ECB gifts disappoint after unwrapping

Santa Mario did not turn into the Grinch, the Christmas monster. However, his long-awaited early Christmas afternoon left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve. At its long-awaited meeting, the ECB today cut the deposit rate to -0.3%, from -0.2%, while leaving all other interest rates unchanged. In addition, the ECB decided to extend the deadline of QE purchases to at least until March 2017, from earlier September 2016, and to introduce other measures, broadening the scope of the monthly purchases. For the first time in a long while, ECB president Draghi underachieved and delivered less than the market consensus had expected. As a result, the euro appreciated and bond yields increased immediately after the policy decision. So what exactly did the ECB decide? Basically five things: i) a 10bp cut in the deposit rate; ii) an extension of the formal deadline of monthly QE purchases to at least March 2017, from earlier September 2016; iii) reinvestments of the principal payments of the securities purchased “for as long as necessary”; iv) the inclusion of regional and local government bonds in the monthly purchases; and v) an extension of fixed-rate tender procedure and full allotment for refinancing operation until the end of 2017. What the ECB did not announce was a bigger cut of the deposit rate, a cut in the refi rate or an increase of the monthly asset purchases. The discrepancy between what the ECB did and did not announce raises the question of the ECB’s ratio behind it and the arguments. Looking at the ECB’s macro assessment, it looks as if almost unchanged growth and inflation forecasts as well as a positive assessment of the impact from QE up to now laid the grounds for the ECB’s rather reserved policy reaction. In more detail, ECB staff now expects GDP growth to come in at 1.7% next year (unchanged) and 1.9% (from 1.8% in September) in 2017 and inflation to accelerate to 1% (from 1.1% in September) next year and 1.6% (from 1.7%) in 2017. The underlying story is still the same one of a gradual recovery with downside risks to growth and inflation. According to Mario Draghi, all ECB measures taken so far have increased the inflation forecasts by 0.5 percentage points for 2016 and 0.3 percentage points for 2017. They also boosted GDP by 1 percentage point over the period 2015 to 2017. Moreover, the ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought and that the ECB itself was surprised by the latest resilience of the Eurozone economy and the estimated positive impact of QE so far. Looking ahead, today’s decision still leaves all doors open for more monetary stimulus, in case the outlook for both growth and inflation were to worsen again. In the short term, however, it leaves the destiny of the euro exchange rate mainly in the hands of the Fed. For ECB watchers, today’s meeting was an important lesson not to take Draghi’s overachieving for granted. All in all, today’s ECB meeting, which was expected as an early Christmas present party, turned out to be a bit of a disappointment, maybe better matching the current Zeitgeist in the Eurozone: no copious and excessive gift party but more introvert modesty.

German consumer defies external woes

No Friday 13th moment for the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.3% QoQ in the third quarter, from 0.4% QoQ in 2Q. Compared with the third quarter of 2014, German GDP increased by 1.7%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was mainly driven by consumption and the construction sector. Investment and net exports were a drag on growth. Today’s GDP data are no relief. They only show that consumption on the back of low interest rates, a strong labour market, low inflation and higher wages is still able to offset industrial and export weakness. In fact, the summer weakness of the German industry seems to be more substantial than only a vacation-driven soft spell. The turmoil in emerging markets and the Chinese slowdown have finally left some marks on the German economy. More generally, the German industry has not managed to accelerate and shift up one gear. Somehow, the weak euro and extremely favourable financing conditions have not fully deployed their full impact on the industry, yet. This is partly the result of weakening external demand but also still the structural lack of investment incentives and projects. Moreover, there might be another interesting aspect, currently affecting the German industry: low oil prices, or better too low oil prices. While low oil prices are clearly not only benefitting German consumers but also producers by lowering production costs, the current question is whether oil prices have actually dropped too far, hurting demand from for German products from oil-exporting countries. This phenomenon of oil bill recycling, ie stronger demand from oil-exporting countries, in the past shielded the German industry against higher oil prices. Consumption, however, is holding up strongly and remains an ever important growth driver. It is not only the strong labour market with record-high employment, low unemployment and wage increases but also the drop in energy prices, boosting purchasing power. In addition, the introduction of the minimum wage has been a positive one-off for consumption. Moreover, the low interest rate environment has further motivated housing investments. Interestingly, while the saving ratio is still relatively stable, household borrowing has increased in the first half of 2015, mainly for property investments and purchases. Looking ahead, the current growth mix is unlikely to change any time soon. The industry should continue to sail in rough seas as the weaknesses in several main export partners should stay around for a while. At the same time, domestic demand, particularly consumption, looks set to continue its recent positive trend. On top of that, the influx of refugees will give at least a short-term boost to domestic demand, although the German government still plans to finance financial aid and investments for refugees without new borrowing. While today’s headline GDP data suggest a strong, healthy economy, they also mask a potential future risk. The downside of consumption-driven growth is well known and could be witnessed in several Eurozone countries during the crisis. It is a growth mix which puts future growth at risk. As long as domestic investments are not picking up, celebrations of strong German domestic demand should be taken with a pinch of salt. These days, it is hard to talk about Germany without talking about cars. For the outside world, German economic strength is very often about cars. In this regard, today’s numbers still show a strong engine with six cylinders, which currently unfortunately only runs on a few but not all cylinders.

Draghi increases bets for December action

Back to back with one of Malta’s biggest casinos, the ECB today clearly increased its bets, sending strong hints on new monetary stimulus at the December meeting. While no decision was taken today, the ECB’s sounded more concerned about the growth outlook for the Eurozone and signaled its willingness to act. According to ECB president Draghi, some members of the Governing Council were already willing to act today. As regards the macro-economic assessment, the ECB voiced more concerns about the growth outlook. Back in September, market turmoil and the slowdown of China and emerging markets were still too fresh to be integrated in the ECB’s projections. Today, the ECB singled exactly these factors out as the main risk for the Eurozone economy. To be precise, the ECB warned that “concerns over growth prospects in emerging markets and possible repercussions for the economy from developments in financial and commodity markets continue to signal downside risks to the outlook for growth and inflation. Most notably, the strength and persistence of the factors that are currently slowing the return of inflation to levels below, but close to, 2% in the medium term require thorough analysis.” Against the background of increased concerns about growth, and related second-round effects on inflation, ECB president Draghi opened the door to more monetary stimulus in December. In this regards, the key statements at today’s press conference were “the degree of monetary policy accommodation will need to be re-examined at our December monetary policy meeting” and that the ECB already today had a “rich discussion and was “open to a whole menu of monetary policy instruments”. Draghi remarked that the ECB had tasked several committees to work on the implementation of possible instruments. He called this a “work-and-assess” stance. Finally, Draghi also mentioned a lowering of the deposit rate as a possibility for future action, even though back in 2014 he had announced that interest rates had reached the lower bound. Obviously, it is hard not to see the ECB’s intention to add more monetary stimulus. Still, the ruthlessness with which Draghi sometimes tried to defend the ECB’s position was a bit surprising. In fact, the ECB is still only one third into its envisaged QE purchases and the discussion on whether low (or even negative) inflation rates are now a curse or a gift for the Eurozone remains unclear. Furthermore, it is also far from certain that the marginal gains from stepping up QE are still positive. Judging from the immediate market reaction, stepping up QE should at least weaken the euro somewhat. In our view, probably the biggest and most important goal of the ECB as it would deliver almost instant success. Even though Draghi repeated the ECB’s well-known position that the exchange rate was obviously not a policy target for the ECB. All in all, Draghi has been more explicit than we had expected. The door for more monetary stimulus is wide open and does not necessarily have to be more QE. It could also be a lower deposit rate, maybe even fx interventions or purchases of other assets (previously excluded). Draghi’s u-turn on the lower bound of interest rates has made him walk in the footsteps of former German chancellor Adenauer who once said “why should I care about my chatter from yesterday”. So everything is possible. In our view, the main triggers for more action in December will be the ECB’s staff projections, particularly the headline and core inflation forecasts for 2017. Even though market participants should know from recent experiences with the Fed that crucial and groundbreaking decisions can be postponed more often than markets believe, it will be hard for the ECB not to deliver in December. Maybe inspired by the casino next door, the ECB today increased its bets. The ECB has to have strong cards, because it will have to show its hand in December.

