Disagreements between Germany and France, and tensions over the eurocrisis, are blamed for the failure of the world's largest defense merger. Photograph: BAE SYSTEMS / HANDOUT/EPA Photograph: BAE SYSTEMS / HANDOUT/EPA
Disagreements between Germany and France, and tensions over the eurocrisis, are blamed for the failure of the world's largest defense merger. Photograph: BAE SYSTEMS / HANDOUT/EPA Photograph: BAE SYSTEMS / HANDOUT/EPA
European markets have closed lower for the third day, as a weak start to the US third quarter earnings season added to existing worries about a continuing global economic slowdown, writes my colleague Nick Fletcher.
Investors continue to be cautious in the wake of the IMF's decision to cut its global growth forecasts and downbeat comments from US aluminum producer Alcoa.
The FTSE 100 has finished 33.54 points lower at 5776.71, down 0.58%
Germany's Dax has dropped 0.4%
France's Cac has closed down 0.5%
Spain's Ibex has dropped 1%
Italy's FTSE MIB has lost 0.41%
Meanwhile across the Atlantic the Dow Jones Industrial Average has dropped 88 points or 0.6%.
As Spain continues to hold out against a bailout, its bond yields have edged lower again.
Incidentally BAE Systems has lost 4.5p to 320.9 but EADS added 5.29% following the collapse of their proposed merger.
And with that it's time to shut up shop for the evening. Thanks for all your comments and we'll be back tomorrow to continue the Neverending Story.
Here's another quote from Francois Hollande this afternoon, during his press conference with Spain's Mariano Rajoy:
If we want there to be more growth in 2013, we have to first restore confidence, that is, do exactly what we have decided to.
Solve the eurozone questions, that's the first condition.
EU leaders have a chance to solve some of the outstanding questions (over banking union, Greece's aid package, other moves towards closer fiscal union) at their summit a week tomorrow.
AMERICAN CHARGED AFTER STREAKING DURING MERKEL VISIT TO ATHENS
In Greece, our correspondent Helena Smith reports that a man who shocked demonstrators yesterday by running naked through the crowds as they protested against Angela Merkel's visit to Athens has appeared before a public prosecutor.
She writes:
The man who soon became the highlight of Tuesday’s anti-Merkel frenzy in Athens, stripping off and running naked in Syntagma square, has been identified as an 56-year old American.
The New Yorker, who has not been named, told a public prosecutor today that he was inspired to take off his clothes to protest the “socio-economic crisis” that is tearing Greece, his adopted home, apart.
The American’s naked appearance caught assembled demonstrators and police so off-guard that it halted the street fighting that was taking place between riot police and protestors at the time. The crowd roared with approval when he ran across the square, waving as he went in all his glory.
The public prosecutor was less approving, however, charging the American with “inciting a scandal” with his indecent behaviour.
Confusingly, it appears that there were two different streakers in Athens yesterday.
Associated Press reports that a second, nippier, chap escaped being grabbed by the, er, authorities:
Louisa Bojesen of CNBC points out that the failure of the BAE/EADS merger suggests Europe still struggles to operate as a single unit, despite the push for closer union.
Are European govts unable to put aside their national interests for the sake of commercial business? #CNBC#EADS#BAE#M&A
Photograph: Antoine Antoniol/Getty Images Photograph: Antoine Antoniol/Getty Images
Spain's prime minister, Mariano Rajoy, said this afternoon that eurozone leaders can solve the ongoing debt crisis if they meet their commitments.
Rajoy told reporters in Paris that euro leaders must deliver on promises such as the creation of a single banking regulator. He said:
We have to show that we're serious people and that we do what we say we're going to do.
The comments echo the stark warning from the International Monetary Fund early this morning (see 8.12am) that the eurozone is the main threat to the global economy.
Rajoy said it was essential that Europe cracked on and established a single banking regulator, but said he "was not aware" that Germany was holding the proposals up.
