The European Union (EU) has officially started the membership negotiation with the Republic of Montenegro. The talks are held to persuade other countries in the Western Balkan that the reforms are paying off. The Montenegrin government submitted an EU membership application on December 15, 2008.

The negotiation might take several years before the country can be an official member of the Union. Also, Montenegro has conducted improvement in the judicial system to curb corruption and organized crime.

In January 2011, some of Montenegro’s senior municipal officials faced accusations of corruption. The former Prime Minister, Milo Djukanovic, was investigated by the Italian police and faced charges, over one billion US dollars, for a cigarette smuggling operation based in Montenegro in 2009. Montenegro has made additional efforts to further strengthen its anti-corruption by legalizing anticorruption legislation and strategies in governmental anticorruption institutions and agencies to help the government’s effort in fighting it. Also it made efforts in independence, impartiality and efficiency of the judiciary.

According to the official European Commission website, European Commissioner for Enlargement and European Neighborhood Policy Štefan Füle said, “Montenegro already did a lot. But much more still needs to be done. This next phase of the accession process will mean even more work in more areas, with continued focus on fundamental freedoms, judiciary, fight against corruption and organized crime.”

The EU leaders have approved to begin the talks at the summit on Friday, June 29. The next screening of the Montenegrin progressive would be in September 2013.

Of the former Yugoslav republics, Slovenia, as of 2004, and Croatia, which will be an official member in July 2013, have joined the EU, while the Republic of Macedonia and the Republic of Serbia are recognized candidates of the EU. Bosnia and Herzegovina Republic and the Kosovo Republic are potential candidates with no submitted membership applications.

Montenegro is a small country that lies on the Adriatic Sea with a population of about 680,000 and an area of 13,812 square kilometers (5,333 square miles). It became an independent state from Serbia in 2006.

The Montenegrin economy is mainly based in tourism and real estate industries. Montenegro has very rich natural and historical tourist destinations in all regions of the country. Also, it has a coast line of 293 kilometers, making more than 120 great beaches in Ulcinj, Bar, Budva, Tivat, Kotor and Herceg Novi municipalities. the Natural and Culture-Historical Region of Kotor and Durmitor National park are two destinations with UNESCO’s world heritage list.

Between 2006 and 2007, Montenegro experienced a real estate industry boom. Most Russian and UK  investors in the country bought properties in the Montenegrin coast. The direct investments in Montenegro made a rapid growth of the economy. The investments in tourism and real estate fields supported the government to meet the requirement of EU membership program.

Montenegro has no national currency, but uses the Euro. Prior to 2002, it used the German Mark as the official currency. Although it was in federation with Serbia between 1992-2003, it stopped using the Serbian Dinar in 1999.

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Spain has received a 100 billion euro ($125 billion) after denying it needed it for several weeks. Although the announcement of the bailout originally had the global markets opening high, the uncertainty surrounding the details and implications of this bailout have caused the enthusiasm to disappear. Investors are still worried about spending money on Spain and they are also worried about what this bailout means for Italy.

The rating agency, Fitch downgraded Santander and BBVA – two of Spain’s largest banks – from As to BBB+s. This downgrade, in addition to uncertainty in the markets has caused investors to sit on their money rather than risk spending it. Fitch claimed the lower rating was caused by its worries that Spain will “remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013 which directly affects the banks’ volumes of activities in Spain.”

The exact amount of emergency funds for Spain are still unknown, but the amount will be announced later in June after the Spanish banks have been audited. Many Spaniards were surprised about the bailout after their government insisted it did not need the money. There were several demonstrations on June 10 against the bailout after the announcement was made.

The Spanish government insists that the banks are the ones that need the bailout and are receiving the bailout, not the government itself. However, the bailout money cannot go directly to the banks, as Spain wants it to be, and must go through the Spanish government. A troika will also be created to oversee the financial management of the money in Spain just like in the bailouts for the Republic of Ireland, Greece and Portugal.