European Commission presents proposals for further reforms of EMU

At least they are trying. Today, the European Commission presented its plans on how to get the monetary union on a more sustainable footing. The Commission released a so-called policy package, trying to bring parts of the “Five Presidents’ Report” into life. To be clear, the Commission aims at implementation by mid-2017. Afterwards, stage 2 should start, which according to the Commission would include “more far-reaching measures”, which will “inevitably involve sharing more sovereignty and solidarity”. Even though the Commission states that its proposals are the result of extensive consultations with Eurozone member states, the European Parliament and stakeholders (whoever this might be), past experience has shown that these proposals are likely to be watered down in the coming months. Looking at the details, the Commission has tried to address all relevant issues, which would make the monetary union more sustainable: increase competitiveness, more supervision of national fiscal policies, a fully-fledged banking union and a common Eurozone voice in international for a. The concrete proposals, however, suggest that the courage to really make a huge step ahead was missing (or probably better said: the room was simply not given by national governments). Concrete, the Commission proposes national Competitiveness Boards, a European Fiscal Board, a more streamlined process for setting up national budgets combined with European supervision, the full implementation of the Bank Recovery and Resolution Directive and the directive on Deposit-guarantee schemes and, last but not least, a common representation of the Eurozone at the IMF. From a negative angle, the Commission proposals are mainly of a cosmetical nature and have a high “old wine in new skins” portion. Only the common representation is new and groundbreaking. Setting up new boards or committees could be regarded as window-dressing and it is doubtful that this really leads to stricter implementation of necessary reforms. The intentions are good but who does still remember the fiscal compact or national debt-brakes? From a positive angle and to give the Commission some credit, however, they at least tried. The Commission’s proposals are a very gentle, probably too gentle, push towards more political union. It is probably already the smallest common denominator across national governments. Let’s face it, the appetite for quantum leaps towards a political union is currently simply not strong enough.

German exports surge in July

The reliable friend. July trade data just showed that the export sector remains an important growth driver of the German economy and has added to evidence of a solid start to the third quarter. Exports increased by 2.4% MoM, from -1.1% in June. As imports increased by 2.2% MoM, the seasonally-adjusted trade balance improved to 22.8 bn euro, from 22.1 in June. While many German commentators still complain about the ECB’s QE programme, German exporters should send a thank-you letter to Mario Draghi. Notwithstanding the excellent quality and product specialization of German exporters, the weak euro has clearly been a very special stimulus package; actually for the entire German economy. While industrial production is still struggling to gain momentum, exports have increased by more than 17% since the start of the year. In the same period, the effective nominal exchange rate of the euro has depreciated by around 4%. A closer look at German exports shows that exports to some countries are more sensitive to exchange rate movements than others. Interestingly, German exporters are normally amongst the main European beneficiaries from a weaker currency. Interestingly, German exports to the US seem to be most sensitive exchange rate changes. An important driver behind the fact that in the first half of the year, the US has become the single most important German trading partner; taking over this number one position from France. As regards the other currently often discussed German trading partners, a comparison of export and exchange rate developments shows that exports to both China and other emerging markets are less correlated. Looking ahead, this link between exports to different destinations and exchange rate movements is both good and bad news for the German economy. It shows that a weak exchange rate might compensate for domestically-driven problems in emerging economies, while at the same time it should further boost exports to the US. All in all, the weaker euro seems to have off-set domestically-driven weaker demand in several emerging economies. If and when the Fed finally starts hiking interest rates and the anticipated further weakening of the euro actually materializes, German exporters should not only send a thank-you letter to Mario Draghi but also to Janet Yellen.

Eurozone: Behind the scenes of Germany's "yes"

Today’s vote in the German parliament will no doubt bring a “yes” for the third Greek bailout package. While the outcome of the vote might not be spectacular, the details are clearly explosive. Greece and the ongoing negotiations have been the dominant topics for German politicians and common people over the entire summer. With today’s vote in the Bundestag, the German parliament could end these discussions; at least for the time being. To be precise: 631 German MPs have returned from their summer vacation to vote on the third bailout package for Greece. Chancellor Merkel’s government holds 504 seats and, moreover, at least one opposition party – the Greens (holding 63 seats) – already announced it would also vote in favour of a third Greek package. Consequently, anything else than an overwhelming “yes” vote would be a surprise. Nevertheless, today’s vote will be a test for Angela Merkel’s leadership. While opposition from other German parties against the new Greek bailout package has been rather muted, it is Merkel’s own party – the conservative CDU – which is still struggling with support for Greece. When the German parliament voted on the start of the official negotiations with the Tsipras government, 60 members of Merkel’s party voted against. In recent days, the “no” voters have received increasing media attention in Germany. According to reports, Merkel’s chief whip, Volker Kauder, had threatened possible dissidents that they would face consequences, like losing posts and positions in the party, in case they do not stick to the official party line. Against this background, all eyes will be on the exact number of “no” votes from Merkel’s own party today. A number higher than the earlier 60 would not immediately be a problem for Merkel. There simply is no crown prince or princess in her own party, neither are there any signs of a palace revolution. However, in the longer run, a growing number of dissident votes would clearly weaken Merkel’s position in the government and might eventually even reduce her appetite to run for a fourth term in office in the 2017 elections. On a more substantial point, the German government will continue having a hard time, even after today’s vote. It’s the role of the IMF in the third Greek bailout package. German politicians have frequently said that there would be no new package for Greece without IMF participation. At the same time, however, IMF participation would mean debt relief or even debt forgiveness for Greece. At least the latter is something, the same German politicians have been strongly opposing for a long while. How the German government wants to square this circle is still unclear. In our view and judging from last Friday’s Eurogroup statement, a face-saving compromise could be that initially IMF participation would be limited to technical assistance, monitoring and surveillance of the Greek reforms. Later, probably in October after a first successful assessment of the Greek measures and their implementation, the Eurogroup could decide on debt relief measures and then bring the IMF on board with additional financial assistance. Such a scenario seems to be backed by Friday’s Eurogroup statement which said that “in line with the Euro summit statement of 12 July, the Eurogroup stands ready to consider, if necessary, possible additional measures (possible longer grace and repayment periods) aiming at ensuring that Greece's gross financing needs remain at a sustainable level. These measures will be conditional upon full implementation of the measures agreed in the ESM programme and will be considered after the first positive completion of a programme review.” All in all, today’s vote might not be as interesting as another episode of “House of Cards” but it has at least the potential to provide some explosives, even Francis Underwood would pay attention to.