That follows reports that Berlin wants to maintain the supervision of its local banks, and also delay the recapitalisation of Spain's weak banking sector until the banking supervisor has established a decent track record.
Photograph: Antoine Antoniol/Getty Images Photograph: Antoine Antoniol/Getty Images
French president François Hollande was questioned about the collapse of the BAE-EADS merger at a news conference at the Elysee Palace this afternoon, during a bilateral summit with Spain's Mariano Rajoy.
Hollande explained that his government had laid out its conditions to a merger, but had not actively stopped it. Those conditions included a significant stake in the merged group, and protecting jobs in France.
Here's the key quote:
As an EADS shareholder France set out a number of conditions so the company heads knew what we could accept and what we could not accept...
Back in the eurozone crisis, and our correspondent in Dublin, Henry McDonald, flags up that recession-pummeled Ireland is one of the most expensive countries on earth.
Henry writes:
Newly released figures this afternoon from the Republic's Central Statistics Office reveals that Ireland is the fifth dearest nation in the EU.
Only Denmark, Sweden, Finland and Luxembourgh are more expensive than the Republic according to the CSO.
Prices across the Republic are 17% higher than the average in the rest of the EU, a new CSO report has found.
On the flip side of the ongoing misery indices, the CSO findings Ireland's unemployment rate is the fifth highest in Europe although on a more positive note The Measuring Ireland's Progress Report 2011 predicts the country did record a positive GDP growth rate.
Ben Wallace, MP for Wyre & Preston North, argued that it was a lucky escape as EADS could never escape "the yoke of French and German political interference":
As long as those two squabbling government shareholders were present the deal should never have been promoted.
"Leopards don't change their spots" and it was clear to me from the outset British jobs were at risk.”
Hundreds of BAE employees work at its sites near Preston in Warton and Salmesbury, so live in or near Wallace's constituency (updated for accuracy, thanks Dad!).
He fears that their jobs could still be at risk, and suggested that BAE's top management should consider resigning if they have "put at risk my constituents’ jobs and fatally wounded the UK's jewel in the manufacturing crown".
Photograph: Chris Ison/PA Photograph: Chris Ison/PA
Guy Anderson, senior analyst with IHS Jane's, also believes that BAE Systems is going to feel the heat from the City.
He told Sky News:
There will almost certainly be greater pressure on BAE Systems than EADS to reveal a plan B strategy as soon as possible.
BAE Systems is better placed than many of its contemporaries in terms of margins and global reach, but the EADS merger talks mean the company has put itself firmly out on the field in terms of merger discussions and strategic direction.
Investors are unlikely to be satisfied with business as usual. The continuation of BAE Systems’ strategy of divesting non-core assets appears likely, although circumstances may call for something greater than the low key approach taken so far.
The fallout from the failure of BAE Systems and EADS to secure a deal will carry on for some time, warns our industrial editor Dan Milmo. For BAE, that includes the possibility of another merger.
Dan explains:
There will be a post-mortem after this and it was evident yesterday that the blame attribution was already underway.
But several people are already casting forward, warning that BAE Systems is under real pressure now.
As Guy Anderson, analyst at IHS Jane's puts it: "We think the pressure will be more on BAE than EADS to come up with a plan B."
BAE has, in the City jargon, put itself in play and there are a number of potential merger or takeover partners, none of them any easier than EADS: Boeing; France's Dassault; and Italy's Finmeccanica.
The other option is to go it alone, of course. At which point investors might wonder if a new boss, or a break-up (it's a big player in the US), is necessary. By the way, just on the post-mortem: everyone will be talking about Angela Merkel tomorrow. Multiple sources say that she was the tipping point in this. That said, UK and France also had big concerns. Difficult to pull off a deal like this in secret, let alone in the bare light of day.
Financial experts continue to pin a lot of the blame for the BAE-EADS merger collapse onto Germany.
Some are citing tensions between Berlin and Paris over the eurozone crisis.