The bailout was meant to alleviate the concerns within financial markets that Spain itself was unstable and would go down with its banks. According to Richard Hunter of Hargreaves Lansdown stockbrokers, “some much-needed time has now been bought in Spain, which will allow the market an – at least temporary – sigh of relief.” However, the bailout seems to be its own worst enemy. The uncertainty surrounding the exact amount, the outcome and the mechanism of the bailout have not led to more investing.

Most of the bailout funds will come from the newly founded European Stability Mechanism that was formed specifically to help alleviate the Eurozone crisis. The funds are considered a loan that the Spanish government will eventually have to pay back, meaning this bailout makes Spain even more in debt. However, the fund itself will be considered a “senior” creditor which means that it will be paid back first if Spain defaults on its loan. Many investors are worried that they will not get paid back if they invest in Spain by buying its government bonds because everyone would be second to the Mechanism fund. Therefore, the Spanish bonds that were over 6% previous to the bailout are now almost up to 6.5% after the bailout according to the BBC.

Spain was still unsure about receiving a bailout but European finance officials pushed Spain into receiving help for its banks.

Moody’s rating agency has also said that Spain’s banking problem, “is not likely to be a major source of contagion to other euro area countries, except for Italy.”

 Italy

Many are now worried that if Spain’s bailout does not succeed, Italy may be next to need help – if it’s not already too late. Italian bonds are up to 6%, meaning that investors see these bonds as high risk. The Italian GDP dropped 0.8% in the first quarter of this year whereas Spain’s only dropped 0.4%. Most predictions show the Italian economy shrinking at least another 1.5% this year. This is Italy’s fourth recession since 2001 and consumer spending and exports are down.

The Italian government has recently been practicing austerity measures under the government of Prime Minister Mario Monti. The Italian Economic Development Minister, Corrado Passera stated, “this great discipline that we have imposed on ourselves in terms of public finances makes us one of the countries best equipped to confront the financial turbulence that Europe finds itself in today.” Passera also claimed, “in the past months, Italy has done, from a financial point of view, everything that needed doing to save itself.”

Italy currently relies heavily on funding from the European Central Bank, which could hurt it in the long run. However, Italian banks have not suffered as much as Spanish banks because they did not suffer from the same housing bubble. Italy’s unemployment rate is also half of Spain’s and its borrowing costs are lower. Italy’s deficit for this year is lower than Spain’s but its overall debt is higher. Still, Italy is in a fragile position.

Sovereign debt expert Nicholas Spiro has warned that too many are linking Spain’s problems to Italy. “Where Spain goes, there is the perception that Italy will follow, which is terrible because it is like comparing apples and pears.” Spiro claimed that Italy’s economy was “infinitely better” than Spain’s, particularly because Italy did not have to deal with the same housing crisis as Spain.

Although it looks as though Italy may save itself, investors are still too skittish. Currently many reforms are still necessary and will have to be passed over the next year. Prime Minister Monti had the support to push through these reforms but he seems to be quickly losing it.

Monti and newly elected French President Francois Hollande are both in favor of Eurobonds, bonds that are guaranteed by all of the Eurozone. These Eurobonds would help alleviate Italy’s debt and would mean its bonds would not be as high a risk to investors. Hollande and Monti will meet on June 14 to discuss the possibility of Eurobonds. However, Merkel has already announced that she is against them and Germany’s support will be necessary for Eurobonds to be successful at all.

Image Courtesy of   European Council

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According to a report put out by the European Central Bank on Wednesday, May 30, 2012, none of the eight countries that are waiting to join the euro currency are ready. Most countries in the group have only been waiting since 2004 or 2007 but Sweden has been waiting since 1995.

Bulgaria, the Czech Republic, Latvia Lithuania, Hungary, Poland, Romania, and Sweden are the eight countries that are members of the European Union but are not a part of the Eurozone – meaning they are not using the euro as their currency. Seventeen countries are currently using the euro, including Greece, although there have been discussions that it may have to leave the Eurozone. Currently the United Kingdom and Denmark are not using the euro either – instead they are using the pound sterling and krone respectively – but the decision to not use the euro was theirs, not the European Central Bank’s.

