Eurobonds To be? Or not to be?

We find that some topics have a habit of recurring mostly because they never get quite settled, at least not to everyone’s satisfaction. At the time however triumph is declared as we enter a new era until reality intervenes, often quite quickly. So last night’s Franco-German announcement after a virtual summit caught the newswires.

France and Germany are proposing a €500bn ($545bn; £448bn) European recovery fund to be distributed to EU countries worst affected by Covid-19.

In talks on Monday, French President Emmanuel Macron and German Chancellor Angela Merkel agreed that the funds should be provided as grants.

The proposal represents a significant shift in Mrs Merkel’s position.

Mr Macron said it was a major step forward and was “what the eurozone needs to remain united”. ( BBC)

Okay and there was also this reported by the BBC.

Mrs Merkel, who had previously rejected the idea of nations sharing debt, said the European Commission would raise money for the fund by borrowing on the markets, which would be repaid gradually from the EU’s overall budget.

There are a couple of familiar features here as we see politicians wanted to spend now and have future politicians ( i.e not them face the issues of paying for it). There is an undercut right now in that the choice of Frau Merkel reminds those of us who follow bond markets that Germany is being paid to borrow with even its thirty-year yield being -0.05%. So in essence the other countries want a slice of that pie as opposed to hearing this from Germany.

Money, it’s a crime
Share it fairly but don’t take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a raise it’s no surprise that they’re
Giving none away, away, away ( Pink Floyd)

Actually France is often paid to borrow as well ( ten-year yield is -0.04%) but even it must be looking rather jealously at Germany.Here is how Katya Adler of the BBC summarised its significance.

Chancellor Merkel has conceded a lot. She openly agreed with the French that any money from this fund, allocated to a needy EU country, should be a grant, not a loan. Importantly, this means not increasing the debts of economies already weak before the pandemic.

President Macron gave ground, too. He had wanted a huge fund of a trillion or more euros. But a trillion euros of grants was probably too much for Mrs Merkel to swallow on behalf of fellow German taxpayers.

She has made a technical error, however, as Eurostat tends to allocate such borrowing to each country on the grounds of its ECB capital share. So lower borrowing for say Italy but not necessarily zero.

The ECB

Its President Christine Lagarde was quickly in the press.

So there is zero risk to the euro?

Yes. And I would remind you that the euro is irreversible, it’s written in the EU Treaty.

Of course history is a long list of treaties which have been reversed. Also there was the standard tactic when challenged on debt which is whataboutery.

Every country in the world is seeing its debt level increase – according to the IMF’s projections, the debt level of the United States will reach more than 130% of GDP by the end of this year, while the euro area’s debt will be below 100% of GDP.

Actually by trying to be clever there, she has stepped on something of a land mine. Let me hand you over to the French Finance Minister.

French Finance Minister Bruno Le Maire said on Tuesday, the European Union (EU) recovery fund probably will not be available until 2021.

The 500 bln euro recovery fund idea is a historic step because it finances budget spending through debt, he added. ( FXStreet )

So the height of the pandemic and the economic collapse will be over before it starts? That is an issue which has dogged the Euro area response to not only this crisis but the Greek and wider Euro area one too. It is very slow moving and in the case of Greece by the time it upped its game we had seen the claimed 2% per annum economic growth morph into around a 10% decline meaning the boat had sailed. In economic policy there is always the issue of timing and in this instance whatever you think of the details of US policy for instance it has got on with it quickly which matters in a crisis.

Speaking of shooting yourself in the foot there was also this.

Growth levels and prevailing interest rates should be taken into account, as these are the two key elements.

The latter is true and as I pointed out earlier is a strength for many Euro area countries but the former has been quite a problem. Unless we see a marked change we can only expect the same poor to average performance going ahead. Mind you we did see a hint that her predecessor had played something of a Jedi Mind Trick on financial markets.

Outright Monetary Transactions, or OMTs, are an important instrument in the European toolbox, but they were designed for the 2011-12 crisis, which was very different from this one. I don’t think it is the tool that would be best suited to tackling the economic consequences of the public health crisis created by COVID-19.

