which markets are currently pricing in only a 40% chance of another rate hike. At her press conference in July, Christine Lagarde indicated that the ECB likely had more ground to cover in tackling inflation, while also reiterating that the ECB’s decisions will be data dependent.

To that end, the ECB’s own Economic Bulletin, released on 10 August, is of interest as it states that a variety of alternative measures of underlying inflation all appear to have peaked. In particular, the Supercore indicator, which comprises cyclically sensitive HICP items, decreased to 6.0%, down from 6.2% in May while the model-based Persistent and Common Component of Inflation (PCCI) measure, which is expressed in terms of an annualised rate, declined further in June (regardless of whether energy is included). Overall, the authors conclude, recent developments in these measures suggest a turning point in underlying inflationary pressures. The minutes will reflect whether this notion of inflation having peaked is gaining traction among significant sections of the Governing Council.

Attending the US Fed’s Economic Symposium last Friday, Lagarde stated that the ECB’s interest rate policy will continue ‘’at sufficiently restrictive levels for as long as necessary to achieve a timely return to our 2% medium-term target’’, insisting that the Bank will stick to its medium-term target.

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