The United Kingdom opted out of the euro by negotiating an exception within the Maastricht Treaty of 1992. Joining the euro was heavily opposed by most of the United Kingdom, although its close neighbor, the Republic of Ireland, has adopted the euro. Denmark was able to opt out of the euro as one of the four conditions of the Edinburgh Agreement in 1992.

The European Central Bank must report on the progress of these eight countries every two years. So far it appears as if only Latvia will be able to join the euro currency by the next assessment in 2014. According to the bank, “in none of the eight countries examined, [is] the legal framework fully compatible with all requirements for the adoption of the euro.” They also claimed, “incompatibilities remain regarding central bank independence” in all of the countries.

Additionally Latvia and Lithuania are the only two countries of the eight currently taking part in the exchange rate mechanism II for more than two years which is required to be a part of the Eurozone.

Many of the countries’ economies are doing better than current eurozone countries. Seven of the eight countries – the exception being Hungary – have a debt-to-GDP ratio under 60% which is the Eurozone limit. Currently Greece’s ratio of debt-to-GDP is 165.3% and Italy, Ireland, and Portugal had ratios last year above 100%.

According to a statement from Prime Minister Donald Tusk of Poland earlier this May, Poland is still interested in joining the Eurozone even though the euro has been damaged by the current debt crisis.

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German Chancellor Angela Merkel met with the English Prime Minister David Cameron to discuss the Eurozone crisis. Both leaders support a two-speed approach to the future of Europe.

Several leaders outside of the Eurozone, such as U.S. President Barack Obama, have urged Germany and the other participating nations to take immediate action on the crisis. Cameron stated, “I’m very clear that urgent action is needed to deal with the market uncertainty… [it] is about building firewalls and recapitalizing the banks.” Although Cameron has urged the Eurozone to solve this crisis, he has made it quite clear that he expects them to solve their own problems.

The United Kingdom and Denmark, although members of the European Union, negotiated agreements in 1992 to be excluded from the euro. Both countries wanted to maintain their own currency, which now appears to have been the best course of action.

Merkel has already admitted that the Eurozone crisis has been building over the last ten years and will not be solved in a day. Merkel stated, “now it will also take a few years to get things right again.”

Many economic experts have claimed that the Eurozone structure is faulty because seventeen nations are connected through a currency but are not coordinated with their budget plans. This lack of budget coordination is not a problem until a crisis such as the 2008 recession arises; now the weaker economies are dragging down the whole system. Merkel agrees that something must be done to integrate these nations better. “We need more Europe, we need not only a monetary union, but we also need a so-called fiscal union, in other words more joint budget policy,” she said.

European Union officials in Brussels want Germany, the strongest economy in the Union, to accept jointly guaranteed European debt and allow the European Central Bank to issue eurobonds. These eurobonds would help to regain some of the debt for the other countries as well as Germany, but Merkel worries that issuing these eurobonds would harm the German people and the German economy more. Before any kind of fiscal union is created in Europe, Merkel is insistent that there needs to be more stability from other European Union countries. Some experts claim that the integration cannot wait.

Another suggestion from the European Commission and European Central Bank is the creation of a central banking authority that would help alleviate concerns of excessive debt. Currently, Spain’s finance minister has claimed that credit markets are “effectively shut” to Spain at this time, making it impossible for them to get the billions in euros to rescue their banks. As of 6 June 2012, the European Commission has announced a plan for a “bank union” in Europe that would make it easier for countries like Spain to get credit.

Although many worry that Spain will need a bailout, Spain insists that they will not. Merkel has stated that Germany will not pressure Spain to take a bailout although the funds will be there if they are necessary.

The European Central Bank cannot provide bailouts due to the ‘no bailout’ clause of the Maastricht Treaty of 1992. However, starting in July there will be a 500 billion euro rescue fund known as the European Stability Mechanism.

Merkel has insisted on austerity measures in bailout countries such as Greece, but these measures have been met with great opposition. Many claim that what governments should be focusing on is growth. Merkel claims, “budget consolidation [aka austerity measures] and growth are two sides of one and the same coin.”