German growth - strong without being impressive

Neither Greece nor China were able to stop the German economy. According to the just released first estimate of the German statistical agency, GDP grew by 0.4% QoQ in the second quarter, from 0.3% QoQ in 1Q. Compared with the second quarter of 2014, German GDP increased by 1.6%. GDP components will only be released at the end of the month but available monthly data and the statistical agency’s press release indicate that growth was driven by exports and domestic consumption. Investment was a drag on growth. The Eurozone powerhouse has successfully defied external turbulences. Despite the Greek crisis, the Chinese stock market collapse and growth slowdown fears as well as continued weakness in many Eurozone countries, the German economy continued its latest stretch of four consecutive quarters with growth averaging 0.4%. Since the last technical recession in 2012, the economy has grown by an average of 0.3% each quarter. And there is more. Exports have returned as an important growth driver, showing that Germany indeed is one of the main beneficiaries of the weaker euro. Nevertheless, not all that glitters is gold. The fact that record low interest rates, low energy prices and the weak euro have not led to a stronger expansion in our view shows that the German economy has simply reached the end of its long positive virtuous circle of structural reforms and growth. Normally, such a cocktail of strong external steroids should have given wings to the economy. This is not the case. Looking ahead, mixed monthly data have made it difficult to get a good grip on Germany’s growth outlook. While industrial production disappointed in June, new orders were encouraging and soft indicators – despite some recent weakening – remained strong. Record high employment, low inflation and decent wage growth remain strong trumps for the domestic economy and bode well for the second half of the year. However, at the same time, it is not difficult to envision a cyclical cooling of Germany’s export-driven engine. The key buyer of German capital goods, China, is in the midst of a slowdown, while Germany’s service sector and domestic consumption – despite recent positive developments – are currently still not able to fully offset a possible strong hit to exports. After the rebalancing discussion as part of the euro crisis debate, China’s slowdown will now provide new arguments in favour of more domestic investment in Germany. Finally, although highly positive in the context of the euro crisis, the latest improvement in Eurozone periphery countries will not be able to compensate for the continued stagnation of the French economy and its direct impact for German exports. All in all, the first estimate of German Q2 growth just confirmed that the Eurozone’s economic powerhouse is cruising along nicely, despite several external turbulences. While the Eurozone economy seems to see some signs of rebalancing with the stagnation in France and strong growth numbers from Spain and Greece, Germany remains an almost boring beacon of reliability. Carsten Brzeski

Eurozone - Return to calm but not normality

The payment of ECB and IMF obligations seems to be topping the institutions’ scale of priorities. The disbursement of the €7.16bn EFSM bridge loan, approved last Friday, has allowed Greece to meet its compelling short-term obligations. Yesterday, the Greek government disposed both the reimbursement of the €3.7bn bond held by the ECB and the payment of around €2bn to the IMF. As confirmed by IMF spokesman Gerry Rice, Greece is no longer in arrears to the IMF. In another step in the search of normality, Greek banks were allowed (upon the positive advice of the Bank of Greece and the ECB) to re-open yesterday. While many of the capital controls will remain in place, partial functionality should nonetheless help customers. They can now cumulate the €60 daily withdrawals into a single weekly withdrawal and have re-gained access to their bank deposit boxes. With cash holdings in boxes reportedly amounting at around €10bn, this could be another handy source of short-term personal liquidity. The government reshuffle put in place by Tsipras over the weekend was not a game changer. Sure, it proved that in principle the party leadership is keen to re-build reciprocal confidence with lenders and that is unwilling to accept ambiguity when working for a third package. However, for the time being, the destiny of the 39 rebels (who voted against the bill or abstained) has not been decided yet. Tomorrow, the Greek Parliament will vote on the second set of prior actions agreed with lenders: these will include a new code of civil procedure and the adoption of the EU’s Bank Recovery and Resolution Directive (BRRD). In view of the vote, it seems reasonable to expect a replication of the voting pattern shown last week. While the passage of the bill does not seem at risk, the outcome of the vote deserves attention, as any further haemorrhage of support from Syriza’s MPs could in principle weaken Tsipras’ position, pushing him to seek snap elections in the autumn. A positive passage of the second bill should in principle pave the way to the quick start of actual negotiations. With representatives of Greece’s creditors (the former Troika) and of the ESM reportedly already in Athens, pressure for a rapid agreement on the memorandum of understanding of a third programme is already mounting. Yesterday, the president of the EU Commission, Juncker, and of the Eurogroup, Dijsselbloem, said that the Greek parliament must complete the bailout agreement with the ESM within two weeks, as this would allow the disbursement of funds in time for Greece to meet its August financial obligations (another ECB held bond matures on 20 August). At the same time, German politicians are still licking their wounds after last week’s agreement to reach a deal. It still does not feel good. According to media reports, there had been different views on Greece and a possible Grexit between Chancellor Merkel and Finance Minister Schäuble. While Schäuble is still flirting with the idea of a Grexit and even hinted at the possibility of his own resignation, Merkel remarked during a television interview that the Grexit discussions should be stopped. The negotiations had started. Some calm has returned to Greece. After last week’s turbulences, yesterday marked the first day of Greece in a new environment. An environment, in which banks are a bit more open but not really open, taxes are higher and Greece has fulfilled short-term payment obligations but is still struggling to find a third bailout. Clearly not a return to normality.

Eurozone - Leap of faith

As expected, today’s ECB meeting was all about Greece. ECB president Draghi did not only answer many questions, he also delivered tangibles for Greece: a minor increase of ELA for one week. Together with the Eurogroup’s parallel decisions to grant bridge financing of 7bn and a principle agreement to grant a third bailout package, the Eurozone’s key players took an enormous leap of faith with Greece. As regards the macro-economic situation, the ECB’s analysis and outlook did not change from last month’s. The ECB still expects a broadening of the Eurozone’s economic recovery and gradually increasing inflations rates. Interestingly, the ECB added the slowdown in emerging markets to its downside risks to growth. Remarkably, despite the broadly unchanged macro-economic assessment, Draghi gave an important hint that market participants should forget about tapering any time soon. The ECB reincluded an important paragraph to its introductory statement, saying that the ECB would “continue to closely monitor the situation in financial markets, as well as the potential implications for the monetary policy stance and for the outlook for price stability. If any factors were to lead to an unwarranted tightening of monetary policy, or if the outlook for price stability were to materially change, the Governing Council would respond to such a situation by using all the instruments available within its mandate.” In our view, a clear sign that – contrary to what the ECB said in early June – the ECB is concerned about the sell-off in bond markets and would react by stepping up, rather than reducing its QE activities; at least as long as the recovery is as fragile as it currently looks like. Most of the press conference was dedicated to Greece. Here, Draghi gave many long explanations and statements on the current state of play. The most remarkable two comments and announcements were: i) the ECB decided to increase ELA for Greek banks by 900 mln euro for one week. With this decision, the ECB fulfilled the request of the Bank of Greece and at least symbolically rewarded latest progress in the Greek crisis. ii) Draghi joined the current choir on debt relief for Greece, saying that “it is uncontroversial that debt relief is necessary”; and iii) Greek bonds would become eligible for the ECB’s QE programme once there is a bailout deal and the ESM has disbursed the first tranche of the money. And there was more news from the Eurozone today. After the principle decision that the Eurozone would offer Greece a 7bn euro bridge financing through the Commission’s rescue fund, the EFSM, the Eurogroup today also reached out to Greece. At the same time that the ECB press conference started, the Eurogroup issued a written statement, welcoming last night’s parliamentary green light for the Greek reforms. Moreover, the Eurogroup said that it would in principle grant a three-year bailout package to Greece, obviously only when all conditions as laid out in Monday’s agreement are met. All in all, let’s not get carried away by too much pathos. The Eurozone finance ministers just confirmed what their chiefs had already decided on Monday. Let’s stick to facts: Greece last night took an important first step towards receiving a third bailout package. More important and complex steps and negotiations will still follow. The decision to grant bridge financing as well as today’s ECB decision to increase ELA are no game changer, yet, but at least a symbolic leap of faith.