They had success without ever being used.

Market Response

Things have gone rather well so far. The Euro has rallied versus the US Dollar towards 1.10 although it has dipped against the UK Pound. Bond markets are more clear cut with the Italian bond future rising over a point and a half to above 140 reducing its ten-year yield to 1.62%. The ten-year yield in Spain has fallen to 0.7% as well. It seems a bit harsh to include Spain after the economic growth spurt we have seen but nonetheless maybe it did not reach escape velocity.

Comment

Actually there already are some Eurobonds in that the ESM ( European Stability Mechanism) has issued bonds in the assistance programmes for Greece, Italy, Portugal and Spain. Although they were secondary market moves mostly allowing countries to borrow more cheaply rather than spend more. On that subject I guess life can sometimes come at you fast as how is this going?

Taking into account these measures, the
government remains committed to meeting the
primary fiscal surplus for 2020 and forecasts a
primary surplus at  3.6% of GDP ( Greece Debt Office)

On the other side of the coin it will be grateful for this.

81% of the debt stock is held by official sector creditors,
allowing for long term maturity profile and low interest
rates

On a Greek style scale the 500 billion Euros is significant but now we switch to Italy we see that suddenly the same sum of money shrinks a lot. I notice that Five Star ( political party not the band) have already been on the case.

It’s just too little, too late
A little too long
And I can’t wait ( JoJo)

This brings me to the two real issues here of which the first is generic. In its history fiscal policy finds that it can not respond quickly enough which is why the “first responder” is monetary policy. The problem is that the ECB has done this so much it is struggling to do much more and the European Union is always slow to use fiscal policy. Such as it has then the use has been in the other direction via the Stability and Growth Pact.

Next comes the fact that there are 19 national treasuries to deal with for the Euro and 27 for the European Union as I note that last night’s deal was between only 2 of them. Perhaps the most important ones but only 2.

What can the ECB and European Commission do to help the Euro area economy?

Today our focus switches to the Euro area and the European Central Bank as we await a big set piece event from the ECB. However as is his wont The Donald has rather grabbed the initiative overnight. From the Department of Homeland Security.

(WASHINGTON) Today President Donald J. Trump signed a Presidential Proclamation, which suspends the entry of most foreign nationals who have been in certain European countries at any point during the 14 days prior to their scheduled arrival to the United States. These countries, known as the Schengen Area, include: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Latvia, Liechtenstein, Lithuania, Luxembourg, Malta, Netherlands, Norway, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and Switzerland.

I have pointed it out in this manner as sadly the mainstream media is misreporting it with Beth Rigby of Sky News for example tweeting it as Europe. Much of it yes but not all of it. Moving on to our regular economics beat this will impact on an area we looked at back on the 27th of February.

Announcing the new findings, ENIT chief Giorgio Palmucci said tourism accounted for 13 percent of Italy’s gross domestic product…… tourism-related spending by both French residents and non-residents, represents around 7.5% of GDP (5% for residents, 2.5% for non-residents)…..This figure represented 11.7% of GDP, 0.4% more than in 2016.  ( Spain)

Numbers must have been hit already in what is as you can see an important economic area. One sector of this is illustrated by the German airline Lufthansa which has a share price dipping below 9 Euros or down 11% today as opposed to over 15 Euros as recently as the 19th of February. There are the beginnings of an official response as you can see from @LiveSquawk below.

Spanish Foreign Minister Gonzalez: Spain To Special Steps To Support Tourism

I presume the minister means the tourism sector here as there is nothing that can be done about current tourism as quarantines and the like move in exactly the opposite direction.

