Eurozone future still uncertain
AFP PHOTO / DANIEL ROLAND
Greece have announced that they have finally agreed the terms for the €11.5 worth of cuts with the Troika of the European Commission, European Central Bank (ECB) and the International Monetary Fund (IMF), that allay previous fears that their money was running out as the EU lenders will now permit part of the €130 billion to be handed over, but the future of the eurozone still remains on a rocky path.
An EU official said: “The Commission, the ECB and the IMF – is currently in Athens for a review mission in order to help the Greek authorities bring Greece's economic programme back on track. In September the Troika will prepare a final assessment on programme implementation".
“As President Barroso has stated in Athens on the 26th of July, the key point is implementation to deliver results. The Greek authorities are fully aware of the need to catch up the time lost and we are confident that a decision on the next disbursement will be made in September. In September we will make a legislative proposal for a single supervisory mechanism. This will help increase confidence and preserve financial stability in the euro area.”
In response to the protracted negotiations with Greece, major figures such as ECB President Mario Draghi, leader of the Eurogroup Jean-Claude Juncker, backed by Chancellor Angela Merkel and President Hollande have reiterated their desire to preserve the euro.
Although how the Eurozone can return to full health will be a difficult process, as the recently released ‘Economic Sentiment Indicator’ would testify, as in July the eurozone decreased by 2 points.
Industrial confidence in the euro area is now the lowest it has been since the financial implosion of autumn 2008, the same goes for consumer confidence, and the retail, construction and financial sectors have all suffered a dip in their belief in the Eurozone since the beginning of this year.
Standard and Poor have forecasted that due to the combination of public, household, and bank deleveraging, GDP in the Eurozone as a whole will decline by 0.6% in 2012 and grow by just 0.4% in 2013,compared to their previous estimate of zero and 1% growth respectively.
They also warned that the ECB’s LTRO and bond buying policy was not filtering through to the real economy, with the banks using the capital to de-leverage and to restructure debt rather than to lend it out to the private sector.
Policymakers now have huge choices to make, and with Eurostats’ announcement that the euro area’s collective public debt has risen to 88.2% of GDP for the first quarter of 2012, compared to 87.3% in the last quarter of 2011, the reach they have has been reduced further.
The Eurozone authorities believe that they are on the right track following the euro area summit of 29 June that paved the way for, in particular, the proposal for a single supervisory mechanism for banks, that the commission is working on and is targeted to be ready in September.
Additionally the EU is pinning its hopes that Germany can complete the ratification process of the ESM treaty, a decision also due in September.
“Fundamentally everyone wants growth in the long term.” Ian Stewart, chief economist at Deloitte UK opined: “There are two possibilities in that we continue on the road of reforms, ones that will integrate the Eurozone economies further, although some of the advice offered is politically not viable , it may or may not work but it will buy time.”
“One view is that the wealthier countries should spend more money to create demand for products in the south, but that could force interest rates up for countries like Germany that pay 1.3% borrowing costs at the moment.”
“The alternative is to reconfigure the Eurozone as we know it and change the status quo, for example you could have regional currency unions with two or more currencies. There’s a view that a change such as this would be a disaster for Europe, but I think its something that could work in the long term.”
Jay Randolph, head of sovereignty risk for IHS Global, has predicted the end for Greek membership of the Eurozone: “We think that that Greeks will exit the Eurozone by early next year, there just has not been enough political will from Greece to sort out its problems, in optimum economic areas there is always political will like we have seen with the rouble in Russia.”
“The other problem countries Ireland, Spain, Portugal and Italy the exports are all up and that is something that the IMF want to see, they have surpluses because they are competitive in the EU, and because there was again more political will.” Randolph continued.
“As for the future its pretty clear that the institutional set up has to change that can reduce the tensions between the countries in the EU. If you look at Germany they have a federal system that allows powers to be given away to supranational bodies, and extending liabilities to countries like Spain, whereas France would go for extended liabilities through greater political union.”
Spain have been handed a boost as Standard and Poor affirmed its
'BBB+/A-2' status due to a strong commitment to economic and fiscal adjustments, and based on the that official loans to distressed Spanish financial institutions will eventually be mutualised among all Eurozone governments, ensuring that public debt remains below 80% of GDP.
This despite rising Spanish borrowing costs that have caused concern in recent weeks reaching a record 7.5%, and this week their official statistics body the Instituto Nacional de Estadistica, reported negative growth of 0.4% for the second quarter of this year, that has seen the alarm bells being once more about their capability in paying their liabilities.
The EU though say they are confident that the €100 billion recapitalisation programme direct from the ESM fund will provide the necessary liquidity for Spanish banks, with a €30bn contingency facility already in place in case of emergency.
They are also confident that the liberalisation of some labour laws, alongside taking the necessary steps to ensure that its public finances are in shape, over the long term will see them eventually progress.
“The problem for the Eurozone is that its trying to evolve in the middle of a crises where there are political constraints with having 17 nations as part of the economic area making things harder still.” Ian Stewart commented.
“In the US monetary union evolved after two or three hundred years after civil wars and the depression in the thirties, if you look at individual sovereign nations how they decide to get credit out has been difficult, but the Eurozone authorities have not done a bad job up to now.”
ABOUT THE AUTHOR
Peter Taberner has previously written for Financial News, Investment and Pensions Europe, Utility Week, EGOV Monitor, European Pensions, Suite101.com, PPP Bulletin, Global Pensions Weekly, Tobacco Journal International, IPS and Seeurope.net.
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