Eurozone: A Pyrrhic 'no'?

The ‘no’ vote in yesterday’s referendum seems to have strengthened Tsipras’ position. However, what looks like a stunning victory could quickly become a Pyrrhic ‘no’. The Greek people yesterday sent a strong message to the rest of Europe: a ‘no’ against austerity. According to the latest results, more than 60% of the Greek people said ‘no’ in the referendum. Officially, this ‘no’ was against a proposal from Greece’s creditors on 25 June to extend the bailout agreement against certain conditions. Whether the ‘no’ was also a vote against Greece’s membership within the Eurozone will never be clear. Ahead of the referendum, there was lots of speculation on what would happen if…now that there is clarity on the outcome of the referendum, the only thing that is clear is that nothing is clear. Only the coming days and hours will show what all involved players are really up to. In our view, the most likely next step is that the Greek government will want to return to Brussels to negotiate a new package with its Eurozone creditors, now backed with a strong mandate of the Greek people. It is hard to tell what the new demands or proposals of the Greek government will really be. The range of demands varies highly between different members of governments, ranging from a democratic change for Europe to no new austerity. The only element that will clearly be in any new Greek proposals is debt relief. In our view, the Eurozone will wait for Greece to make the first move. Initially, the Eurozone will insist on the technical issue that there no longer is a Greek bailout programme and that the Greek government would have to apply for a new programme. Interestingly, the German parliament and other parliaments would have to agree to a start of new formal negotiations. In this regards, it is noteworthy that new negotiations with Greece could also put the Eurozone’s inner stability to a test. It will not be easy to find a common strategy for any new negotiations that will be embraced by all Eurozone countries. Still, even if it is hard to see that the other Eurozone countries will give their Greek colleagues a warm welcome and that new negotiations are more fruitful than over the last five months, the outcome of the referendum will push the rest of the Eurozone to at least start talking. In theory, a compromise could be possible. A deal with less austerity but serious reforms, including tackling corruption and tax evasion, in Greece, obviously, would be the best outcome. Such a deal could even include some debt relief, but at the end of the ride and not upfront. This, however, would require that all parties involved could jump over their own shadows. In particular, the bad blood created by sometimes excessively inadequate language will be a large liability for any new negotiations. While politicians in the Eurozone are preparing for possible new talks, it is once again up to the ECB to do the dirty work. Today, the ECB will have to decide on what to do with ELA. Apparently, the Greek central bank applied for an increase of ELA. The ‘no’ has not made the ECB’s life any easier. With every step that Greece is moving closer to total default or even a Grexit and Greek banks are losing deposits, it will be harder for the ECB to label Greek banks as solvent, and thereby eligible for ELA. In our view, the ECB will not be the one pulling the trigger on Greece. As long as Eurozone politicians will signal their willingness to negotiate with Athens, the ECB will keep ELA at its current levels – even if it will create a bigger headache in Frankfurt every day. Still, this strategy will come to an end on 20 July. If Greece is not able to reimburse the ECB and would default on the bond, it is very hard to see the ECB continuing ELA. All in all, the ‘no’ vote in the referendum will lead to the expected uncertainty. At the current junction, the ‘no’ vote is not (yet) a first step towards a Grexit. Even if Eurozone politicians won’t have a huge appetite to talk to possibly triumphant Greek counterparts, they will never refuse initial talks. How such negotiations will end is hard to tell. A lot will depend on how ready to compromise both the Greek government and the other Eurozone governments are. We still think that eventually a sustainable compromise can be reached. However, the risk for a Grexit has never been higher than today. To a large extent, the current situation brings the Eurozone and Greece back to square one. Square one as it looked like in January: the Greek people have voted against austerity, the Greek government wants debt relief from its Eurozone peers and the Eurozone has troubles finding a united reaction. The big difference with January, however, is that lots of bad blood is on the floors, Greek banks are closed and Greece does not have a bailout programme. These three factors clearly do not argue in favour of a strong Greek position vis-à-vis the rest of the Eurozone. Did Tsipras celebrate a Pyrrhic ‘no’?

Eurozone: It's (never) too late?

Another last-minute stunt from Tsipras could not avoid the end of the bailout programme and Greece missing the reimbursement of an IMF loan. Never a dull moment. The events in the Greek crisis over the last 24 hours once again had interesting twists and turns but this time around the hard facts remained unchanged: Greece has missed its payment to the IMF, the bailout programme has expired and the referendum is on track. Greek Prime Minister Tsipras pulled another rabbit out of his hat yesterday, submitting a new proposal to the Eurozone creditors. The proposal was a request for a two-year programme funded by the ESM (without IMF involvement). This programme would cover all Greek financial needs and would also include debt restructuring. According to media reports, the proposal did not include any new reform measures. Tsipras’ proposal came hours after reports that the European Commission had suggested that a new compromise might still be possible. Whether Tsipras’ move was a kind of late self-persuasion or just standard brinkmanship remains unclear. In our view, it was a last attempt to gain the upper hand in the ongoing blame game between Greece and the Eurozone, showing Greece’s so-called willingness to compromise. In a telephone conference last evening, the Eurozone finance ministers quickly discussed the proposal but the conclusion was clear: nice try but far too late. Eurogroup chairman Dijsselbloem said that “the political stance of the Greek government doesn’t appear to have changed”. Requests from Tsipras for an extension of Greece’s bailout programme or debt relief were not possible. Nevertheless, the Eurogroup will have another conference call tomorrow. All of this means that Greece will not reimburse an IMF loan and the official bailout programme has expired. As regards the IMF loan, we stick to our view that this will not trigger a credit event. According to the IMF rules, missing a payment will now start an entire procedure with several steps which after a period of up to 24 months could lead to the expulsion of Greece from the IMF. In addition, after one month, the EFSF would have the legal possibility to reclaim all already paid loans to Greece. Something, which in our view would only happen if the political will to keep Greece within the Eurozone at that moment in time would have entirely disappeared. All in all, missing the reimbursement of the IMF pushes Greece into the same league as Zimbabwe, Sudan and Somalia, but it would not lead to further crisis escalation ahead of the referendum. The same holds for the expiration of the second bailout programme. Technically-speaking, nothing will change in the short run. However, the fact that the programme has officially expired means that, legally, it cannot be extended anymore. No matter what the outcome of the referendum and consequent steps of the Greek government will be. From a legal and technical perspective, any new compromise would now start from scratch and would have to be a third bailout programme. In sum, yesterday’s events marked another symbolic step in the Greek crisis but also confirmed that the issue between Greece and its Eurozone creditors goes beyond numbers and substance. It’s the clash between an ideologically-driven government and a consensus-driven and compromise-oriented Eurozone. Even if it is tempting, we will refrain from sharing our memories of famous songs referring to “too late” but one thing is sure: only a miracle could solve the current stand-off in the Greece crisis before this weekend’s referendum.

Eurozone: Referendum, chaos, Grexit?