There is also the specific case of Italy where it is easier now I think to say what is open rather than closed. As the economic numbers will be out of date we can try and get a measure from the stock market. We see that the FTSE MIB index is at 17,000 as I type this as opposed to 25,477 on the 19th of last month. It is of course far from a perfect measure but it is at least timely and we get another hint from the bond market. Here we see for all the talk of yield falls elsewhere the ten-year yield has risen to 1.3% as opposed to the 0.9% it had fallen to. That is a signal that there are fears for how much the economy will shrink and how this will affect debt dynamics albeit we also get a sign of the times that an economic contraction that looks large like this only raises bond yields by a small amount.

Meanwhile actual economic data as just realised was better.

In January 2020 compared with December 2019, seasonally adjusted industrial production rose by 2.3% in the euro area (EA19) and by 2.0% in the EU27, according to estimates from Eurostat, the statistical office of the
European Union. In December 2019, industrial production fell by 1.8% in the euro area and by 1.6% in the EU27.

The accompanying chart shows a pick-up in spite of this also being true.

In January 2020 compared with January 2019, industrial production decreased by 1.9% in the euro area and by
1.5% in the EU27.

The problem is that such numbers now feel like they are from a different economic age.

The Euro

This has been strengthening through this phase as we note that the ECB effective or trade weighted index was 94.9 on the 19th of February and was 98.14 yesterday. So if there is a currency war it is losing.

As to causes I think there is a bit of a Germany effect an the interrelated trade surplus. But the main player seems to be the return of the carry trade as Reuters noted this time last year.

On the other hand, the Japanese yen, Swiss franc and euro tend to be carry traders’ funding currencies of choice, as their low yields make them attractive to sell.

Yields in Switzerland on the benchmark bond return -0.35 percent; in Germany barely 0.07 percent. But the euro has been particularly popular this year as the struggling economy has further delayed policy tightening plans in the bloc.

Of course both Euro interest-rates and yields went lower later in the year as the ECB eased policy yet again. But can you spot the current catch as Reuters continues?

Should U.S. growth deteriorate, international trade conflicts escalate or the end of the decade-long bull run crystallise, the resulting volatility spike can send “safe” currencies such as the yen, euro and Swiss franc shooting higher, while inflicting losses on riskier emerging markets.

Comment

There is quite an economic shock being applied to the Euro area right now and it is currently being headlined by Italy. In terms of a response the Euro area has been quiet so far in terms of action although ECB President Christine Lagarde has undertaken some open-mouth operations.

Lagarde, speaking on a conference call late on Tuesday, warned that without concerted action, Europe risks seeing “a scenario that will remind many of us of the 2008 Great Financial Crisis,” according to a person familiar with her comments. With the right response, the shock will likely prove temporary, she added. ( Bloomberg).

 

I have no idea how she thinks monetary action will help much with a virus pandemic but of course in places she goes ( Greece, Argentina) things often get worse and indeed much worse. She has also rather contradicted herself referring to the great financial crisis because she chose not to coordinate her moves with the US Federal Reserve as happened back then. Also all her hot air contrasts rather with her new status as a committed climate change warrior.

A real problem is the limited room for manoeuvre she has which was deliberate. In my opinion she was given the job and was supposed to have a long honeymoon period because her predecessor Mario Draghi had set policy for the early part of her term. But as so often in life  we are reminded of the Harold MacMillan statement “events, dear boy, events” and now Christine Lagarde has quite a few important decisions to make. Even worse she has limited room. It used to be the case that the two-year yield of Germany was a guide but -1% seems unlikely and instead we may get a frankly ridiculous 0.1% reduction to -0.6% in the Deposit Rate.

The ECB may follow the Bank of England path and go for some credit easing to rev up the housing market, so expect plenty of rhetoric that it will boost smaller businesses. We may see the credit easing TLTRO with a lower interest-rate than the headline to boost the banks ( presented as good for business borrowers).

However the main moves now especially in the Euro area are fiscal even more than elsewhere as the monetary ones have been heavily used. So the ECB could increase its QE purchases to oil that wheel. Eyes may switch to European Commission President Von der Leyen’s statement yesterday.

These will concern in particular how to apply flexibility in the context of the Stability and Growth Pact and on the provision of State Aid.

