This is an addendum to my yesterday’s post on Greece.
What do we have to keep in mind after the agreement (see the press release here)
This agreement is the end of the financial rescue program that started 8 years ago
Greece will receive €15bn and the total amount of the rescue program is €96bn.
Therefore the cash reserves is now at €24.1bn which is perceived as sufficient for the next 22 months. In other words, Greece will not have to go on the market before 22 months.
In order to ensure debt sustainability, Greece will have to respect a constraint on its budget: a primary public surplus at 3.5% of GDP until 2022 and 2.2% on average from 2023 to 2060.
Its gross financial needs (public deficit + funds required to roll over debt that matures in the course of the year) has to be 15% in the medium term and 20% thereafter.
Repayment of the EFSF debt has been postponed by 10 years to 2033 and maturities have been extended.
Therefore, debt repayment will be limited until 2030.
The profit done from the ECB portfolio (SMP) will be reversed to the Greek budget (€1bn)
In other words, Greece will receive new cash, will postpone its debt repayment but will have to follow strict rules on primary public finance balance. We can imagine lower long term interest rates.
That’s pretty fine but the question that remains is the source of impulse after 10 years of recession. Greece will not be able to use a Keynesian type fiscal policy due to constraints on its public finance. So even if institutions converge to a more efficient framework, the question is on the possibility to change the growth trend. It could have been efficient in a “normal” economy not in one that has suffered a 10 year recession.
Greece doesn’t have strong fundamentals that will allow to recover endogenously. This is not the last episode for Greece.
Eurozone governments have brokered a long-awaited debt relief deal for Greece, pushing back repayment deadlines on almost €100bn of bailout loans as the country prepares to exit its era of financial rescue programmes.
After years of recession, the Greek economy is back to growth as the first graph shows. But the 2017 figure is very low while the rest of the Eurozone was in a strong expansion. Despite this improvement, the GDP level remains, at the end of 2017, 25% below the 2007 peak. The adjustment, almost 10 years of recession, that has been imposed by the troika (IMF, European Commission, ECB) was extremely strong, persistent and brutal. It has broken the capacity of the Greek economy to recover endogenously.
An historical comparison shows that the duration of the Greek depression has been longer than that witnessed by the US during the great depression in the 30’s. Ten years after the start of the US depression the US economy was back to its pre-crisis level. After 10 years, the Greek economy is still 25% below this peak. That makes the difference and show how deep and strong was the adjustment. Continue reading
The BoE comment on its monetary policy suggests that a rate hike is a possibility at the August meeting as activity is expected to rise. BUT, the momentum is low and even if there is an improvement it will not catch up what has been lost in 2017.
The graph shows the GDP deviation from trend in the UK, EA, France and Germany. The UK was not able to catch the strong EA momentum in 2017 and its internal dynamics was not enough to support growth. Therefore what’s happening at Threadneedle Street? Wishful thinking?
Donald Trump’s threats to world trade are a desperate attempt from the US to maintain the country’s world economic leadership. The most dramatic shift over the past 20 years has taken place in China, as the country has displayed stellar growth and now accounts for an increasingly large percentage of the world economy.
China has been one of the big winners from globalization, as citizens have enjoyed an impressive surge in income to the detriment of the middle and lower classes in developed markets, as shown by Branko Milanovic’s famous elephant chart. This chart also goes a long way to explaining recent political events in western countries: the middle classes across the board have ended up in a more unstable situation than 10 or 20 years ago, and this has major consequences for the way they vote.
The industrial momentum that very swiftly pushes up income is now the preserve of Asia, and China in particular. Industrial output across the US, Japan and Europe – the three major areas that drove world growth after the Second World War – has stagnated over the past ten years, while figures in Asia (excluding Japan) have doubled. The “Made in China 2015” plan seeks to further accelerate this shift.
This contrasting industrial momentum now comes firmly down on the side of Asia and acts as the focus for Trump’s trade measures against China. Output is no longer increasing in western countries, but rather in Asia, driving the region’s catch-up trend and reducing developed countries’ headway. The US is seeing its leadership diminish, while at the same time the situation also raises major challenges for Europe, although it has not taken the same aggressive course of action as the White House. Furthermore, the industrial revival in developed countries often referred to as “Industry 4.0” only seems to involve the substitution of existing production, rather than a true jump in production volumes. For the moment, this so-called revival is not sufficient to point to a reversal in the aforementioned trend towards the location of production in Asian countries. Continue reading