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FINANCE

Merkel and Sarkozy push financial market reforms

France and Germany on Wednesday called for a European ban on certain high-risk financial market instruments such as naked short selling in a joint appeal that came amid tensions over the eurozone debt crises.

Merkel and Sarkozy push financial market reforms
Photo: DPA

French President Nicolas Sarkozy and German Chancellor Angela Merkel wrote jointly to EU Commission President Jose Manuel Barroso and urged quick action to regulate certain transactions due to “turbulence” on the markets.

“The commission’s work should include a possible ban at European level on naked short selling of all or certain shares and bonds and of certain credit default swaps on sovereign securities,” they wrote in the letter.

Credit default swaps are instruments offering insurance against the risk that a government might be unable to honour payments due on debt it has issued

to investors to cover its overspending.

“Naked” short selling is a particularly aggressive technique of selling assets for a future date without having any immediate access to it, even through borrowing. Traders seek to profit from a future drop in prices.

The biggest market for such financial products in Europe is in London where the new Conservative-Liberal Democrat government is already facing regulatory moves from EU authorities considered unwelcome for British financial centres.

A sudden, unilateral decision by Germany to ban some forms of “naked” short selling in government debt caused consternation in European government debt markets and helped make big deficits and debt in the eurozone a hot issue.

“Strong measures have already come into force,” Merkel and Sarkozy wrote in the letter dated Tuesday but released on Wednesday.

“Severe turbulence on the financial markets in recent months has however raised serious concerns among member states of the European Union and all our citizens,” they added.

“We believe there is an urgent need for the (European) Commission to speed up its work concerning the strengthened framework of the market” governing transactions such as the credit default swaps and short selling.

They called on the commission to present a comprehensive action plan before a meeting of economic and finance ministers of the 27 EU countries on July 9.

Sarkozy and Merkel are to hold talks on Monday in Berlin ahead of a European Union summit later that week that will be dominated by worries over the eurozone’s debt crises.

There have been mounting disagreements between the two leaders over economic policy, including frequent clashes over multi-billion-euro bailout packages for Greece and then the wider eurozone.

Paris had blamed Berlin for dragging its feet over a near trillion-dollar plan drawn up to prevent Greece’s fiscal woes from spreading to other vulnerable countries, saying that it pushed up the price of the package.

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ECONOMY

German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.

READ ALSO:

With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.

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