I expect some action here although it is awkward as again President Von der Leyen had a pretty disastrous term as German Defence Minister. Although not for her, I mean for the German armed forces. So buckle up and let’s cross our fingers.

Also do not forget there may be a knock on effect for interest-rates in Denmark and Switzerland in particular as well as Sweden.

The Investing Channel

Since the first quarter of 2018 the GDP of Germany has grown by a mere 1%

This morning has brought what has become pretty much a set piece event as we finally got the full report on economic growth in Germany in 2019.

WIESBADEN – The gross domestic product (GDP) did not continue to rise in the fourth quarter of 2019 compared with the third quarter of 2019 after adjustment for price, seasonal and calendar variations.

Regular readers of my work will have been expecting that although it did create a small stir in itself. This is because many mainstream economists had forecast 0.1% meaning that they had declare the number was below expectations, when only the highest Ivory Tower could have missed what was happening. After all it was only last Friday we looked at the weak production and manufacturing data for December.

Annual Problems

One quarterly GDP number may not tell us much but the present German problem is highlighted if we look back as well.

In a year-on-year comparison, economic growth decelerated towards the end of the year. In the fourth quarter of 2019, the price adjusted GDP rose by 0.3% on the fourth quarter of 2018 (calendar-adjusted: +0.4%). A higher year-on-year increase of 1.1% had been recorded in the third quarter of 2019 (calendar-adjusted: +0.6%).

As you can see the year on year GDP growth rate has fallen to 0.4%. The preceding number had been flattered by the fall in the same period in 2018. Indeed if we look at the pattern for the year we see that even some good news via an upwards revision left us with a weak number.

After a dynamic start in the first quarter (+0.5%) and a decline in the second quarter (-0.2%) there had been a slight recovery in the third quarter of the year (+0.2%). According to the latest calculations based on new statistical information, that recovery was 0.1 percentage points stronger than had been communicated in November 2019.

If we switch to the half year we see growth was only 0.2% which is how the running level of year on year growth is below the average for the year as a whole.

The Federal Statistical Office (Destatis) also reports that the resulting GDP growth was 0.6% for the year 2019 (both price and seasonally adjusted).

Analysing the latest quarter

Trade

We can open with something that fits neatly with the trade war theme, and the emphasis is mine.

The development of foreign trade slowed down the economic activity in the fourth quarter. According to provisional calculations, exports were slightly down on the third quarter after price, seasonal and calendar adjustment, while imports of goods and services increased.

There is something of an irony here. This is because the German trade surplus was one of the imbalances in the world economy in the run-up to the credit crunch. So more imports by Germany have been called for which would also help the Euro area economy. Actually if we look back to last week’s trade release this may have been in play for a while now.

Based on provisional data, the Federal Statistical Office (Destatis) also reports that exports were up 0.8% from 2018. Imports rose by 1.4%. In 2018, exports increased by 3.0% and imports by 5.6% compared with the previous year. In 2017, exports were 6.2% and imports 8.0% higher than a year earlier.

Those numbers also show a clear trade growth deceleration and for those who like an idea of scale.

in 2019, Germany exported goods to the value of 1,327.6 billion euros and imported goods to the value of 1,104.1 billion euros.

Domestic Demand

There was something extra in the report which leapt off the page a bit.

 After a very strong third quarter, the final consumption expenditure of both households and government slowed down markedly.

That will change the pattern for the German economy if it should persist and it somewhat contradicts the rhetoric of ECB President Lagarde from earlier this week.

support the resilience of the domestic economy

I did point out at the time that the use of resilience by central bankers is worrying. This is because their meaning of the word frequently turns out to be the opposite of that which can be found in a dictionary.

If we switch to investment then they seem to be adopting the British model of prioritising housing.

Trends diverged for fixed capital formation. While gross fixed capital formation in machinery and equipment was down considerably compared to the third quarter, fixed capital formation in construction and other fixed assets continued to increase.