On Friday night, the course of the negotiations on the end of the second Greek programme took another unexpected twist. A crucial week for Greece and the Eurozone lies ahead. No one knows how this week will end or what will happen after Sunday. However, it increasingly looks as if there are only two options left: new elections or Grexit. Tsipras’ move is now another climax in the increasingly disturbed relationship between the Greek government and the rest of the Eurozone. Capital controls, bank holidays and increased uncertainty will accompany Greece on its way to the 5 July referendum. Whether this road will eventually end with the Grexit is still too early to tell, even though the probability of a Grexit has clearly increased over the last days. In short, absent a last-minute miracle, Greece is looking into an unprecedented financial and political future in the coming days. Whether this future will eventually also include the Grexit is currently impossible to tell. The expiration of the official bailout programme and the reimbursement of the IMF, both due on Tuesday, will in our view not automatically lead to a default and further turbulences. All involved Eurozone players will probably want to keep the situation as contained as possible, at least until next Sunday. Comments from Eurozone finance minsters suggest that the door for new negotiations in the days ahead of the referendum is closed, though not fully locked. The most interesting question is what will be next. As we have seen so often in the Greek crisis, nothing is granted. It is very hard to exactly forecast what will happen. Even the Greek government returning to the negotiations between now and Tuesday night cannot be excluded entirely. In our view, without fresh money from creditors, Greece is likely to be in arrears on a €1.6bn payment due on Tuesday to the IMF. While credit agencies have not classified this as it lent to Greece on the back of the missed payment to the IMF. Of course, this is very unlikely to happen. In our view, Greece will not technically default in the days leading to the referendum, neither as a consequence of not paying the IMF nor as a consequence of the end of the bailout programme. Another issue, however, is whether the Greek government can actually pay public salaries and pensions at the end of the month. Cash withdrawals from Greek banks have accelerated in recent days. It was therefore almost a holiday. At the writing of this note, it is unclear whether Greek banks will only close for one day or for the entire week. Such capital controls and one or several bank holidays, might have been the price, the ECB had asked to continue with ELA. For the ECB, the tricky question is how to deal with this new situation. An ECB referendum is not part of the ECB’s rulebook. This means that the ECB will have to take technical decisions on ELA, which in fact have political implications. In our view, the ECB will continue with ELA until the referendum. It can argue that up to the referendum the solvency of Greek banks has not significantly changed from last week. At least in the ECB’s eyes. Moreover, in our view, the ECB will be very hesitant to increase political pressure on Greece just a couple of days before the entire Greek population can make use of a democratic right. The days leading to the Greek referendum should therefore be dominated by uncertainty and possibly financial market turbulences – at least in Greece. It does not look as if peripheral spreads will widen significantly, given that financial markets will probably regard the entire crisis as a Greek crisis and contagion should be limited. If we are wrong and financial markets go crazy, the Eurozone has sufficient instruments to fight contagion. In our view, the ECB’s OMT programme might only be a remote option. The more efficient tool to fight short-term volatility would be QE. It would also help the ECB to solve its front-loading problem. With volatility but no chaos in the rest of the Eurozone in the coming days is our base case scenario, the other question is what will happen on (or better: after) Sunday. It is impossible for us to forecast the outcome of the referendum, but we can at least sense the domestic political strategy behind the latest twist in the Greek drama. As the creditors’ proposals cross a number of “red lines” of the Greek government, Tsipras is risking a break-up of the government or his own party. A YES vote would give him the authority to clinch a deal with the creditors without losing face because of broken electoral promises. In this case we would probably see the five-month extension of the current programme, during which a total of €15.5bn of financial support would be provided. This would allow the Greek government to implement the structural reforms, which could then lead to a third programme and some limited form of debt restructuring. This still looks a feasible scenario as in a poll on Saturday, published in the To Vimanewspaper, 57.5% of Greeks said the government should close a deal with the creditors, while two-thirds want Greece to remain in the Eurozone. However, this scenario basically means that the Greek problems will continue to haunt the Eurozone economy for some time to come. With a Greek government that has not been very co-operative until now and doesn’t seem to have the will to implement market-oriented reforms, one can already anticipate a new stand-off when the extension of the programme would end in November. A defiant Greek government is actually recommending the Greek population to vote NO. If this were to be the outcome, then we would be back to square one: the Greek population wants to remain in the Eurozone without accepting the terms of the creditor nations. However, the fatigue amongst the creditor nations with the negotiating tactics of the Greek government has reached the point, that a Greek exit from the Eurozone is now considered as a viable alternative. According to The Guardian, Merkel told Tsipras that the vote was “a choice between the euro and the drachma”. A NO vote would not necessarily immediately lead to a Greek exit. We might actually see Greece also default on the ECB reimbursement on 20 July, without adverse consequences. However, this would necessitate the ECB to continue providing ELA to the Greek banks (already a stretch) and capital controls and limits on bank withdrawals will have to remain in place to avoid a collapse of the banking sector. However, a “no” vote and a default on the bond held by the ECB, even if not technically, is very likely to trigger an end to ELA. As a consequence, Greek banks would need to be recapitalsied (and/or nationalised) with money the Greek government does not have. IOUs or a dual currency would be the solution and, consequently, lead to a Grexit (see also our earlier note with an Q&A on the Grexit). In all cases, one thing seems quite sure: the recession in Greece would most probably deepen and more unrest is to be anticipated. The Greek mythology offers lots of interesting stories. Many of these stories seem to come back in the current Greek crisis, which took another unexpected and exciting twist over the weekend. Looking at the latest events, we see memories of Hydra and Hubris. Hydra was the serpent-like water monster with reptilian traits, which possessed many heads. For each head cut off, it grew two more. Hybris, or Hubris, on the other hand was the goddess of insolence, violence, reckless pride, arrogance and outrageous behaviour. Or simply put, an excess of ambition, pride, etc,ultimately causing the transgressor's ruin. Parallels with the current Greek crisis are obvious. Looking beyond the coming days and the next weekend, the Greek referendum does not only mark a new climax in the Greek crisis but also the end of muddling through in the Eurozone – even if the Greek people vote in favour of the proposal and indirectly of their membership in the Eurozone. Will there now be a series of referenda on the Eurozone membership? It is time to speed up institutional reforms and make the monetary union sustainable. The latest report of the five European presidents was supposed to kick-start the discussions. Discussions which should quickly shift to warp speed, if the Eurozone wants to consign Greek mythologies back to the realms of fantasy.

Final showdown - this time for real?

