Eurozone plans return to growth

From left to right: Pierre Moscovici, French Minister of Finance; Christine Lagarde, Managing Director of the IMF; Wolfgang Schauble, German Federal Minister for Finance; Maria Fekter, Austrian Federal Minister for Finance, (Council of the European Union photographic library).

After Dr Wolfgang Schaeuble, the German minister of Finance stated that it was a fair decision by Brussels to give France two more years to straighten up its fiscal accounts, the climate in Eurozone has changed from winter to spring. Up to now Paris was at odds with Berlin over the severe austerity policies imposed on Eurozone, as the only effective cure for the single money zone’s financial problems. The French President Francois Hollande had problems at home, with the economy oscillating around zero if not receding unable to offer more jobs, and his own governing socialist party on roof tops against the Germans.

Now all Eurozone countries with stagnation or recession problems, including the three programme member states (Greece, Portugal Ireland) have received from Brussels two more years, to straighten their fiscal deficits. This must have been realized with the consent of Germany, as Schaeuble left to be understood.

The idea is that in cutting down government spending during the past two to three years, almost all Eurozone economies at the exemption of Germany are now either stagnating or receding, while unemployment skyrockets. Incidentally Hellastat, the Greek statistical service announced yesterday that unemployment in this country reached 27% in February compared to 26.7% in January this year and 21.9% in February 2012. This dreadful development is not confined only to Greece. Spain suffers of exactly similar unemployment rates while Portugal, Ireland, France and even Holland are seeing their numbers of workers without a job at dangerously high levels.

Unfortunately, this is not a tendency with visible end or reversal, if the same policies were to be followed throughout this year as in 2012. The European Commission in its spring forecast predicts GDP losses for 2013 and only 0.5% growth towards the second half of 2014. Understandably this tiny 0.5% may very easily become negative, if the austerity policies are to be continued with the same vigour as in 2012. Recession has actually now touched even Germany, with the country’s business community being in negative sentiment.

Compromise for growth

Seemingly in view of all that Berlin has diluted a bit its bitter medicine, as Schaeuble was quoted agreeing with the Brussels EU Commission, in giving everybody two more years of tolerance to bring down their excessive fiscal deficits. It’s not clear however if the German minister of Finance is authentically expressing Berlin’s governing elite. In the past this minister was reprimanded by Chancellor Angela Merkel for being ‘generous’ while negotiating the Cyprus package. In any case Germany cannot retract from what Schaeuble said.

As a result the present political and economic conjuncture in Eurozone hinges on a short-term compromise between austerity loving Germany on the one side and on the other almost all the other Eurozone countries. Seemingly if the economies react positively during the next months after this slight dilution of austerity, the climate will change.

Markets help

The sentiment in capital markets is visibly positive to this new turn of Eurozone towards a bit more relaxed policy direction, and Eurozone sovereigns can borrow at reduced interest rates. This week Portugal returned after two years to capital markets, placing easily a 10 year government bond of around €3.5 billion at an interest rate of 5.25%.

Things are much more positive for Ireland. The tenth report on the country’s economy drafted by the troika of creditors and auditors comprising the Commission, the ECB and the IMF, was published yesterday and was very encouraging. The report went as far as to open for Ireland the exit door from the ‘programme’. Not to forget that Ireland has already returned very successfully in the capital markets, with an auction of a 10-year benchmark bond of which the yield declined to a low of around 3½ percent. The report said that, the three “teams (Commission, ECB, IMF) also discussed with the Irish authorities preparations for programme exit”.

At the same time Greece is targeting this year to zero the prime deficit (without interest rate payments) in the government budget. If this effort bares fruits it will trigger a new haircut on the country’s huge debts, bringing it from presently at 165% of the GDP to sustainable levels, probably lower than 120%. The Greek minister of Finance, Giannis Stournaras, said yesterday that his country may return to economic growth and the capital markets before the end of next year.

As for Italy and Spain, they are expected both to make good use of the two more years given to them in order to bring to acceptable levels their budget deficits and return to growth. At the same time the European Commission and the European Central Bank show a distinct interest for the Small and Medium Enterprises. The target is that the SMEs get access to loans and adequate financial support. Those plans are expected to effectively aid the south Eurozone countries, to restart their economies.

All in all Eurozone is not standing idle now and the dawning new compromise between the Germany and the rest of the Eurozone may open, if not a new growth period, at least to reverse the downside trend.