Here's some more early reaction from my Reuters terminal (see 13.33 for our first wrap):
Zafar Khan, analyst at Societe Generale:
I would have thought that they would have gone for an extension [from the takeover regulators] but clearly Germany must have dug in their heels for them just to call it a day at this stage.
I take this as very good news as I didn't think this was a very good deal. I think it should be a huge sigh of relief for EADS shareholders.
Etienne de Durand of the IFRI think tank
Given the overall context it does not surprise me this failed - it was always going to be a risky project. Franco-German relations were already difficult because on the big issue, notably management of the euro zone crisis, the two sides don't see eye to eye either on the timing or the substance.
We see of course that it is Germany that has leadership on political and economic questions in Europe. France is in the pilot's cabin but it has not got its hand on the wheel. And that creates difficulties.
The impression you get is that on neither side of the Rhine were politicians very happy with the EADS-BAE tie-up. It seemed to both sides as if they were being taken for a ride by the other.
Simon Nixon of the Wall Street Journal makes the point that disagreements between France and Germany torpedoed the BAE-EADS merger (as outlined at 13.24).
He also points to the lack of co-operation between the eurozone's two largest economies:
BAE_EADS deal mainly torpedoed by Germany - as predicted by @andypeaps here.Bad day for Europe's single market. on.wsj.com/QgVTt7
There had been fears that a BAE-EADS conglomerate would lead to job cuts.
But the collapse of the €35bn deal could also be a blow to Europe's defence industry in the years ahead.
David Gow, our highly experienced former European editor, argued on Monday night that if the merger failed it would be "a hammer blow to Europe's industrial base and future as a centre of innovation and cutting-edge technology":
Europe's defence market has been far too fragmented for decades and needs consolidation. Europe has a substantial market share and reputation in civilian aerospace but the Chinese, Indians and Brazilians are growing challengers.
If the merger fails, BAE will be prey to the giant American groups such as Boeing and Lockheed, its partner on the F35 fighter, or face break-up. EADS's defence business will be similarly vulnerable. The merger helps Europe's manufacturing retain its place in the globalised "champions league".
BAE Systems shares are down almost 2% today, as traders digest the news that it couldn't pull off its merger with EADS, the Franco-German defence firm behind AIrbus.
Richard Hunter, head of equities at Hargreaves Lansdown:
It was clearly a question of shareholder and political issues and they were insurmountable given the time that we had.
EADS were going to have the slightly larger representation in the new company so what they haven't got now is that distraction to the business that they would otherwise have.
Ian Waddell of the Unite Union:
A merger, with a jobs guarantee, would have created a strong new company that could have protected the UK's long term interests.
There was an industrial logic to the merger, but national and political interests proved to be the stumbling block. The UK government now needs to strengthen its 'golden share' and send a powerful message that it backs British manufacturing and BAE Systems.
BAe-EADS deal abandoned. Given failure of European govts to co-operate on anything else, few should be surprised
The collapse of the €35bn BAE Systems/EADS deal in the last few minutes (see 13.11pm) is being blamed on national European government's failure to co-operate better (bit like the eurozone crisis, really).
German chancellor, Angela Merkel, was the main barrier to progress at the political level. As we reported this morning, Berlin feared that the French might raise their own stake above Germany's in future, while the UK wanted both country's national stakes pegged at 9% of the combined company.
There was also bickering over the location of the new joint headquarters, and resistance from BAE System's largest shareholder to the whole deal.
BAE and EADS had until 5pm today to agree a deal or seek an extension, but they appear to have concluded that there was no hope.
European corporate news: the merger between BAE Systems and EADS has just collapsed. In this statement, the two defence firms confirm that they have been unable to reach a deal with the three governments involved - France, Germany and the UK.
BAE and EADS argued that the merger represented "sound industrial logic", but squabbling over national government stakes has left it dead in the water (for now at least).
Ian King, Chief Executive of BAE Systems, today said:
We are obviously disappointed that we were unable to reach an acceptable agreement with our various government stakeholders. We believe the merger presented a unique opportunity for BAE Systems and EADS to combine two world class and complementary businesses to create a world leading aerospace, defence and security group.