Ch-Ch-Changes

Yesterday the European Commission released its winter forecasts for the German economy. So let us go back a year and see what they forecast for this one.

Overall, real GDP growth is expected to strengthen to 2.3% in 2018 and remain above 2% in 2019.

In fact the message was let’s party.

Economic sentiment continues to improve across sectors, suggesting continued expansion in the coming quarters. Survey data show expectations of improving orders, higher output and greater demand.

Whereas in fact the punch bowl disappeared as growth faded from view.

Yesterday they told us this.

Overall, real GDP growth is forecast to rebound
somewhat to 1.1% in 2020, helped by a strong
calendar effect (0.4 pps.).

That is pretty optimistic in the circumstances perhaps driven by this, where they disagree with what the German statistics office told us earlier today.

Resilient domestic demand supported growth.
Private consumption increased robustly amid
record high employment and strong wage growth.

All rather Lennon-McCartney

Yesterday,
All my troubles seemed so far away,
Now it looks as though they’re here to stay
Oh I believe in yesterday.

Comment

From the detailed numbers one can get a small positive spin as GDP increased by 0.03% in the final quarter of 2019. But the catch is that in doing so you note that the 107.19 of the index is below the 107.21 of the first quarter. Care is needed because we are pinpointing below the margin of error but if we look further back we see that the index was 106.18 at the end of the first quarter of 2018.

There are three main perspectives from that of which the obvious is that growth since then has been only very marginally above 1%. So the European Commission forecasts were simply up in the clouds. But we have another problem which is that looking forwards from then the Markit business surveys ( PMIs) were predicting “Boom! Boom! Boom!” in the high 50s as the economy turned down. They later picked up the trend but missed the turning point. Or if you prefer looked backwards rather than forwards at the most crucial time.

Now we await the impact of the Corona Virus in this quarter. Let me leave you with one more issue which is productivity because if yearly output is only rising by 0.4% then we get a broad brush guide by comparing with this.

The economic performance in the fourth quarter of 2019 was achieved by 45.5 million persons in employment, which was an increase of roughly 300,000, or 0.7%, on a year earlier.

The Investing Channel

Number Crunching and Seigniorage at the ECB

This week has seen a flurry of activity at the ECB or European Central Bank and I do not mean the usual “sauces” which have been raising some doubt about a further reduction in the monthly flow ( currently 30 billion Euros) of QE bond purchases. Let us open with some Brexit bingo from the Financial Times.

Brussels is considering a €56bn raid on European Central Bank profits to plug a hole in the EU’s long-term budget after Brexit.  The European Commission will discuss the plan at its weekly meeting on Wednesday, where it is due to consider a range of new revenue sources as it tries to maintain its financial firepower once the EU’s second-biggest net budget contributor leaves the bloc in 2019.

There is some debate over whether the UK will be the second or third largest net contributor but you get the message. We also get a clear sign of the bureaucratic mind which of course wants more revenue rather than cutting spending in true Sir Humphrey Appleby style. But why not simply get the money from the usual sources ( minus one)?

The commission is considering an ECB cash raid as a quick way to generate money for the common EU pot as several wealthier members, including the Netherlands and Austria, refuse to raise their contributions to the €1tn EU budget after the UK’s departure.

Okay so as they do not want to pay how would it raid the ECB?

The ECB proposal would divert profits made by the eurozone’s 19 national central banks from printing banknotes straight into EU coffers. The commission estimates the revenue stream could generate €56bn during the seven-year span of the next EU budget.

No doubt more than a few of you have spotted what Shakespeare would call the rub here but let me explain.

Seigniorage

This is the profit from issuing money which comes from the fact that if we take the example of the picture of the 50 Euro note it costs a lot less than that to make one. So as it comes off the printing presses hey presto there is a large profit, or rather when someone wants it there is. From the ECB.

They make their way to you via your bank, which pays the face value of the notes to the central bank. To do this your bank usually needs to borrow money from the central bank or it pays by handing over some of its assets. The central bank earns interest on the money it lends, or receives a return on the assets it acquires – and this is called seigniorage income.

