Here's today's look at some of the top stories on markets and politics in Europe:
Putin pardons Khodorkovsky
Russian President Vladimir Putin signed a decree pardoning his best-known political opponent, former oil tycoon Mikhail Khodorkovsky. Formerly Russia's richest man, he has been in prison on trumped-up charges since 2003. Putin explained to reporters on Dec. 19 that Khodorkovsky had asked for a pardon in a personal letter, because he needed to spend time with his seriously ill mother. Not even Khodorkovsky's lawyers knew of the letter, and some observers doubt its existence. The former oilman had less than a year of his prison term remaining and releasing him now gives Putin a chance to appear merciful ahead of the winter Olympics in Sochi. Pro-Kremlin commentators will now do their best to portray Khodorkovsky's hypothetical appeal for a pardon as an admission of guilt, so as to neutralize any attempt by the ex-billionaire at regaining political prominence.
Banking union criticized as S&P downgrades EU
After EU finance ministers agreed, under German pressure, on a "single resolution mechanism" for bank insolvencies, a wave of criticism is rising in the banking community and even among EU officials. Standard & Poors seemed unimpressed, too, stripping the EU of its AAA rating, citing a lack of cohesion among the members and increasingly contentious budget negotiations. The problem with the single resolution mechanism is that it is not so single. Though the European Central Bank will supervise the biggest banks, it will be up to national governments to wind them down, first punishing banks' depositors and creditors with haircuts and then using their own resources to recapitalize banks. Only by 2026 will there be single rescue and deposit guarantee funds, and even then, at $136 billion, it will be puny compared to the European banking system's $35 trillion in liabilities. Even the recent bank bailouts in Ireland and Spain would have been impossible with a fund of that size. The imperfect mechanism is better than nothing, but it is designed to protect German taxpayers more than save failing banks.
Eurofighter maker suffers $9 billion setback
The U.K.'s BAE Systems revealed that the United Arab Emirates declined to buy 60 of its Eurofighter Typhoon jets for about $9 million. It would have been a major deal for the defense company and the U.K. government. British Prime Minister David Cameron even took an unscheduled trip to Dubai last month to push for it. The UAE negotiators may have used talks with the U.K. company to extract a lower price from France's Dassault, makers of the Rafale jet. Rafale needs the contract after suffering a setback in Brazil this week, where it was beaten by Sweden's Saab. The competition among EU military jet producers is fierce and losses are painful, because of the high financial stakes. The battles for Middle Eastern and Latin American orders is a good illustration of the reasons why EADS, the European aerospace giant, is cutting thousands of jobs in its defense division: The current market is not big enough to sustain all the players.
French economic growth to remain weak in first half of 2014
The French official statistician, INSEE, released its economic growth forecast for the first two quarters of 2014. After a 0.4 percent increase in gross domestic product in the last three months of 2013, spurred in part by a bump in domestic consumption in anticipation of a VAT hike, France will only see 0.2 percent growth in each of the next three-month periods. With forecasts like this, the French government cannot speak of a true recovery: Such feeble growth is not enough to reduce unemployment or boost demand. Recession in France is replaced by torpid stagnation. It is hard to see how it can be overcome without political change.
EU postpones binding economic reform contracts for members
German Chancellor Angela Merkel announced at the EU summit in Brussels that the introduction of reform contracts for member states will be postponed until October, 2014. The contracts, a German-backed idea, were meant to give the EU more power over members' economic decision-making: A common monetary policy is not enough when budgets, labor and industrial policies remain the states' sovereign territory. Most member states, however, are in no hurry to give up their powers and they persuaded Merkel it was a bad idea to discuss the contracts before a European Parliament election, expected to reflect rise in popularity of euro-sceptics. Merkel is going to find out in the coming months that it's harder to tell countries what to do if they don't expect you to bankroll them. The new German policy of "more Europe at less cost" is wishful thinking.
(Leonid Bershidsky can be reached at email@example.com).