As I wrote early last week Antonis Samaras was to spend much of the weekend in talks with Angela Merkel and Francois Hollande about the future of his nation. As the Telegraph pointed out yesterday the results were, as expected, unconvincing:
Angela Merkel and Francois Hollande pledged to keep Greece in the Eurozone, but offered Greece no immediate relief from its current regime of painful austerity measures.
Both the German and French leaders stated that Greece must stay in the Eurozone, but must first prove that it will enact changes to its economy that satisfy the northern creditors. The statements thereafter made little sense with words such as:
[Greece] has to demonstrate the credibility of its programme and the willingness of its leaders to go the whole way, while doing it in a way that is bearable for the population.
I’m not even sure what that means, but it is very obviously not credible. As I stated in my previous post, Greece’s economy has been shrinking for nearly 5 years, the government deficit is still 9% of GDP, the current account deficit almost 10% of GDP even with an improving balance of trade ( which is still negative ) , unemployment is over 23% and climbing and leading business indicators suggest that worse is yet to come.
In order to meet the requirements of the Troika, Greece is expected to cut another €13.5bn from the government budget over the next two years and by doing so will supposedly prove its credibility with the rest of Europe and its own citizens. This scenario is quite obviously delusional, and made more so if we go back 2 years and hear what the then Greek Finance Minster, George Papaconstantinou, said about Greece’s compliance.
“Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.
…
“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”
Two years on and all that has occurred is the unemployment rate has increased by another 10%, GDP has fallen by about the same and the country remains highly indebted even after a private sector write-down on sovereign debt. Quite simply the policy response has failed miserably and once again Europe has dragged itself back to the point of crisis over Greece.
As I stated in last week’s PMI post, the ability for Europe’s politicians to react is slowly diminishing as contagion spreads to their own national economies. Spiegel reports on the unenviable position that the German leader now finds herself in:
The IMF is taking a particularly hard line in the negotiations. The fund’s envoys feel that Greece’s debts are not sustainable and are threatening to withdraw from the aid program altogether. The only alternative is for the public creditors, in particular the European Central Bank (ECB), to write off a portion of Greece’s debt.
The German government faces a dilemma. Chancellor Angela Merkel had made IMF participation a condition of any Greek bailout, but if public-sector creditors agreed to a debt haircut, it would cost Germany many billions of euros.
For Merkel, that is out of the question, as is a third aid package or extending the current program by two years, as Samaras has requested. Both of the latter two options would cost additional money, and that, the chancellor fears, is something members of her own party, the Christian Democratic Union, and its coalition partners, Bavaria’s Christian Social Union (CSU) and the business-friendly Free Democrats (FDP), would refuse to support in the German parliament, the Bundestag.
There is obviously the other issue of the German constitutional court and whether it will decide whether to block the ESM. My feeling is that this is unlikely, but that does not rule out caveats that limit the capacity of the ESM which may hamper other efforts by the ECB.
Angela Merkel and Francois Hollande agreed that there would be no final decision on Greece until after the Troika report was delivered. Although this was supposed to occur in September there are now reports that this document will not be ready until some time in October. The Eurogroup are due to meet in Luxembourg on October 8, and are expected to discuss the outcome of the report in the lead up to the EU summit in Brussels on October 18. There is now some doubt whether the report will be ready in time, and I suspect if true, will quickly lead to questions about political stalling around the decision.
In the meantime, while the focus is back on Greece, the other parts of the Euro-crisis roll not-so-merrily on. We still haven’t heard of any bailout requests from Spain, but overnight the National statistics office provided some new data that will probably speed up the process:
It seems Spain’s economy was in a worse state than we knew.
GDP contracted by more than previously estimated in 2010 – by 0.3 percent – more than the 0.1 percent contraction originally reported. It also grew by just 0.4 percent last year, which was less than the 0.7 percent figures first published.
The just released revised figures from the National Statistics Institute in Madrid play into fears about Spain’s ability to rein in its public deficit. The official data provider said the changes were a result of new structural data available and revisions to preliminary data
The downwards revision to the 2011 growth figures was a result of a change to external demand figures, which showed exports were slightly weaker than first thought.
Dwindling tax revenues brought on by record joblessness and deep recession will force Portugal to seek breathing space, much like Greece has, on commitments to EU-IMF creditors, analysts say.
In data published Thursday, the Portuguese budget office said 2012 first half tax receipts dropped 3.5 percent compared with the same period last year, hit by a fall in consumption as the economy shrank and unemployment reached 15 percent.
As things stand, the government, which had forecast an increase in revenue of 2.6 percent this year, is set to miss this year’s deficit target of 4.5 percent, several analysts agreed, if it cannot come up with an extra two-three billion euros ($2.5-3.8 billion).
Finance Minister Vitor Gaspar, unable to foresee the impact of austerity measures on the Portuguese economy, “has lost the fight”, wrote business daily Diario Economico in an editorial.
Paulo Mourao, economist at the University of Minho, said the new data served to “lay the ground” for “needed flexibility on Portugal’s rescue programme.”
Obviously Portugal will be watching the outcome for Greece very closely.