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As the Greek drama dominated news bulletins throughout the first half of 2015, there was generally little impact on global financial markets, outside Greece itself. It is true that eurozone equities underperformed the world equity market after mid April, but the euro actually strengthened over this period, and the yield spreads between peripheral eurozone bond markets and German bunds widened only slightly, at least until this week.
This general aura of market calmness had consequences for the talks themselves, since it emboldened the Germans and other EU negotiators to take an even harder line with the Syriza-led Greek government. With no hint of a concession to take back to Athens, Mr Tsipras had nothing to sell to the left of his party.
Paradoxically, the fact that the markets remained quiet for months has therefore increased the chances of a major accident taking place as political nerves fray.
The prolonged period of market insouciance should not lull any of Europe’s leaders, headed towards Brussels for an emergency summit on Monday, into a false sense of security. There is no guarantee that the markets would remain relaxed in the case of a Greek default or exit from the euro. The real test starts now. Read more
Tuesday’s extremely weak German industrial production figures published for August have come an awkward time for the German government. An informal “employment conference” including some EU leaders has been called by Italian Prime Minister Renzi, and it is scheduled to take place, amid little advance publicity, in Milan on Wednesday. This will presumably set the stage for the next European Council meeting on October23. In between will be the International Monetary Fund/World Bank annual meetings in Washington, when the German approach to economic policy in the euro area will be heavily scrutinised.
The official German line heading into these meetings is that the recovery is proceeding well, both in Germany and in the euro area as a whole, implying that the recent marked weakening in both gross domestic product and inflation data are just a temporary aberration. There is no sign that the Merkel administration is ready to change its longstanding formula for economic success in the eurozone: member states should stick to the fiscal targets in the Stability and Growth Pact, and should accelerate structural reforms, so that the expansionary monetary stance provided by the European Central Bank can bear fruit. Read more
A few weeks ago, I wrote that the twists and turns in the eurozone crisis had, in the early months of 2012, lost the power to shock global asset prices. The reason given was that the prophylactic provided by the use of the ECB’s balance sheet essentially trumped the deteriorating economic fundamentals in several countries, notably in Spain. This view has since been severely challenged, but it has just about remained intact; after all, American and Asian equities are still 6-7 per cent up so far this year.
However, the crisis which surrounds political events in Greece threatens to change all that. This is the first major revolt by any electorate against the eurozone’s austerity policies, and it is those policies which have underpinned the willingness of the ECB to use its balance sheet to rescue the banking system. Furthermore, Greece is just the tip of the iceberg. The swing against austerity by voters in the eurozone is manifesting itself in many different places. I have been wondering whether this is good or bad news for the resolution of the crisis. Read more
In the second half of 2011, the twists and turns in the eurozone crisis dominated global markets to such an extent that nothing else seemed to matter. This remained true in January and February of this year, when the strong rally in peripheral bond spreads in the eurozone coincided with an equally strong rally in global equities. But in recent weeks, the umbilical link between the eurozone crisis and global risk assets seems to have broken down. As the graph shows, peripheral bond spreads (proxied by the average of Spanish and Italian spreads over German bunds) have returned towards crisis mode, while global equities have fallen only slightly. Read more
Angela Merkel. Image by Getty.
The Greek financial tragedy seemed set to enter the end game last week, when the troika representing big official lenders (the EU, ECB and IMF) was close to abandoning the next tranche of official loans to the country. Without these official loans, a disorderly default would have been inevitable within a month, and the departure of Greece from the euro, if not from the EU itself, would have been on the agenda.
Germany was reported to be examining these radical options at the weekend. However, having looked over the precipice, Angela Merkel, German chancellor, seems to have recoiled from them, for now. We will learn more in the next few days, but yesterday she hinted that she would still prefer a delayed, “orderly” Greek default, rather than an immediate and disorderly one. Unfortunately, neither option looks very appealing. Read more
A couple of months ago, financial markets realised that the developed economies were slowing sharply, while the policy response from central banks and finance ministries was slow, or confused, or in some cases, like the debt ceiling debacle in Washington, directly damaging. Since then, some policy makers have woken up and smelled the coffee. There have been significant policy shifts in the US, and at the ECB. But there has been no progress whatsoever in the eurozone sovereign debt crisis. Last week, that became by far the most urgent problem facing the global economy. Read more
If the eurozone were a genuine single economy, like the US, then the buoyant second quarter GDP figures, published today, would be a cause for unbridled celebrations. The increase of 1.0 per cent in GDP in Q2 was nearly double the growth rate in the US and, if maintained, it would be more than enough to bring down the unemployment rate in Europe. Yet much of the market reaction has focused not on the fact that the eurozone as a whole enjoyed a fantastic quarter, but on the widening gaps which are developing between the healthy German economy and the ailing economies on the periphery of the bloc, and which leave the troubles of the euro far from resolved. Read more