Week in review: All eyes on Europe again, as the Eurogroup meets today to discuss the situation of Greece, the last chance to reach a deal before the bailout ends on 28 February. The Greek Government has requested an extension of funds but rejected the conditionality imposed by the bailout programme. Germany and Slovakia have already announced they will not accept the deal, as Germany has declared that it considers the reform package promised by the Greek Government not credible enough. The negotiations are likely to last well into the night. Should they fail, the risk of a Grexit will increase sharply. The example of the Argentinian and Icelandic defaults suggest that the consequences would be severe:
- For Greece, a short-lived (1/ 2 years) recession, followed by a moderate recovery, with GDP per capita back to its previous level 3 years at the earliest, lack of access to the markets and a sharp rise in inflation.
- For Europe, a significant risk that the least competitive and more indebted countries may become targets for the markets, particularly once the ECB quantitative easing programme ends, after 2016.
Meanwhile in France, the Government has approved a package designed to improve the economy’s competitiveness, despite opposition even from within the ranks of its own party, thanks to an obscure law that allows to by-pass the Parliament, and after surviving a no-confidence vote. The plans include extending Sunday-trading hours, shortening labour arbitration procedures and deregulating notary and legal professions, among other reforms. The Government hopes to lift growth thanks to these measures, after several quarters of near stagnation.
The ECB has published its first minutes, acknowledging that markets had priced in the announcement of quantitative easing on 22 January, therefore, not announcing it would have led to monetary tightening. The minutes also show that council members were concerned about downside risks to growth, despite the decline in oil prices. Minutes are useful tools because they expand a little on the official speeches and meeting reports. However, their forward guidance role remains limited by the fact that they are released well after the meeting, when the economic situation may have changed quite a bit, particularly in times of turmoil such as the one we are experiencing.
Turning to data, despite the situation in Greece, activity in the euro area has picked up in Q1, according to the Purchasing Managers Indicator (PMI). The composite PMI has risen to 53.5 in February after 52.6 in January, a 7-month high. The rise was driven by an improvement in the services’ sector to 53.9 (52.7 in January, while the manufacturing index edged up to 51.1 (51.0 in January). A value above 50 indicates expansion, the data is currently pointing to a small rise in GDP growth from 0.3%qoq in Q4 in the euro area.
- Tuesday 24: Euro area flash inflation for February: likely to remain in negative territory, as oil prices remain weak
- Thursday 26: European Commission Business and Consumer surveys for February: Expect further small improvement as economic activity gains traction.
- Friday 27: Portuguese Q4 GDP demand details: INE has reported an improvement in export growth.