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Week in Review (8 March)

ECB opts for action following major downgrades to 2019 growth and inflation forecasts

As was widely expected, the ECB used the 7 March publication of its latest staff projections to ‘substantially’ downgrade its forecasts for GDP and inflation growth in the coming year.

The implication of the downward revisions is that the ECB will need to provide accommodative conditions for longer than had been anticipated. This was reflected in the forward guidance, which – despite some concerns about tying the hands of Mario Draghi’s successor as ECB President – was altered to state that the GC now expects rates ‘to remain at their present levels at least through the end of 2019.’

In our preview of the meeting we said that the GC would likely take the opportunity to discuss the idea of TLTRO, and that Draghi could then send a signal to markets that one could be introduced later in the year. In the end the GC followed the course of signalling that a TLTRO would be launched, but opted to provide rather more information on its parameters than had been expected. TLTRO III will run from September 2019 and end in March 2021.

Financial Transaction Tax still won’t die

Plans to implement a Financial Transaction Tax (FTT) across a selection of EU countries have had limited progress since they were first introduced in 2010. The levy has been pursued under the EU’s “enhanced cooperation” mechanism - through which nine or more Member States can pursue a joint initiative. Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia, and Spain make up the group of Member States that have engaged in discussions that have generated little agreement beyond a list of financial products that could be subject to a future tax.

An updated proposal submitted this week shows that the FTT would collect around €3.5 billion per year – significantly below the €20 billion estimate submitted by the original FTT. Ministers from the participating countries will meet at Monday’s Eurogroup to discuss the revised proposal which has been tweaked to apply to companies with a market value of over €1 billion. The document also shows an ambition to expand the pool of participants beyond the current group of ten Member States and suggests that this could be done by linking the proceeds to funding for the EU budget. Given the small sums involved it remains to be seen whether the political will remains to implement it, even on this limited basis.

Investment proposals further highlight divide within Italian government

Our 11 February report noted that the results of the regional election in Italy’s Abruzzo region would exacerbate strains within the government in Rome. A meeting yesterday between Conte, Salvini and Di Maio exacerbated these divisions with Di Maio accusing Salvini of threatening a government crisis due to his insistence that the Turin Lyon high speed rail link go ahead. Conte has indicated that he has doubts over the costs of the project and will go to Paris to discuss costs.

The government is also divided over the proposal to join China’s belt-and-road initiative. Rome’s stated intention to join also highlights the ongoing EU dispute about how to handle China ahead of an EU-China summit on 9 April where EU Member States will look to balance the need for Chinese investment with the wishes of the United States. Shortly after the EU-China summit, China is scheduled to meet with 16 central and eastern European states – including 11 EU Member States. Brussels fears the grouping is a Trojan horse to divide the EU.

Malmstrom back in Washington, as US continues push for agriculture inclusion

EU Trade Commissioner Cecilia Malmstrom arrived in Washington on 6 March for further preliminary talks on an EU-US trade accord. Malmstrom is of the view that a trade agreement can be reached by the end of 2019 if serious negotiations

begin immediately.

Whether such rapid progress is possible will, though, depend on EU Member States. Germany is anxious for rapid progress given that the US government will decide in mid-May on whether to impose automotive tariffs. It is possible that Trump could put a form of conditionality on any such decision, possibly with a quid pro quo on the EU including agricultural products in any trade negotiations.

Following this week’s negotiations, Malmstrom claimed that agriculture would be expressly excluded from a future deal as there is no appetite in Europe for such an agreement. In our view this heightens the risk of US tariffs being imposed on the EU car industry.

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