Greece: the agreement will not create the necessary impulse to boost growth

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.

A lower momentum for the Euro Area during the second quarter

GDP growth for the Euro Area was confirmed at 0.3% (flat) for the second quarter of this year (2.2% at annual rate).
The table below shows growth figures for different countries of the Euro Area.
In the largest Eurozone countries there is a slowdown during the second quarter. This is the case for Germany (from 2.9% to 1.7%), for France (+2.7% to -0.2%) for Spain (from 3.1% to 2.8%) and for Italy (from 1.1% to 0%) Growth is stronger in other countries.
Carry over for 2016 at the end of the second quarter is 1.3% for the Euro Area but 1.5% for Germany and 2.6% for Spain; but just 1.1% for France and 0.6%% in Italy. For other countries it is circa 1% except for Greece where it is still negative. Continue reading

On the state of the Monetary Union

Synthetic publication by Thomas Philippon (NY University) on the state of the European Monetary Union.
It distinguishes different times depending on whether one is interested in the financial crisis, economic crisis or political crisis. These three dimensions overlap but do not fall within the same period.
He suggests to go faster on the Union Bank and the union of capital markets but also create Eurobills to prevent money market disruptions.

The shock on Greek activity has been brutal and violent in July

The Greek crisis, with its uncertainties related to the place of Greece within Europe and with the constraints associated to the banking sector shutdown since the beginning of July, has provoked a deep drop in economic activity.
The Markit survey for July shows a synthetic index at 30.2 for the manufacturing sector. An index below 50 implies a reduction in economic activity. The index is at its lowest level ever, much lower than during the 2008/2009 recession. That’s what we see on the graph below. The impact on the GDP profile will be dramatic in the third quarter. Continue reading

After the Eurogroup, some questions remain

After the deal at the Euro-Summit, there are still questions that puzzle me.

The first is the question related to growth. At which moment in the future can we imagine a growth take off in Greece? There are some minor measures on competition (shops open on Sunday and liberalization for pharmacy ownership and bakeries) and on the labor market. They can improve the situation but will not create a boost that will be able to change the global picture.
Last Thursday, Alexis Tsipras mentioned that the target for primary surplus was 3.5% of GDP in 2018 versus less than 1% this year. This means that an extra saving of 2.5% will be needed in the 3 year to come. It will come from higher VAT rate and lower pensions. This will lead to lower internal demand and then to a poor GDP performance.
In 2014, austerity was a bit lighter and we saw the beginning of a rebound in activity and in jobs at the end of the year. The phenomenon was the same than in the UK and in Spain since 2013: less austerity implies stronger growth momentum.
Since the beginning of the year the situation was messy with the arrival of Syriza at the government but we cannot expect a rapid improvement after the measures Greece will have to take.
In other words, after a deep drop in GDP during the last five years, we do not expect a rapid recovery. Probably, recession will remain the main word to describe the Greek outlook.
The retirement reform that is expected to be presented at the end of October will have the same effect. With the large drop in GDP, the reform will scale down contributions and pensions to the lower level of activity. This will also penalize growth.
Two questions are associated with this issue Continue reading