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

Temporary exit of Greece: it’s an illusion. 

The notion of temporary exit from the Eurozone is a nonsense. It is just a way for Germany to push Greece out definitely. 

Out of the Euro Area and willing to come back implies that a country has to dramatically reduce the imbalances that led to its temporary exit in a environment which will not be the one of the common currency. With its new currency its interest rates would be much higher.  

Efforts to be made to satisfy Eurozone criteria would be too important. The temptation would then to make efforts to take advantage of the devaluation of the currency in order to reshape the economy. 

In other words a temporary exit is a polite manner for Germany to “fire” Greece definitely. But would Greece be an isolate case or the first of a long list?

The Public Debt to GDP ratio in Greece

The ratio of public debt to GDP is amazing when it is decomposed.
GDP since 2009 was down by more than 20%. During this period the debt has not grown so much.
In other words, the profile of the ratio of Public Debt to GDP reflects mainly the drop of the economic activity. This is the consequence of the austerity policy that was imposed to Greece by the troika. (See here for the Greeks’ effort)
We can then understand that the debt relief discussion that will come after the agreement on yesterday’s proposals by Tsipras is just a counterpart of this persistent austerity.
070715krugman1-blog480Source Paul Krugman (see here)

Greek proposals: Ingredients for a deal?

The document in pdf format is MarketFlash_10_07_2015EN

The program, which has been presented by Alexis Tsipras to the troika, reflects the will to catch an agreement as soon as next Sunday during the meeting of the European Chiefs of government. Measures are expected to be approved in order to keep Greece in the Euro Area. Its aim is to get EUR 50bn on three years in order to repay Greek’s debt.

All the proposals that have been made by the Prime Minister are close to those on which the troika agreed on before the referendum.
The expected profile for the Greek public finance is to converge to a primary budget surplus of 3.5% of GDP in 2018. This surplus will be less than 1% this year. It will then not feed the debt anymore. Continue reading

Remarks by President Donald Tusk after the Euro Summit of 7 July 2015 on Greece

The official press release can be found here

I will read out what was agreed by leaders at tonight’s Euro Summit:

1. We met tonight to discuss the serious situation in Greece. We noted that the euro area authorities stand ready to do whatever is necessary to ensure the financial stability of the euro area as a whole.

2. Following the Greek referendum, Prime Minister Tsipras committed to present a new request for a programme within the framework set by the ESM Treaty, including strict policy conditionality.

3. We agreed to urgently examine whether it is possible to establish a basis for finding an agreement that respects existing commitments and our common rules.

4. The Greek government will on Thursday 9 July at the latest set out in detail its proposals for a comprehensive and specific reform agenda for assessment by the three Institutions to be presented to the Euro Group.

5. The Heads of State or Government will meet on Sunday 12 July.


Let me add a few words from my own perspective. All sides of the negotiations share the responsibility for the current status quo. That is why today I called on all leaders to try to find consensus, which will be our common success, with no losers or winners. If this does not happen it will mean the end of the negotiations with all the possible consequences, including the worst-case scenario, where all of us will lose. Our inability to find agreement may lead to the bankruptcy of Greece and the insolvency of its banking system. And for sure, it will be most painful for the Greek people. I have no doubt that this will affect all Europe also in the geopolitical sense. If someone has any illusion that it will not be so, they are naive.

The stark reality is that we have only five days left to find the ultimate agreement. Until now, I have avoided talking about deadlines. But tonight I have to say loud and clear that the final deadline ends this week. All of us are responsible for the crisis and all of us have a responsibility to resolve it.