To give you an idea the US Federal Reserve calculates it costs some 12.9 cents to make each US $50 note so the note is almost “all gravy” to coin a phrase. A little care is needed as smaller denomination coins actually make a loss – hence the campaigns from time to time to get rid of them – but overall the operation is extremely profitable. However you may note that it is not the capital profits under discussion here ( that presumable can wait for a more desperate time) it is the income from them.

Is anybody else thinking that the campaign to get rid of the 500 Euro note might now have a rethink? Kenneth Rogoff might go from hero ( of the establishment) to zero overnight.

But then we hit a rather large stumbling block.

Although the ECB does not physically issue banknotes, it has been agreed that of all the banknotes in circulation in the euro area, 8% – in terms of value – are considered to be issued by the European Central Bank. The national central banks put the notes into circulation on the ECB’s behalf, and the ECB earns seigniorage income on the 8% through the claim it holds on the national central banks.

Okay before we break that down let us have a break for some humour. From kim in a comment to the FT article.

The ECB takes a cut of the transferred seignorage, to pay for its Christmas Party.

But the 8% is a gift as you see the income goes to the central bank which is each national one.  Oops!

Danger! Will Robinson Danger!

There are consequences here and let me take you back in time to explain them. Let me illustrate from the Maverecon Blog of my tutor from back in the day Willem Buiter from 2009.

The NCBs that own the ECB themselves have a range of formal ownership arrangements, but
are ultimately under the financial control of their national fiscal authorities, because the
national fiscal authority can always tax the NCB.

So we are back in a way to how this story started because the money belongs to the national governments via their treasuries or if you consider belongs to be over playing it they can at least take it via taxation. It is not usually expressed as taxation but we regularly discuss payments from central banks to national treasuries as part of QE declared profits. Most of us would love to be able to declare something “independent” then sing along with the Steve Miller Band.

Go on take the money and run
Go on take the money and run
Go on take the money and run
Go on take the money and run

We of course would sooner or later end up in jail unless we had the wisdom to set up a bank ourselves. But then looking back to 2009 there is this that strikes to the core of the ECB itself.

What makes the ECB more independent than any other central bank is the fact that it has 16 national Treasuries as its counterparties rather than a single national Treasury. Should a European fiscal federal authority ever emerge, the anomaly of the ECB as a de facto as well as a de jure financially independent central bank would probably come to an end.

There are of course some extra treasuries now so it should be even more independent and yet seems set to lose it. My argument with my old tutor would be that politicians are pretty much the same the world over so the situation has always been more like the episode of Star Trek where the USS Enterprise is swallowed by a giant amoeba in my opinion. Of which this is simply the latest step. It should not be true under the rules of mathematics but we know that in human behaviour more can sometimes be less.

The Income

Actually there is a problem here too as the ECB notes.

Seigniorage income has been falling since 2008, in line with a decline in euro area interest rates.

Let me make that clearer because you see at the moment their isn’t any because the current account rate is a grand 0%. Actually contrary to the forecasts above the ECB under Mario Draghi seems in no hurry to raise interest-rates so they could be there for a while and may well survive his term as ECB President. If a recession hits they could cut interest-rates again in which case the European Commission will have shot itself in the foot.

Comment

There are several issues here which go to the heart of an “independent” central bank. Up until now it has operated in concert with the establishment where lower interest-rates and QE have generated gains for the establishment. But the irony of the European Commission proposal would be that it would lose if the ECB cut interest-rates again as seigniorage income would be negative. So suddenly we might find that they are keen on higher interest-rates which is quite a tangled web! It might have been far better if the subject had remained in the text books.

Also there are national issues as some national central banks issue more cash that others under the ECB system. We find ourselves quickly returning to yesterday.

The value of accumulated net issuance of euro banknotes by the Bundesbank rose between the end of 2009 and the end of 2017 from € 348 billion to € 635 billion. Since 2010
On average, the Bundesbank gave an average of € 35.8 billion in euro banknotes a year.
This corresponds to an average annual growth rate of 7.8%.