It seems as if the excessively used words of “final showdown” in the Greek crisis are finally here. And they are for real. Honestly, it becomes harder and harder to comment on the Greek crisis in a meaningful way. Yesterday was another example of confusion and diffusion. The day started with news reporting that Tsipras had told the Greek parliament that some creditors had rejected the Greek proposals. Later in the day, it became clear that the IMF had indeed issued a counterproposal, amending and integrating the Greek offer. No break-up of the negotiations, but normal exchange of proposals in an exhausting bargaining process. Later, the Eurogroup meeting ended with another unexpected twist. While earlier in the day, expectations were that the Eurogroup would negotiate for as long as needed to reach a deal with Greece, the Greek crisis took yet again another dramatic turn. The Eurogroup was suspended inconclusively after only one hour. Instead, a new meeting with Commission President Juncker, Greek Prime Minster Tsipras, Christine Lagarde from the IMF, ECB president Mario Draghi, Eurogroup president Dijsselbloem and ESM chairman Regling was held at midnight. Again inconclusive. All of this provides little evidence to become more optimistic about a positive outcome of the Greek negotiations. Today, the meeting marathon will continue with technical meetings of senior officials already this morning, at 6am, another meeting at the political level at 9am, another Eurogroup meeting scheduled for 1pm and then later at 4pm the European summit. Obviously and technically speaking, this meeting marathon could continue for many days (even weeks), European leaders will still be in Brussels tomorrow and a deal could even be signed off in the weekend. However, it is hard to see that all parties involved in the negotiations have the energy and will to continue much longer. Trying to separate facts from noise, the substantial differences between Greece and the Eurozone creditors mainly concentrate on three main areas: taxes, pensions and debt relief. While there seems to be a general agreement on the headline targets for the primary balance, there are still huge discrepancies on how to get there. It looks as if currently the main hurdle seems to be taxes. Instead of cutting public expenditures, the Greek government proposed to increase taxes and strengthen revenues. For a country not really known for a good track record in tax collections, this looks like a risky strategy. The creditors proposed to trim the Greek proposal of an increase in the corporate tax rate and reject the introduction of a one-off corporate tax on corporate profits. The more controversial area seems that of pension reforms. The institutions clearly want Greece to accelerate the transition towards a broad-based implementation of the limit of the statutory retirement age of 67 years, requesting that to happen by 2022, and not by 2026, as in the last Greek proposal. Also, the counterproposal asks to raise health contributions and to harmonize the contribution rules for all pension funds, seeking a closer link between contribution and benefit. Finally, the never-ending issue of debt relief is probably the biggest stumbling block. The Greeks want it, the others don’t want to give it (or eventually only at the end of a long reform ride). Looking at the substance of the differences between Greece and its creditors, a compromise still looks possible; at least in our view. The two crucial questions are how to deal with the issue of debt relief and how to eventually sell any compromise back at home. The latest comments from the Greek parliament suggest that selling at home might still be a challenge for Tsipras. Still, even if a compromise could be feasible, the series of latest events sends contrary signals and does little to soften atmospherical disturbances. In fact, it seems as if the entire Greek crisis has switched into warp speed. There are now as many contradictory statements, denials, inconclusive meetings and ad hoc special meetings on a single day as there were before within a week or a month. In our view a clear sign that the excessively used words of “final showdown” can again be used with a good heart.

Eurozone - Still united in diversity

The final stage of the Greek saga debuted along the lines of the recent past. Neither side seems in a hurry to bow to the counterparty’s requests. Having irritated EU Commission President Juncker late last week by quipping that the EU suggestions were irrational, on Tuesday the Greek PM Tsipras finally submitted his new proposal to the institutions. As reported by Kathimerini, it foresees an increase in the primary surplus targets to 0.75% of GDP (from 0.6%) for 2015 and to 1.75% (from 1.5%) in 2016 and an upward adjustment to its three-rates original proposal. The Commission’s first reaction was a cool one, focusing on the fact that the proposal contained ideas already rejected in the past rather than on the adjustments to the primary surplus targets and on the new VAT rates. Unsurprisingly, Greek Finance Minister Varoufakis was also dismissive as he defined last week’s creditor proposal a return back to square one, as if the negotiations had not happened. In our view, even if the manners and procedures of this never-ending process will definitely not win any beauty contest, just looking at the sheer facts it seems as if at least headline numbers and targets have converged again – a tiny bit. The issue is not so much numerical targets but rather how to reach them. This is where the biggest discrepancies between Greece and the rest of the Eurozone still exist. The other, probably most controversial issue is the Greek pension system. While the Eurozone demands an overhaul of the system to make it more sustainable, the Greek government refuses any changes. Even if both sides are still well apart, these discrepancies look bridgeable; at least in normal European circumstances. However, the Greek crisis has long ago entered new dimensions. Therefore, it looks as if an old negotiation pattern is currently emerging again: when progress at the technical level failed to materialise, the negotiation table is shifted to the top politicians. Looking at the key players, it seems as if we are reaching the final stage of the negotiations; at least for a short-term solution. After negotiations at the wider European level, including the IMF, it again seems to come down to another Greek-German showdown. These two government leaders will have to decide whether they can pour more water into their wine and still serve it at home as an exclusive drink and not as a cheap spritzer. In this light, observers were yesterday eagerly awaiting a meeting between Tsipras and Merkel at the margins of an EU-Latin America summit in Brussels. However, the two left main actors of the Greek crisis continued their game of chicken, now even at the level on whether or not a meeting would take place. After denials and opposing news, Tsipras and Merkel, supported by French president Hollande, finally met late last evening. After two hours, the meeting was concluded with only one official statement: government leaders had a good exchange of views in a constructive atmosphere. The negotiations between Greece and the three institutions will be continued with high intensity in the coming days. For us, it is hard to tell what really happened during yesterday’s meeting. It all looks as if the psychological game of who will blink first continues.

ECB meeting - Taper tempering

As expected, the ECB did not announce any new policy measures at today’s meeting. While generally speaking, today’s meeting was one of those meetings which do not necessarily require a press conference, ECB president Draghi sent two main messages: the fragile start of a cyclical recovery does not justify any tapering speculations, and, the ECB will not pull the trigger on Greece. The ECB’s macro-economic assessment remained cheerful and almost self-congratulating. The tone on the recovery has become somewhat more positive and risks to the outlook for growth were for the first time in a long while described as “more balanced”, though still at the downside. The ECB staff projections remained virtually unchanged compared with the March projections, forecasting GDP growth in the Eurozone to come in at 1.5% this year, 1.9% next year and 2.0% in 2017. The positive tone was only slightly offset by Draghi’s remarks that the recovery had lost some momentum in the second quarter, which explained why the ECB currently only expected the recovery to “broaden” but no longer to “strengthen”. Cruising along. Interestingly, the ECB takes lots of comfort from stronger domestic demand. In our view, continued deleveraging and still high unemployment make banking on domestic demand as a sustainable growth driver a risky strategy. As regards inflation, the slight uptick of oil prices has pushed up inflation projections for this year to 0.3%. For 2016 and 2017, inflation projections remained unchanged at 1.5% and 1.8% respectively. The ECB’s current economic and inflation outlook could give rise to speculations about an earlier-than-expected end of QE. To tackle any of these speculations, Draghi emphasized several times today that the ECB’s macro-economic outlook was conditional on the full implementation of QE. Moreover, there were three even stronger signals from Draghi that any tapering discussions were premature: 1) the cross-checking part of the introductory statement included a new sentence reading that “…confirms the need to maintain a steady monetary policy course, firmly implementing the Governing Council’s monetary policy decisions”; 2) Draghi said that even if the inflation projections were close to the ECB’s definition of price stability, the ECB was nowhere near fulfilling its target and could even add to the monthly purchases; and 3) any exit strategy was a “high class problem” and not yet discussed by the ECB. Even possible bubbles or misallocations in financial markets were no reason for the ECB to adjust QE. Draghi clearly stated that any possible negative effects from QE had to be tackled by supervisors but not by monetary policy. However, despite trying to temper tapering speculations, Draghi is still struggling to give clear guidance. The question on whether QE could be ended before end-September 2016 if inflation expectations are back at where the ECB wants them before, was unanswered. The story of the hour (or better: days, weeks, months and years), is clearly Greece. Earlier today, some details of the latest – some even call it the last – take-it-or-leave-it offer from Greece’s Eurozone creditors had surfaced. According to media reports, the Eurozone would be willing to adjust Greece’s fiscal targets for the coming years. Instead of a permanent primary surplus target of 4.5% starting next year, Greece would be allowed a softer path, gradually tightening austerity screws from a surplus of 1% this year to 3.5% in 2018. However, it is unclear how the Eurozone creditors want to stick to the same debt targets without debt restructuring when fiscal targets are softened and growth has been weaker. Here, Draghi – who initially didn’t want to comment on Greece at all – said that the ECB wanted Greece to be in the Eurozone but that there was a need for “a strong agreement”. Greece was a viable economy if the right policies were implemented. The ECB was in favour of a strong agreement which provided social fairness and economic growth but also fiscal sustainability and financial stability. Answering to questions on ELA and possible additional haircuts on Greek bonds, Draghi remarked that the ECB would stick to its rules-based approach and the different rules applied to ELA and the ECB’s collateral rules. It is obvious that the ECB will not pull the trigger on Greece autonomously. As long as there is the political will from all sides to find a sustainable agreement, the ECB will continue with its current ELA and liquidity stance. All in all, today’s press conference showed that the ECB is aware of the upcoming tapering speculations and clearly wants to temper them. However, more forward guidance and communication streamlining will be needed in the months to keep speculations at bay. Carsten Brzeski

