Failure of the negotiation with Greece

May be will it be next Monday? It’s the conclusion we can have after the failure of the negotiation between Greece and its Eurogroup partners (finance ministers of the Euro Area). This non-scheduled meeting was billed as a last chance for a compromise. There will be one more last chance Monday.

The most worrying in this meeting is its failure of course but also the lack of capacity to write a communique. One was written but Athens’ government, in a last-minute move, didn’t want to sign it. Everyone agreed on this communique including Yanis Varoufakis the Greek finance minister who was the Greek negotiator.

The arm wrestling between the Greek Prime Minister Alexi Tsipras and all the other European governments continue. The negotiation is twofold; one part is on the financial ground between Greece and Europe and it is an important one for Greece and also for the Eurozone survival; the other part of the negotiation is linked to the commitment between the Prime Minister and Greek citizens.
To be strong on the European side he needs a strong support from Greek people but to gain and keep domestic support he has to be strong in his negotiation with Europe.

There is another issue in the battle: I’m sure that he is persuaded that the Euro zone will not accept a Grexit (Greece exit) because it is too risky for every European country from Germany to Finland. Who really wants to take this risk as we don’t really know what would happen? Tsipras probably imagine that Europe has more to lose than Greece if at the end of the day the negotiation is a real failure.

To keep the Euro Area working well, there is a need to find a solution quickly as the deadline is February 28 and repayments for Greece in 2015 are large. On the whole year, Greece will have to repay about EUR 9.8bn to the IMF. The amount is almost homogenous during the year. It will have to repay EUR 6.7bn to the ECB (SMP portfolio). This will be in July and August. There is also a need to roll the short-term position. The government will have to roll EUR 14.5bn (1.4 to 2 per month). These Tbills are in Greek banks’ portfolio.

Greece needs to find a solution to avoid a default. This is really urgent as tax receipts are lower than expected and a failure could lead to a bank run.
A solution must be found before next Monday. It would avoid a situation of default for Greece and it will at the same time limit the risk of a persistent shock on Europe

It’s always possible to minimize the impact of a Grexit because of the size of the country. But we can imagine that in the case of a Grexit, the credibility of the Euro Area construction would be at risk. Who would like to take this type of risk? And who, outside Europe, would trust Europe?
Next Monday will be an important date for the Euro Area: it can be a new step of integration within the Euro zone but it can also be the first large and deep crack in the European construction

My Daily Column – Confusion in Emerging Countries

There is confusion currently on markets and mainly on emerging markets. This implies sometime strong and brutal adjustments.
Last night, such an adjustment has been seen in Russia when the central bank of Russia has increased its main interest rate from 10.5% to 17%. It was a response to the deep and dramatic drop of the ruble.
On a more general ground, we’ve seen strong movements on emerging debts and emerging exchange rates. Equity markets volatility was not restricted to emerging countries. On all these issues, the oil price issue is major. On the equity market in developed countries, short-term uncertainty hides the positive story associated with lower oil price: lower investment in the oil sector today but more consumption in the future and more investment in other sectors. Continue reading

My Daily Column – Income Distribution and Growth

Income distribution is currently a major topic as the crisis has persistent effects. We remember during fall of 2011 the “Occupy Wall Street” movement. More recently Thomas Piketty‘s book gave a framework to analyze and to understand deformations in income distribution. Piketty suggests that the economic dynamics doesn’t spontaneously converge to a fair situation and that corrective measures may be needed.

Nevertheless we didn’t have an analysis linking income distribution and growth.
In a recent document, OECD gave some answers to this question that divides economists: Is an unequal income distribution a key-element to create incentives for growth? Or: Is a narrow income distribution the clue for a strong growth? We understand that answers are necessary to understand how economies move in the long-term. Continue reading

ECB: The need for a QE

The ECB will have to go beyond the monetary policy measures that have already been announced.
It will not probably be at today’s meeting as the next TLTRO operation is scheduled for December the 11th. But probably some new instruments will be presented at the next meeting on January the 22nd.

The first reason for this new approach is on macroeconomic ground.
The current economic situation is weak as it was suggested by the Markit survey yesterday. I think that we can have a recovery in 2015 linked to a lower euro and lower oil prices. But monetary policy has also to be supportive.
The rate of inflation at 0.3% in November is also a source of worry. It is to low and well below the ECB target of 2%. Moreover looking at the macroeconomic adjustment who can expect a rapid and certain convergence to the 2% target? It would be risky
That’s why the ECB has to act rapidly.

The current instruments that have been put in place by the ECB are not sufficient to fulfill all the ECB targets. Continue reading

Daily Column – Economic Momentum in November

The global economic outlook was still much contrasted in the manufacturing sector at the end of November. That’s the result of PMI/Markit and ISM surveys.

The first point to mention is the marginal drop of the PMI world index from 52.2 in October to 51.8. (An index above 50 means an improvement of the activity in the manufacturing sector. Going from 52.2 to 51.8 means that activity is still growing in the manufacturing sector but at a slower pace)

The downward inflection of the global index is linked to a US PMI index that is weaker than last summer according to the Markit survey. This is in contrast with the ISM survey that shows that since last summer the manufacturing sector is booming. The divergence can be seen on the chart. Continue reading

My Daily Column: Euro Area – Elements for a recovery

Every morning I record a podcast in French (see here) on a specific topic. The text below is the translation of this morning podcast.

The combination of a more competitive euro, an oil price at $ 70 and a proactive monetary policy will be strong support for an economic improvement in the Euro zone.
For now, this situation is not good. Surveys like PMI/Markit show a fragile dynamics, while in the same time, consumer confidence is bending on the downside.

The fall of the euro will have two effects
First it will restore European companies’ competitiveness. Given their recent performances, France and Italy will benefit more because of their current poor exports’ performances. Continue reading