Or we can put that another way as Lorcan R Kelly does here.

The Bundesbank has, since the introduction of the euro in 2002, put a net 327 billion euros into circulation above its on-paper allocation………In total, 592 billion of the 1.1 trillion euros worth of banknotes in circulation at the end of 2016 started life at the Bundesbank.

The ECB explains this by giving an example of German tourists spending money abroad whereas I am sure I am not the only person who remembers the phase where people were worried about the Euro and therefore keen on “German” Euros as opposed to in the worst case “Greek” ones. Also should interest-rates rise there is a cost as you have to pay if over your allocation.

Should the ECB, over time, raise benchmark interest rates to 2 percent, for example, that would impose an annual cost of 6.5 billion euros on the Bundesbank.

So a transfer to the European Commission what could go wrong. Also if we note that this seems to be something under the aegis of Mr.Juncker he might be able to help out with this.

One more thing worth noting from the data is the position of Luxembourg’s central bank. It has an allocation of less than 3 billion euros and yet has put over 96 billion euros into circulation, and in this case it doesn’t seem like holiday makers are to blame.

So as a final thought is the US Federal Reserve planning a Seigniorage party with its interest-rate rises?

 

Greece reaches a Euro area target or standard

Yesterday saw an announcement by the European Commission back on social media by a video of the Greek flag flying proudly.

The Commission has decided to recommend to the Council to close the Excessive Deficit Procedure (EDP) for Greece. This follows the substantial efforts in recent years made by the country to consolidate its public finances coupled with the progress made in the implementation of the European Stability Mechanism (ESM) support programme for Greece.

It sounds good although of course the detail quickly becomes more problematic.

Greece has been subject to the corrective arm of the Stability and Growth Pact since 2009. The deadline to correct its excessive deficit was extended several times. It was last set in August 2015 to be corrected, at the latest, by 2017.

That reminds us that even before the “Shock and Awe” of spring 2010 Greece had hit economic trouble. It also reminds us that the Euro area has seen this whole issue through the lens of fiscal deficits in spite of calamitous consequences elsewhere in both the economy and the country. I also note that “the corrective arm” is a rather chilling phrase. Here is the size of the change.

The general government balance has improved from a deficit of 15.1% in 2009 to a surplus of 0.7% in 2016

Greeks may have a wry smile at who is left behind in the procedure as one is at the heart of the project, one has been growing strongly and one is looking for the exit door.

If the Council follows the Commission’s recommendation, only three Member States would remain under the corrective arm of the Stability and Growth Pact (France, Spain and the United Kingdom), down from 24 countries during the financial crisis in 2011.

Let us wish Greece better luck than when it left this procedure in 2007. Also let us note some very curious rhetoric from Commissioner Dombrovskis.

Our recommendation to close the Excessive Deficit Procedure for Greece is another positive signal of financial stability and economic recovery in the country. I invite Greece to build on its achievements and continue to strengthen confidence in its economy, which is important for Greece to prepare its return to the financial markets.

Another positive signal?

That rather ignores this situation which I pointed out on the 22nd of May.

The scale of this collapse retains the power to shock as the peak pre credit crunch quarterly economic output of 63.3 billion Euros ( 2010 prices) fell to 59 billion in 2010 which led to the Euro area stepping in. However rather than the promised boom with economic growth returning in 2012 and then continuing at 2%+ as forecast the economy collapsed in that year at an annual rate of between 8% and 10% and as of the opening of 2017 quarterly GDP was 45.8 billion Euros.

Achievements? To achieve the holy grail of a target of a fiscal deficit on 3% of GDP they collapsed the economy. They also claimed that the economy would return to growth in 2012 and in the case of Commissioner Moscovici have claimed it every year since.

A return to financial markets?

Whilst politically this may sound rather grand this has more than a few economic issues with it. Firstly there is the issue of the current stock of debt as highlighted by this from the European Stability Mechanism on Monday.