Unstoppable optimism?

Is sky the limit? German business optimism seems to be unstoppable, paving the road for an excellent growth year 2015. Germany's most prominent leading indicator, the Ifo index, just increased for the sixth month in a row to 108.6 in April, from 107.9 in March. While the current assessment component improved to 113.9, its highest level since June last year, expectations weakened somewhat to 103.5, from 103.9 in March. The German economy is in good shape. The first months of the year point to a good, though not excellent, growth performance in the first quarter and the next quarters should not be very different. In fact, Germany remains the biggest beneficiary of the euro crisis and the ECB’s QE. Even if the weak euro has not yet entirely found its way to strong export numbers, at some point in time it should. Moreover, strong domestic demand on the back of record high employment, wage increases, low energy prices and a new appetite for consumption, driven by record low interest rates, has become an important growth driver for the German economy. Yesterday’s GfK index confirmed the picture of almost euphoric consumers. At 10.1, the index is now at its highest level since October 2001. However, before becoming too lyrical about the German economy and jumping on the bandwagon of upwardly revised growth forecasts, a brief glance at today’s expectation component and yesterday’s PMIs justifies some caution. Particularly the Greek crisis but also an unexpected longer-than-expected soft spell of the US economy and a further weakening of the Chinese economy provide reasons enough to be optimistic, but not lyrically overoptimistic. Carsten Brzeski

Merkel, growth, Greece and TGEFKAT

The German economy ended a volatile year on a very strong note. According to the statistical office’s first official estimate, the economy grew by 0.7 % QoQ in the final quarter of 2014. This is more than the first estimate for the annual growth number had suggested. Compared with the last quarter of 2013, the economy grew by 1.6%. Details of 4Q GDP will only be published at the end of the month but available monthly indicators and the statistical office’s statement suggest that domestic demand was the main growth driver. A clear sign that lower oil prices have found their way into consumers’ pockets. Looking ahead, the German economy looks set to continue surfing on a wave of economic well-being. With the strong labour market, wage increases, low energy prices and extremely low interest rates, consumers should continue to spend it. At the same time, the weak euro will definitely benefit German exports, letting them return as a growth engine. With a statistical overhang of 0.5%, less public holidays and the external stimulus package our current GDP growth forecast of 1.5% for 2015 looks almost pessimistic. The big unknown for 2015 remains domestic investment. While low interest rates and comfortable liquidity positions of many corporates should normally bode well for investment, uncertainty about the future of the Eurozone and continued geopolitical tensions could still dampen investment growth in 2015. While the German economy is doing what it is supposed to do (ie growing), the German government can concentrate on the conflict with Greece. After the disappointing Eurogroup meeting, hopes on a compromise had received a clear hit. However, yesterday evening at the European leaders’ meeting in Brussels, comments from German chancellor Merkel surprisingly opened the door for Greece. Merkel signaled German willingness to compromise, stressing the importance of rules and being a reliable partner in Europe. Combined with German media reports and official statements, the German government could eventually become flexible on the primary surplus target for Greece and conditions of the planned privatisiation. However, red lines the German government is not willing to cross are clearly debt forgiveness, supervision and credible commitments. This means that Greece would have to swallow some bitter pills like an extension of the current bailout programme and cooperation with the Troika. In this context, it does not surprise that German media yesterday night reported that a group of experts from the three institutions formerly known as The Troika will investigate possible overlaps between the current bailout programme and the wishlist of the new Greek government in the coming days. Whether Merkel’s comments are really a substantial change in the Eurozone’s negotiation chaos and an invitation to compromise or just a precautionary measure so that she cannot be blamed if things go completely wrong, remains to be seen. One thing is at least for sure: with Merkel’s moves, the pressure is now on Greece.

German Ifo increases in January

Good news from the perfect little world. German business confidence confirmed the decent rebound of the economy in the final quarter of the year. Germany's most prominent leading indicator, the Ifo index, just increased for the third month in a row to 106.7 in January, from 105.5 in December. While the current assessment component improved to 111.7, from 110.0, expectations increased to 102, from 101.1 in December. The rollercoaster ride of German economic data could still last for a while. The conciliatory end of the year 2014, with an estimated annual growth rate of 1.5%, could take turns with rather disappointing December data. Let’s not forget that December was yet another month, strongly affected by the timing of vacation. Luckily, the year 2015 should be less sensitive to seasonal fluctuations. Looking ahead, the German economy should enjoy a pleasant tail wind, stemming from lower energy prices, the weaker euro and rock-bottom interest rates. Over the last twenty years, German exports to non-Eurozone countries have shown a rather unique correlation with exchange rate movements. Relatively immune against currency strengthening but strongly benefitting from currency weakening. Another boost for the German economy on the back of the ECB’s QE is one of the ironies of the Eurozone. The country with the most outspoken criticism could be the biggest beneficiary. Unless German ECB critics had in mind that a recovery on the back of an external stimulus package bears the risk of further self-complacency and a resistance to start new reforms. All in all, almost everything is put in place for another strong year of the German economy. At least in a little perfect and linear world. However, the aftermath of the Greek elections will show that perfect and linear worlds do not exist. As first German official reactions to the Greek election results this morning have shown, maybe the biggest challenge for at least German policymakers in the short run.