And Tom Enders, Chief Executive of EADS, thanked everybody who supported both firms and worked on the deal:
A special thank-you goes to Ian King for his trust and partnership. It is, of course, a pity we didn't succeed but I'm glad we tried. I'm sure there will be other challenges we'll tackle together in the future.
Several Greek observers have reported that riot police used a women as a 'human shield' during yesterday's demonstrations, when they came under fire from rock-throwing protesters.
And writing for the New Statesman this morning, Yiannis Baboulias reports:
Right in front of me, as I was making my way through the backstreets of Syntagma, a hand-cuffed girl was used as a human shield by riot police against stones hurled at them by demonstrators.
She was then dragged by her hair, probably towards the nearby Acropolis police station.
Ugly stuff.
UPDATE: This photo from yesterday is also relevant:
Greek police bravery Part 2/ valentía policía griega, parte 2/ Polizia greca valore parte 2/ αστυνομική γενναιότης ν 2 twitter.com/CrippleHorse/s…
Klaus Regling, speaking earlier this week. Photograph: EU
Klaus Regling, who runs the European Stability Mechanism, has argued that Spain isn't prepared to take the plunge and ask for a bailout because its bond yields are in safe territory at present.
In an interview with Germany's Die Zeit, Regling indicated that he didn't expect a request for help from Madrid until yields are in the danger zone.
Regling said:
It depends on the government in Madrid and on market developments...
The yields on the capital market have fallen for Spain, therefore the country is not currently disposed to getting aid.
Spain's 10-year bond yields is a little lower today, at 5.794%. High, but sustainable.
The curious issue here, though, is that Spanish yields are lower at present than a few months back because a bailout is expected, which would trigger the option of unlimited bond-buying from the ECB to keep borrowing costs down.
Gary Jenkins of Swordfish Research was on good form about the situation in Spain today, after the European finance ministers' meeting in Luxembourg ended last night.
The official communique would lead you to believe that Spain was not discussed at all which is interesting because the Spanish economy minister Luis de Guindos said that “…there was a positive evaluation of Spain’s economic policy and the need to carry out a fiscal adjustment that is sensitive, sensible to the economic situation in the country.”
So it appears that he discussed the situation with someone, although he did say this took place on Monday evening so maybe he was leaning against a bar somewhere having a quiet drink whilst unloading his woes on the bored barmaid.
Photograph: Paul White/AP Photograph: Paul White/AP
Here's a photo of Red Cross volunteers collecting money in the streets of Madrid today, as its first-ever public appeal for donations to help Spaniards in need of help because of the economic crisis (see 10.15am for more details).
Italy saw a jump in its borrowing costs at an auction of short-term debt this morning.
The Italian treasury sold €8bn of 12-month bills at an average yield (or interest rate) of 1.94%. That's up from 1.69% last month, and is the highest level since August.
Not a dramatic move, but a sign that bond trades are more nervous about holding peripheral sovereign debt.
Nicholas Spiro of Spiro Sovereign Strategy said the rise in yields shows Italy is not "out of the woods", adding:
It's much too premature to say that Italy is no longer susceptible to contagion [from Spain].
In the short-term, mounting uncertainty over Spain's willingness to request an ECB-backed bond-buying programme, which the markets are pricing in, remains a key risk factor for Italy.
Just in: Reuters reports that Greek labour unions have called an anti-austerity general strike on Thursday October 18. That will coincide with the first day of the upcoming EU Summit in Brussels.
Back in Greece, there is widespread widespread relief that the anti-austerity demonstrations held to mark the visit had been largely peaceful in nature.
Helena Smith writes:
The presence of tens of thousands protesting against the dead-end policy of pursuing austerity without growth had been driven home to the chancellor, commentators said.
“The Greeks acted very maturely,” said an aide to the prime minister. “We are delighted that many came out to make the point that they are hurting because of the measures but did so in such a calm way.”