Holding over 51% of the Greek public
debt, we are by far Greece’s biggest creditor a long-term partner

I note that the only reply points out that a creditor is not a partner.

The ESM already disbursed €39.4 bn to and combining EFSF it adds up to € 181.2 bn.

That is of course a stock measure so let us look at flow.

I am happy to announce the ESM
has today effectively disbursed €7.7 bn to Greece

I am sure he is happy as he has a job for life whether Greek and Euro area taxpayers are happy is an entirely different matter especially as we note this.

Of this disbursement, €6.9 bn will be used for debt servicing and €0.8 bn for arrears clearance

Hardly investment in Greece is it? Also we are reminded of the first rule of ECB ( European Central Bank ) club that it must always be repaid as much of the money will be heading to it. This gives us a return to markets round-tripping saga.

You see the ESM repays the ECB so that Greece can issue bonds which it hopes the ECB will buy as part of its QE programme. Elvis sang about this many years ago.

Return to sender
Return to sender

There is also something worse as we recall this from the ESM.

the EFSF and ESM loans lead to substantially lower financing costs for the country.

Okay why?

That is because the two institutions can borrow cash much more cheaply than Greece itself, and offer a long period for repayment. Greece will not have to start repaying its loans to the ESM before 2034, for instance.

Indeed and according to a speech given by ESM President Regling on the 29th of June this saves Greece a lot of money.

We have disbursed €175 billion to Greece already. This saves the Greek budget €10 billion each year because of the low lending costs of the ESM. This amounts to 5.6 percent of GDP, and allows Greece the breathing space to return to fiscal responsibility, healthy economic developments and debt sustainability.

No wonder the most recent plans involved Greece aiming for a fairly permanent budget surplus of 3.5% of GDP. With the higher debt costs would that be enough. If we are generous and say Greece will be treated by the markets like Portugal and it gets admitted to the ECB QE programme then its ten-year yield will be say 3% much more than it pays now. Also debt will have a fixed maturity as opposed to the “extend and pretend” employed so far by the ESM.

What if Greece joining the ECB QE programme coincides with further “tapers” or an end to it?

If you wish to gloss over all that then there is this from the Peterson Institute for International Economics.

http://www.ekathimerini.com/219950/opinion/ekathimerini/comment/time-for-greece-to-rejoin-global-markets

Is austerity really over?

There are issues with imposing austerity again so you can say it is now over. I looked at this on the 22nd of May.

The legislation contains more austerity measures, including pension cuts and a higher tax burden that will go into effect in 2019-20 to ensure a primary budget surplus, excluding debt servicing outlays, of 3.5 percent of gross domestic product.

It was noticeable that one of the tax rises was in the amount allowed to be earned before tax which will hit the poorest hardest. But according to Kathimerini yesterday the process continues.

The government is slashing state expenditure by 500 million euros for next year……..The purge will mainly concern health spending, while credit for salaries and pensions will be increased.

Comment

The background economic environment for Greece is as good as it has been for some time. Its Euro area colleagues are in a good phase for growth which should help exports and trade. According to Markit this is beginning to help its manufacturing sector.

Having endured a miserable start to 2017, the latest survey data is welcome news for Greek manufacturers as the headline PMI pointed to growth for the first time since August last year.

If we look for another hopeful signal it is from this as employment has been a leading indicator elsewhere.

The number of employed persons increased by 79,833 persons compared with April 2016 (a 2.2% rate of increase) and by 23,943 persons compared with March 2017 (a 0.6% rate of increase).

The catch is that in spite of the barrage of official rhetoric about reform that Greek economy has gone -1.1% and +0.4% in the last two quarters with the latter number being revised up from negative territory. But the worrying part is that elsewhere in the Euro area things are much better when Greece should be a coiled spring for economic growth. Let me give you an example from the building industry where it is good that the numbers are finally rising. But you see annual building was 80 million cubic meters in 2007 and 10 million yes 10 million in 2016. That is an economic depression and a half….