Currently a budget-discipline agreement is being discussed across Europe and has already been ratified in some countries. The Irish referendum vote in the previous week affirmed the agreement. Merkel’s coalition government in the German Parliament is working to get the two-thirds majority necessary to approve the agreement. However, the opposition party – which believes the debt crisis can only be solved by spending for growth – has also requested a financial transaction tax be added to the agreement or at least followed by Germany.

The United Kingdom, with London being the biggest financial center in Europe, is opposed to a Europe-wide financial transaction tax. Cameron stated that the tax would “simply [draw] those transactions offshore and to other places.”

On 7 June 2012 Merkel stated, “we need a political union first and foremost… step by step we must from now on give up more competences to Europe, and allow Europe more powers of control.” Although Cameron agrees that the Eurozone must become more integrated financially, his country is not a member of the Eurozone and would not have to deal with the consequences.

After meeting with Cameron, Merkel announced that she is tolerant of a ‘two-speed’ Europe, meaning that while the current Eurozone countries become more integrated fiscally and politically, other countries such as Denmark and the United Kingdom that use their own currency would still be a part of the Union but relegated to the edges. Merkel claims, “we have to be open. We always have to make it possible for everyone [to join]… but we must not stop because one or the other don’t want to come along just yet.”

Merkel says that one of the greatest aids for the European Union countries is to become more competitive. She claims that the economies will improve when they begin producing more on the global market.

An EU summit is planned for later in June and the leaders will discuss plans for a political union. However, according to Merkel, the decision and the arrangements will not be completed in one summit and more meetings will have to be planned.

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In recent weeks Spain’s banking crisis has gone from bad to worse. Spain’s credit rating has recently been downgraded from an A to BBB+ by Standard & Poor’s because of the debt it will most likely take on from its banks and regional government failures. Spain is the fifth largest economy in the Eurozone, leaving many worrying about the ramifications of these recent developments on the rest of Europe.

Currently Spain’s deficit is too high for the Eurozone. The European Commission says that Spain can be given more time to reduce their deficit from the 8.9% of the GDP – as it stands currently – by 2013. However, the high deficit in Spain is causing fewer individuals and countries to risk investing in the country.

Bond yields in Spain are up to 6.7% meaning that they are high risk. Yields on bonds are higher when they are riskier because investors want a higher return if they are putting money into something that is unstable. In contrast the German and US bond yield is at 1.28% and 1.64% respectively. Therefore, instead of investing in Spain’s government bonds more people are investing in the US and Germany. However, this high bond yield also means that Spain will accumulate more debt and have to pay a higher interest when borrowing money.

Despite all recent efforts the Spanish economy is expected to shrink 1.8% this year alone and another 0.3% next year. However, Prime Minister Mariano Rajoy insists that Spain will not require a bailout like Portugal, the Republic of Ireland, and Greece have needed; Spanish banks, on the other hand, have already asked for bailout money.

Bankia, a recently formed banking group of seven banks, asked for a 19 billion Euro bailout. Bankia originally reported a 309 million Euro profit for the year of 2011 when it actually had lost 2.98 billion euros. It is unknown as of yet how Spain will get the bailout money when it is already struggling under its own deficit.

The President of the European Commission, José Manuel Barroso, has suggested that they use the Eurozone’s new 500 billion euro stability mechanism to inject some capital into the banks, but Germany, Europe’s largest economy, has already rejected the plan. Another option is for Spain to give Bankia government bonds to then trade with the European Central Bank (ECB) for money.

Although it has been reported that the ECB has already rejected this plan a recent article by the BBC claims that these reports are false and that the solution is not yet off the table. The European Commission has also suggested creating a “banking union” to monitor all Eurozone banks in the future.

In addition to struggling with the mounting bank debts, Spain is also forced to rescue several regional governments who are no longer capable of borrowing money. Several regional governments have gone bankrupt and rating agencies, such as Standard & Poor’s, have put these regions at junk status. Most recently Catalonia, the wealthiest autonomous region in Spain, has asked for help from the central government; Catalonia accounts for one-fifth of the Spanish economy.