As we reported yesterday, the small number of stone-throwing protesters were outnumbered by the many people who marched peacefully through Syntagma Square,
But Greece’s fragile coalition also realizes that the hard work is far from over, Helena adds:
The German chancellor made clear that the debt-stricken country will only get its next tranche of aid – at €31.5bn euro vital to replenishing near-empty public coffers and re-energising the cash-starved Greek economy – once the government passes the controversial package of spending cuts it has been deliberating over for the past several months and implements long-overdue structural reforms. Merkel made a particular point of the latter saying the reforms – many of which should have been enacted when Athens received its first bailout in May 2010 – would boost Greece's competitiveness. Samaras promised to enact the changes – which include opening up “closed-shop” professions, overhauling health care, merging state-run organisations and reforming local administration – by the end of the month. Privatizations will also have to be accelerated.
“The country is going down and down. It has lost 25% of its national outlay since the crisis began,” the minister of development, Kostis Hadzidakis, who is in charge of privatizations, told me. “There is a way forward if we ensure that we change. Because the decline has been so steep the rebound can be spectacular.”
The Red Cross is launching its first ever campaign to raise money for the poorest in Spain.
The charity is asking Spaniards to donate to help feed and support the 300,000 poorest people in their country, which is racked by recession and record unemployment. It hopes to raise €30m through the campaign, which is called Now More than Ever
A campaign video shows the Red Cross delivering a box of groceries to a family with an all but empty fridge.
The campaign underlines the sharp decline in living standards suffered by some ordinary citizens in Europe over the last few years. The Red Cross focuses on providing support to people in the poorest countries of the world (It does also provide emergency support for UK disasters, and healthcare help).
As this map shows, much of its work is in Africa and parts of Asia, not Europe.
Over in Greece our correspondent Helena Smith, says the German chancellor’s visit yesterday has received overwhelmingly positive coverage with many hailing it as a turning point for the crisis-hit country.
Helena writes:
Angela Merkel’s lighting visit to Greece is being seen this morning both by Athens’ coalition government and the media as a resounding success.
The German chancellor may only, as the leading centre-right Kathimerini pointed out, have given “qualified support” but her words of encouragement for a country now mired in a fifth year of recession have gone down well.
Endorsement by the woman long seen as the Mother of austerity has offered the “first ray of hope,” say officials, who like prime minister Antonis Samaras and the press at large have also interpreted Merkel’s visit as marking the end of the isolation Greece has endured since the eruption of the euro zone crisis in Athens more than two years ago.
“The brief presence of Angela Merkel can be seen as only positive,” opined Ta Nea in a front-page editorial headlined “One step closer to rescue.” “The chancellor might have been careful in her pronouncements but she took Greece out of the isolation of the past two and a half years and even declared that she sees “light in the tunnel.”
The daily said while the German leader had not come armed with concrete promises, the visit had also succeeded in putting an end to the hostile climate that had “poisoned relations” between the two EU partners while also sending a clear message that she “has not written off Greece as a member of the euro zone, contrary to many members in her own centre-right camp who would like Greece out of the euro as an example for other laggard partners in the European south.”
Even better, said Ethnos, she had “for the first time” acknowledged the need to extend Greece’s fiscal consolidation programme whose brutal deficit-reducing targets have been blamed for record levels of unemployment and poverty. “In an extremely positive climate, the Greek prime minister and the German chancellor agreed on everything and together sent a message of determination to the markets and those who are fighting the efforts our country is making,” Ethnos wrote.
“The chancellor also made mention of the need to adopt measures [to promote] development which will be supported by Europe and her country. And she also said she was convinced that our country will succeed in its goals saying that “I hope and wish Greece remains in the eurozone.”
Its headline reads: Das hat Deutschland nicht verdient! - or Germany Does Not Deserve This, adding "disgusting protests against Merkel in Athens! And we're paying even more."
The IMF has declared that it would be happy to provide Spain with a bailout, if Madrid requests one.
