Viewpoint: Greece. In the hope that the new elections will ease tensions

This week’s calendar of events is not conducive to developments in terms of the debt crisis: in waiting for the outcome of the elections in Greece…..

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          the safety net represented by European funds remains inadequate. As regards growth, while it has been acknowledged that there is little sense in pursuing absolute deficit targets during a recession, stimulus initiatives such as the introduction of “project bonds” remain limited. In the meantime, the round of monthly data for May has signalled the risk of a fall back into recession for the euro area in the spring months, after a stagnation phase at the beginning of the year, as even Germany, the continent’s last stronghold, seems to be wavering.
          – There is no real use in trying to assess the results of an “informal dinner”, where no decisions could effectively be taken, as was the case at the 23 May meeting of the European Union’s heads of state and government. However, the G8 summit, the informal dinner, and the statements made following the events, allow us to investigate the progress being made on a number of important issues.
          – First, the safety net for the euro area. No miracles were expected, and none came about. As we have noted in the past, apart from possible cosmetic touch-ups to the modus operandi of the future ESM, the safety net represented by European funds remains inadequate, and only the ECB can provide the necessary capacity and swiftness of action. However, out of respect for the independence of the central bank, it is unthinkable that the Council officially call for the ECB’s greater involvement, and any extraordinary measures will only be announced by the ECB’s Governing Council, when appropriate. However, Spain has apparently made an informal request for support from the monetary authorities, through the already tested channels.
          – Second, Greece. In the hope that the new elections will ease tensions rather than add to them, it
          is only reasonable to have contingency plans in place in the event of the situation spiralling out of control. Equally reasonable is the choice not to talk of the issue too much, in order not to increase the risks of a spontaneous collapse of the domestic situation.
          – Third, growth. In the dialogue of the deaf among euro area member states, one shared notion seems to be acceptance of the principle that there is little sense in pursuing absolute deficit targets during a recession. This in itself marks some progress (albeit made prior to both the G8 and the informal dinner). The idea of “project bonds” is conceptually interesting, but of little practical clout, given the very modest size of the pilot project. Also, considering Italy’s historical record, it is not necessarily better to have higher taxes and larger public investments, rather than lower taxes and smaller public spending.
          – Speaking of growth, the indications received this week were far from reassuring. The round of monthly data for May has signalled the risk of a fall back into recession for the euro area in the spring months, after a stagnation phase at the beginning of the year, as even Germany, the continent’s last stronghold, seems to be wavering. The composite PMI stabilised at 45.9, a low since June 2009, and is compatible with a contraction of the economy in the spring months.
          Business confidence dropped more than expected in France, as also in Belgium. However, the most worrying aspect is that even Germany, the continent’s last stronghold, seems to be wavering. The IFO took a surprise dive, to 106.9 from 109.8. The index is still one standard deviation above the long-term average (100,8), but has dropped back to last autumn’s levels, when the German economy contracted by -0.2% q/q. Survey data broken down by sector show that the IFOs’ decline is explained only in part by business conditions in the manufacturing sector. Retail sales were the main culprit, down by 14.3 points to -3.6, probably due to exceptionally cold weather conditions. The German Composite PMI activity index slipped to 49.6 in May, from 52.9 in the first three months of the year. Therefore, the IFO and PMI monthly surveys suggest that Germany’s growth rate of +0.5% q/q, which supported the European average at the beginning of 2012, will not be matched in the spring months. This will be all the more likely if the month-on-month slowdown of the manufacturing sector’s order book trend is confirmed, as the support of German exports, the main growth driver in the first part of the year, would also wane. On this front, the drop of the HSBC PMI in China, and of the Markit PMI in the United States in May, offer no comfort.


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