Spain is giving these regions government-backed bonds which they can then use to borrow money. However, as stated previously, these bonds are at a high yield which makes this solution temporary. A Spanish economy ministry spokesperson stated, “the goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not ale to borrow on the market.”

Regional banks have tried to strengthen each other through mergers. Ibercaja, Liberbank, and Caja3 merged in late May to become more resilient. This merger created the seventh biggest lender in Spain with 120 billion euros in assets. Liberbank and Caja3 were previously mergers of four and three regional banks respectively.

Spain’s unemployment as of April is at 24.3%, the worst in the Eurozone – even worse than Greece. It is expected to climb to 25.1% by 2013 even with the recent precautions taken by the newly elected center-right government. Prime Minister Rajoy has made several labor market cuts including cutting back on severance pay and restricting inflation-linked increases in salary; these decisions have been unpopular with unions and workers. Spain’s high unemployment also means that there are fewer people who are paying higher tax rates or even paying taxes.

Spain’s economy is heavily tied to the economy of Italy, the fourth largest economy in Europe. These close ties lead investors to worry that if there is a run on the Spanish banks there will also be a run on the Italian banks, throwing both countries into a deeper crisis. Italy is now borrowing at a rate over 5.66%; borrowing at a consistent 7% rate is considered unstable and has triggered the bailouts for Greece, Portugal, and the Republic of Ireland in the past.

The Spanish debt crisis was not caused by irresponsible government spending such as in Greece. Spain ran a balanced budget every year until the recession hit in 2008. The problems were planted when Spain joined the euro in 1999 and interest rates fell because Spain’s economy was good and other economies, such as the German economy, were not.

Investors wanted to invest in Spain which is what drove the interest rates lower. While the Spanish government resisted taking out more loans because of the cheaper interest rate the Spanish people did not. The country experienced a long housing boom that also affected the construction sector. When the recession hit, the housing and credit bubbles burst leaving many banks with toxic debt – debt that was unlikely to be repaid.

Image Courtesy of  Alberto Carrasco Casado

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Slowly, but surely, the tide has been turning in favor of sterling over the past few months, with the euro now significantly weaker against the pound than it has been for many months. In fact, the last time sterling was at its current level of approximately EUR1.20 to the pound was in the summer of 2010 and, before that, in December 2008.

While the UK economy is not yet showing any significant signs of recovery, it seems the weakness which has affected sterling may finally have bottomed out, with currency markets now punishing the euro, which has weakened against both sterling and the U.S. dollar.

For the UK buyer who has been searching for a new home in France, this is significant. The effect of the exchange rate changes over the past few months has been to effectively reduce property prices by around 10 percent, according to Offshoreonline.org. Add to this the aggressive pricing by developers in areas of the Cote D’Azur, such as Nice and Cannes, and the scene is set for UK buyers to at last be able to take advantage of what has been one of France’s stronger property sectors.

Exchange rate movements are important for buyers from the UK. Put simply, around six months ago, one pound sterling would have bought EUR1.10, but now for the same pound sterling, the UK buyer can expect to receive over EUR1.20. The net effect is to make any purchase of euros around 10 percent cheaper, saving GBP 20,000 on a GBP 200,000 house purchase, for example.

Buyers looking at high end new launches, such as Parc Eugenie in Cannes, should immediately see an enhancement to any rental returns, as with lower upfront purchase cost, the real yield they can expect will rise accordingly.

Commenting on the improved outlook for UK buyers in France, Offshoreonline.org managing director, Tim Harvey, said, “Exchange rates are a vital part of the mix for most UK buyers operating in France, but now it seems the tide may be moving slowly in favor of the UK buyer, with the weakening euro opening up some very attractive options for UK buyers.

With mortgage rates available from 3.45 percent, we have noticed a slow, but steady, increase in enquiries since before Christmas which has continued into the New Year.”

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Both the FTSE 100 and Dow were expected to make modest gains by the end of 2012, according to a survey of 100 senior representatives of investment firms. The Euro was expected to deteriorate further compared to sterling, while the US dollar would increase in value. However, the majority interviewed thought that President Obama’s government had not done enough to stimulate the economy in the US.