Speaking to Spanish radio station Cadena Ser this morning Jose Vinals, the IMF's financial councellor said:
The government will have to decide whether to request the ECB's mechanism. It's up to the government and we would welcome any decision to take it. If not, we understand they must have their reasons.
Mariano Rajoy's government continues to resist applying for aid, despite signs that its budget deficit is widening faster than Madrid can cut (details here on Bloomberg).
The IMF's summit in Japan, which begins later this week, has been hit by a diplomatic row. China's central bank governor is reportedly refusing to attend, in the latest twist in the dispute over the ownership of a group of islands in the East China Sea.
Reuters reports that Governor Zhou will not give his lecture during the meeting, leaving his deputy Yi Gang to represent China at the meeting.
In an important message to EU leaders ahead of a Brussels summit on deepening fiscal integration, banking union and bank recapitalisation next week, the IMF issued a stark warning that the lack of decisive action by European governments and institutions risked tipping the global economy into deeper crisis.
The Financial Times focuses on the IMF's warning that eurozone's banks will see a capital flight of $2.8tn (or $4.5bn in the worst-case scenario) unless they 'beef up' their crisis response:
The deleveraging would weigh on growth and add to increasingly high unemployment levels in the region. Businesses would suffer as bond markets proved unable to plug the gap left by banks.
The Wall Street Journal argues that the Global Financial Stability Report "sets the tone" for talks between the world's finance ministers and central bankers meeting in Tokyo this week at the annual IMF and World Bank summit.
With the fate of global growth tied to Europe's crisis-resolution efforts, the report will arm the financial leaders as they press euro-zone authorities for action.
The meetings, which include a conference of officials from the Group of Seven largest industrialized countries, come between two euro summits where officials are trying to hammer out their differences on how to resolve the crisis.
Spain's prime minister, Mariano Rajoy, will be able to discuss the IMF's warning with French President Francois Hollande in Paris today. There are also a couple of bond auctions due.
Rajoy and Hollande hold talks in Paris: from 8am BST
European Parliament debates banking proposals: morning
Italian industrial output for August: 9am BST
Italian auctions €11bn of short-term debt: 10am BST
International Monetary Fund's financial counsellor Jose Vinals, in Tokyo today. Photograph: KIM KYUNG-HOON/REUTERS Photograph: KIM KYUNG-HOON/REUTERS
Good morning, and welcome to our rolling coverage of the eurozone crisis, and other events in the world economy.
Despite recent progress, the eurozone remains the main threat to the global economy. That's the message from the International Monetary Fund today, which has warned that risks to global financial stability have risen in the last six months.
The IMF's latest Global Financial Stability Report, released in Tokyo a few hours ago, said confidence was "very fragile". Unless conditions improve, the eurozone risks a huge flight of capital out of its banks, perhaps as much as $4.5 trillion.
In the latest 'hurry-up' to the eurozone, the IMF said it was vital that policymakers urgently deepen the financial and fiscal ties within the euro area.
Here's the key quote from the new report:
Despite many important steps already taken by policymakers, this agenda remains critically incomplete, exposing the euro area to a downward spiral of capital flight, breakup fears and economic decline.
The IMF did give the eurozone some credit, citing its plans for a new banking union, Mario Draghi's pledge to do everything needed to preserve the euro, and the new €500bn permanent bailout fund.
But unless leaders press on, the euro crisis could flare up again.
From Tokyo, my colleague Phillip Inman explains:
The authors of the report, Peter Dattels and Matthew Jones, said confidence in politicians has waned as each economic initiative fails to unite policymakers.
A failure to tackle key financial decisions in Washington and Tokyo is also blamed for the increase in instability, but the governments are deemed less of a threat than the eurozone and are given years rather than months to sort out their problems.
"Despite significant and continuing efforts of European policymakers, which have been essential in addressing investors' biggest fears, the principal risk remains the euro area crisis," Dattels and Jones said.
"Incremental policymaking has been insufficient to fully allay market tensions, despite the recent market rally since the end of July."
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