Thursday, February 19, 2015

Eurozone - Bluff or u-turn?

The next act of the Greek crisis has all the elements for a new blockbuster: conciliation, refusal, only the happy end is still far from certain. What a day. Yesterday, events in the Eurozone unfolded at a breakneck pace. First, the Greek government submitted an official request to extend its bailout by six months. More than an hour later, the German government reacted with a strict refusal. Are the Germans a party pooper? This was the first reaction to the series of events. Now that Greece finally came across and let go earlier positions regarding the bailout, what made the Germans refuse it? To understand the German refusal, one has to apply lots of semantic skills and European institutional memory. In the official Greek letter, Finance Minister Varoufakis asked for an extension of the “Master Financial Assistance Facility Agreement” (MAFA). This is only one part of the bailout programme, the laying out of the financing scheme. The so-called Memorandum of Understanding (MoU) which includes all reforms and policy requirements was not mentioned at all by Varoufakis. While some claim that accepting the MFAFA automatically includes the MoU, there is a legal escape clause stating that the MoU should be applied unless otherwise specified. In the eyes of the German government, not mentioning the MoU is another Greek provocation. Moreover, the Greek government’s letter has little concrete commitments, except for the promise to only implement fiscally-neutral new policy measures. For the rest, the letter suggests that the role of the Troika should be redefined as well as further financial agreements. As such, the letter can be interpreted as the request for a bridging facility with the only goal of renegotiating the bailout programme but little concrete commitments. In the eyes of the German government, the Greek letter could just be a Trojan horse, bringing more cumbersome discussions and fights to the Eurozone. The current dispute is only at first glance a semantic dispute. In fact, the Greek government’s letter invited the view that it is only a smart attempt to extend the loan while escaping full conditionality, trying to keep Greece and Greek banks afloat with ECB support. The positive interpretation of the Greek letter is that it is the first substantial concession of the Greek government and that a real compromise is within reach. When Eurozone finance ministers meet today for a special meeting in Brussels, the Eurozone will get its next face-off. A face-off with an open end: either the Greek government will go all the way and convince its Eurozone partners, particularly the ones where national parliaments would have to agree to an extension of the loan, that its commitment is credible, or the German government was right and yesterday’s letter was only a bluff. In the latter case, any happy end would be deferred to a distant future.

Thursday, February 12, 2015

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.