The Week Ahead

The Week Ahead
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EU finance ministers discuss European banks and budgets. The Hague rules on South China Sea dispute. The future of the French Socialists lays in the balance. The Bank of England announces first monetary policy decision post Brexit. China releases GDP figures. All in The Week Ahead.


EU finance ministers discuss European banks and budgets

On Monday, the Eurozone finance ministers will meet in Brussels to discuss Italy’s precarious banking position, as well as Greece’s progression with economic reforms. In the case of Italy’s banks, an attempt last week by Italian Prime Minister Renzi to convince the ECB and German government to permit an Italian bailout of overly indebted Italian banks — of which 17% of loans are non-performing, in contrast to America’s 5% at the height of the financial crisis — fell through, leading to a severe downturn in Italian stocks and bank shares. The path forward is difficult to see, given the EU’s constraints on “state assistance” to banking sectors that could be perceived to run afoul of competition law. The Eurozone finance ministers will also discuss the European Commission’s recent objection to Spanish and Portuguese budgets for failing to curb deficits sufficiently in 2015.

This meeting will be followed on Tuesday with a meeting of all 28 EU finance ministers to discuss the Spanish and Portuguese budgets, and whether or not to sanction the two governments. Any significant economic or political blowback to Spain from this budget will do its current political environment no favors. Last month’s election again failed to garner a clear majority for the PP or PSOE — although the PP improved its position, and may end up forging a weak coalition with Ciudadanos, in spite of Rajoy refusing to step down as leader of the PP. 

This will represent the first two major political and economic issues the EU will discuss following the Brexit vote. The EU has struggled mightily to effectively find its footing following the vote, with divergent opinions from member states muddling a united EU voice of stability — some governments, particularly in Eastern Europe, have called for the brakes to be applied on more Europe, while several Western European governments and political parties have called for further reform. Given this uncertainty, it would be unsurprising if Spain and Portugal end up with little more than a slap on the wrist, and the ECB finds some way to accommodate Italy’s banking sector.

 

Hague rules on Philippines-China South China Sea dispute

On Tuesday The Hague is expected to rule on a challenge brought by the Philippines against China regarding ownership over disputed lands and waters in the South China Sea which began following China’s established control over the Scarborough Shoal from the Philippines in 2013. China has long maintained that the court does not have jurisdiction over this case, and has long held that bilateral talks remain the preferred means of dispute arbitration. That being said, many governments including Great Britain, which has established warmer relations with China in recent years, have urged China to abide by the ruling. This will represent a major test of China’s willingness to abide by international rulings that may conflict with the country’s geopolitical interests. China would have major reasons to abide by the ruling as well as major reasons not to.

In terms of abiding by the ruling, if the court indicates that China does not have ownership over the contested waters either because they fall under the jurisdiction of another country or are international waters, the Chinese government would assuage some of the concerns of several of its neighbors, including not just the Philippines, but Indonesia, Vietnam, and Japan. This could also remove a need for a stronger U.S. presence in the region, which China and some of its neighbors have long bristled at. On the other hand, by accepting the ruling of the tribunal, it would tacitly concede the legitimacy of a court the government had long said had no jurisdiction over the case and could embolden future claims against Chinese-claimed waters in the region, as well as weaken the political position of President Xi Jinping. Given the strong negatives of accepting the ruling, China would probably be more inclined to reject it, though the blowback from its neighbors and the United States could be significant. This would also undermine the rule of law in UNCLOS disputes. Regardless of its decision, the governments of Asia and Europe are very likely to discuss it at the 11th Asia-Europe summit in Ulaanbaatar, Mongolia, which will begin on Friday.  

           

The future of the French Socialists may shift significantly this week

Two speeches this week, one by the French President and the other by the French Economy Minister, could chart the future of the French Socialists and alter the 2017 presidential race. On Tuesday, Economy Minister Emmanuel Macron is expected to speak at an En Marche (a new political party created by Macron) rally, and speculation is swirling that he may announce his bid for the French presidency there.

On Thursday, President Hollande will hold a nationally televised interview where he is expected to discuss a wide range of subjects, but will likely at least touch on whether or not he intends to seek reelection. President Hollande has long maintained that he would not seek reelection if French unemployment remained high and growth low. The French unemployment rate remains stubbornly at around 10.3%. Should Macron make his bid for the presidency outside the Socialists — he was himself a Socialist at least until 2009 — this could lead Hollande to withdraw in favor of a more popular French Socialist to run in the 2017 elections. H

owever, Macron’s party, if it manages to grow beyond its current 55,000 membership, could throw sand in the gears of all parties looking ahead to next year’s elections. Do the Socialists continue their schism of some supporting/some opposing Macron’s labor reforms?  Will En Marche bleed support principally from the left, or could his party form a technocratic alternative to both the Socialists and the Sarkozy-led Republicains? How would the Republicains, or even Marine le Pen’s National Front, respond to this somewhat popular, though divisive, figure and his upstart political party? The first sign of a sea change will be President Hollande’s announcement, but it in all likelihood will not be the last major announcement from the Socialists should Macron run — particularly if he continues to push reforms within the Hollande government that most Socialists oppose.  

 

Bank of England announces first monetary policy decision since Brexit vote

On Thursday, the BoE will issue its decision for the UK’s July interest rates. It would not be surprising if the Bank chose not to lower interest rates, given that this would lead to further uncertainty and could be a tacit acknowledgement of the severity of the Brexit decision. However, it could strongly signal its intent to do so over the next few months.

The Bank of England has become, to some extent, the one island of tranquility in a stormy sea; BoE Governor Mark Carney immediately sought to reassure markets following the Brexit vote, indicating that £250 million stood at the ready should banks need further liquidity given the market volatility; Carney also indicated that the Bank would take a slow and deliberative assessment of the British economy before making any major interest rate decisions. This came about despite, or perhaps because of, Carney’s indications several times that a Brexit vote would have severe economic consequences, though dismissed by pro-Leave campaigners. Without putting too fine a point on it, Governor Carney appeared by many to have been the only one with a plan in the event of an actual Brexit vote. Consequently, his moves, as well as the Bank’s, will be watched with extremely careful attention.

China releases GDP figures

On Friday, China will release its GDP estimates for the 2nd quarter of 2016, with many economists expecting a reduction in growth from 6.7% to 6.6%, just a hair above China’s stated growth range of 6.5%-7%. Unless China’s growth estimate deviates significantly from that number, the release may not get nearly as much attention as one would expect, given both geopolitical concerns in the area that may suck up most of the attention in the region, as well as major economic concerns in Europe that will likely drive the economic conversation.

However, should growth rates fall below that estimate, and especially if it falls below the 6.5% target, this could attract significant attention and move conversations about European banks and South China Sea political disputes squarely to the economic strength and security of the world’s second largest economy. A lower growth conclusion could also have major ripple effects, with the Fed holding off — if Brexit didn’t already convince it — on raising interest rates further this summer or fall. This could also lead the Chinese government to overreact and intervene in its markets and banking sectors, which have previously proven problematic.  It would also contradict President Xi’s recent comments that the economy was stable and doing fine.

 

The Week Ahead provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, The Week Ahead presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

The Week Ahead is written by GRI analyst Brian Daigle.

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