In respect of improving business and the economy in the UK, there were calls for tax cuts both for individuals and for businesses together with the elimination of stamp duty on share purchases. A number of respondents also demanded that the government did more to simplify rules for pensions, stopped changing pension rules and improved the level of understanding of investments, particularly those which were more tax efficient, e.g. ISAs.

Those interviewed were asked to predict the best FTSE companies for capital growth in 2012. Vodafone was the most popular choice in the FTSE 100, followed closely by Barclays and BT. Balfour Beatty and Centamin Egypt featured well from selections from the FTSE 250.

A wide selection of funds were also selected. These included iShares FTSE 100 and Liontrust UK for capital growth and the Artemis and MG Optimal for income.

Other predictions included:

Inflation                                 To fall to 4.25%

Base Rates                           To remain at 0.5%

Unemployment                     Increasing to 2.75 million

Price of Unleaded Petrol      GBP1.43 per litre by 31st December 2012

The survey was carried out by financial services management consultants, Goodacre UK and sponsored by TD Wealth Institutional.

Commenting on the responses, Stephen Pinner, Goodacre’s MD, said

“The survey responses suggest that markets will remain slightly ahead of where they are now. There was a high degree of confidence that levels of inflation would reduce throughout the year although further increases in unemployment were predicted. With base rates estimated to remain so low, most of those interviewed thought that the best investment returns would come from equities and funds”.

The survey was based on personal interviews of 100 selected representatives from UK based investment companies. The survey was conducted from November through to December 2011.

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Contradicting Europe’s right-wing rise, the Danish Social Democrats have won the Danish Parliamentary election on September 15. The election have ended a decade of center-right majority in the Danish Parliament whilst electing their first female leader, Helle Thorning-Schmidt.

According to three polls released on the 14th September, voters were ready for a change as they prepared to cast their vote on the 15th, in order to elect the 179 members of Parliament. The Prime Minister in office Lars Loekke Rasmussen, who took over two years ago, replacing Anders Fogh Rasmussen who went on to be NATO Secretary General, was not taken too kindly by the Danish people as early voters cast their ballots and criticized his policies. Rasmussen lead a coalition composed of pro-market Liberals and Conservatives and was supported by the Danish People’s Party (DPP), a far-right and xenophobic party.

The election is expected to usher in the end of market reforms and strict border control, while the Socialist Democratic party will make a comeback as the majority leader in the Parliament, after 10 years in opposition.

Even though significant changes aren’t expected, Thorning-Schmidt, 44, hopes to protect the welfare system by raising taxes on banks and the rich and refrain from several austerity measures formulated by the government in order to avoid waves of contagion from debt-ridden countries. Altough Denmark did not hop on the Euro train, its economy relies on the export of national products to other European countries and its currency is subject to the uncertainty attached to the Eurozone.

According to a recent Associated Press interview, “We have a government that has believed that austerity was the right way to achieve more growth in Denmark,” Thorning-Schmidt said, “Austerity and tax cuts are not the right course for Denmark. What we want to achieve is to create more growth, kickstart the economy and then after that create the foundation for a new sustainable growth.”

The votes of Thurday’s election have been accounted for and resulted in a narrow win for the Social Democrats, with 92 seats, against the 87 seats won by Rasmussen’s coalition. Thorning-Schmidt must now manage a left-wing alliance consisted of former marxists, environmentalists, social democrats and liberals, who don’t see eye to eye in a small array of topics. There is some evidence of possible disagreement among the coalition parties. Margrethe Vestager, leader of the Socialist Liberal party, agreed to the austerity package presented by the previous government and is not backing away from that decision:

“We have made a deal which we believe is really good. It means that we will get more money in the chest and a sound economical starting point,” she said. Thorning-Schmidt’s toughest challenge has proved to be finding room in her Cabinet for the leaders of the Socialist Liberal Party and the Socialist People’s Party. According to political analyst Rune Stubager of the University of Aarhus “Her two coalition parties will try to almost tear her apart. The early retirement issue will be a big one for them to deal with.”

Hopefully, the election have created a turning point in immigration policy, as ten years of strict immigration and refugee legislation come to an end.

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