Oren

Waarom hebben Nederlanders zulke grote oren? Omdat alle kinderen door hun vaders bij de Duitse grens bij de oren omhoog worden getild met de woorden: kijk daar woont de wereldkampioen voetbal...Een flauwe, maar op dit moment weer zeer populaire mop in Duitsland. Een kleine troost voor alle Nederlandse kinderen: als ze vandaag omhoog worden getild, kijken ze ook neer op een stagnerende economie. Als er niets geks gebeurt, zullen de nieuwste cijfers van Eurostat vanochtend bijna historisch zijn. Voor het eerst sinds het begin van de crisis is de economie van de eurozone harder gegroeid dan de Duitse. Vooral voor de Duitsers is dat een schok. Zijn ze, nu ze eindelijk wereldkampioen voetbal zijn, opeens de titel Europees groeikampioen kwijt? De crisis in Oekraïne en de Europese sancties voor Rusland worden vaak genoemd als oorzaak voor de recente afzwakking van de Duitse economie. Naar mijn gevoel iets te populistisch gedacht. De componenten van de Duitse groeiprestatie worden pas eind augustus bekendgemaakt, maar de beschikbare maandelijkse macrocijfers vertellen alvast een ander verhaal. De Duitse groeistop is home made. De logische correctie in de bouw na een uitzonderlijk sterk eerste kwartaal door het milde winterweer, en uitzonderlijk veel vrije brugdagen in mei in combinatie met voortdurende economische zwakte in Italië en Frankrijk zijn de redenen voor de groeiteleurstelling, niet Rusland of Oekraïne. Maar wat niet is, kan toch nog komen? Zeker, maar niet zozeer via de export, maar via andere kanalen. Een lang aanhoudende onzekerheid door geopolitieke conflicten kan Duitsland het meeste pijn doen, waardoor de broodnodige binnenlandse investeringen opnieuw worden uitgesteld. Zonder investeringen en met aanhoudende problemen in Frankrijk, Italië en China ligt het lot van de Duitse economie in de handen van een beetje consumptiegroei en export naar de VS en het VK. Dat is mooi meegenomen, maar niet genoeg voor aanzienlijke - en houdbare - groei in de komende jaren. De titel Europees groeikampioen zal Duitsland ook na de cijfers van vandaag nog zo snel niet verliezen. Niet door zijn eigen kracht, maar omdat de andere landen de kracht ontberen om Duitsland naar de kroon te steken. De groei in Nederland lijkt vanwege technische factoren uitzonderlijk hoog, de Spaanse consumptiegebaseerde groei onhoudbaar hoog, België vertoont tekens van stagnatie en Frankrijk en Italië zullen nog lange tijd worstelen met economische hervormingen. Voor Duitse beleidsmakers moeten de cijfers van vandaag echter een duidelijk signaal zijn dat het ouderwetse 'weiter so' een gevaarlijke strategie is. De tijd is echt gekomen om binnenlandse investeringen te stimuleren, zowel door de overheid als door bedrijven. Het enige risico van die strategie zijn zure kinderen met flaporen bij de buren... Deze column verscheen vandaag in het Belgische dagblad "De Tijd"

EU Summit preview: Flexible, more flexible, Cameron?

They will not bend it like Beckham but when European leaders meet in Brussels this week, they are likely to present varying forms of flexibility. Flexible and rigid. These have probably been the best two key words describing the main issues of this week’s European Summit: flexibility on the Eurozone’s fiscal rules and rigidity in the power game on the nomination of the next president of the European Commission. As regards to the Eurozone’s fiscal rules, the economic stagnation in France and Italy combined with the overall rather anaemic recovery of the Eurozone has revived the debate on growth versus austerity. Irony or not, it is mainly the countries, which up to now have not really been glowing with structural reforms, that are now pushing for more fiscal wiggle room. It is also the same countries which have not built in automatic correction mechanisms in their national debt brakes under the so-called fiscal compact. The basic idea behind a new initiative of mainly social democratic governments is to give countries more time for fiscal consolidation in return for structural reforms. Moreover, it should be possible to exclude certain investments and the costs of economic reforms from nominal fiscal deficits. Many social-democratic leaders suggested that the fiscal framework should be applied in a more flexible way. In our view, these attempts of publicly watering down the Eurozone’s fiscal framework are mainly hot air and much ado about nothing. The discussions on flexible interpretations of the rules are as old as the rules themselves. The calculation of the so-called cyclically-adjusted fiscal balances has already shown how complex and open for interpretations these methodologies can be. Moreover, the Eurozone’s fiscal rules already provide more time to adjust in a period of very low or negative GDP growth. Of course, as long as it is a tit-for-tat, including structural reforms into the fiscal equation can make sense. However, this can be better done by clear-cut and strict commitments and supervision than by new methodological tricks. Moreover, let’s not forget that earlier proposals by Germany to introduce binding reform contracts between countries had been rejected by many. The basic principle for economic rules to work is that they should be easy and simple. Further complexity by adding proxies for structural reforms could make sense economically but would make the fiscal framework even more complicated. Monitoring of fiscal policies would then definitely be an art, not a science. It is obvious that flexibility will be one of the buzz words at this week’s Summit. However, the interpretation of flexibility is likely to differ. While several countries led by France and Italy seem to advocate new rules with new flexibility, Germany will stick to the flexibility under the current rules. As long as there is no agreement on any binding framework for structural reforms, it is very hard to see Germany agreeing to any changes of the fiscal framework. The other big topic that will address at least some government leaders’ flexibility is the first stage of European musical chairs: the nomination of the next president of the European Commission. Remember that government leaders have to propose a candidate who will then have to be nominated by European Parliament. Despite earlier reservations, a consensus amongst government leaders to support Jean-Claude Juncker has emerged. Only British Prime Minister Cameron and his Hungarian colleague Orban are still publicly opposing Juncker. Cameron suggested earlier that failing to get his way may increase the chances of a UK exit from the EU. This threat, however, has turned out to be an own goal. Many other European politicians showed little understanding for what some called tactical exaggeration with Cameron’s aides now seemingly resigned to defeat on Juncker’s appointment. Cameron is in a difficult position having promised a referendum on EU membership should his Conservative Party win the 2015 General Election. He has said that he would campaign in favour of remaining in the EU so long as the UK’s relationship with the EU can be renegotiated with certain EU powers “brought back” under domestic control. With Juncker in charge the perception – rightly or wrongly – is that Cameron will be less likely to win any concessions. With the Labour Party currently leading in the UK polls it is possible that the proposed referendum never takes place. However, the Labour leadership is coming under pressure from its own backbenchers to offer it given that UKIP, the anti-EU party that “won” the recent European parliamentary elections, is starting to eat into its support. However, another interesting aspect of all this is the increased polarisation in the UK population’s thinking on its relationship with the EU. UKIP’s surge in the polls has been attracting headlines, but we also see that a greater proportion (and rising) of the UK's population are in favour of staying in the EU. However, it isn’t a majority being led by positive sentiment to Europe – it is more the fear factor of what might happen should the UK leave with people worried about jobs and growth. If there is a form of negotiation that brings some powers back to the UK then approval to stay in the EU rises to 57% according to a recent YouGov poll. However, if no EU concessions are won by the UK government, which would lead to a widespread press revolt and could quickly lead to a reversal in the polls, there is a high probability that the UK leaves the EU in 2016/17. If this occurs, the assumption is that the UK will quickly be allowed into the European Free Trade Association (with Norway, Switzerland, Iceland and Liechtenstein), which basically would give the UK population what it wants – access to the single market without the political ties. It would also allow Europe to press on with greater integration without having to continually make amendments to appease the British. That said, there may be some concern within Brussels about losing the UK given it is still a large, important (and rapidly growing) economy that positively contributes to the EU’s coffers. Some may also take the view that having the UK within the EU also helps boost the EU’s own global influence – US President Obama has recently explicitly stated he wants to see the UK remain part of the EU. Furthermore, demographics do not look good for the EU and losing the UK (whose demographics are dramatically different) may intensify worries over the outlook for the EU’s population, growth and wealth over coming decades. All in all, this week’s Summit almost looks like sports event with government leaders bending and stretching their flexibility. As in real sports, overstretched flexibility can sometimes lead to unexpected injuries. This piece is a co-production together with my ING colleague and UK expert James Knightley