News & Analysis

European economics, finance and companies review and analysis

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

There was very little important data to move the markets. German exports slumped in January and consensus GDP forecasts are now below 2% in each of 2010 and 2011. Attention was focussed on Greece, where a general strike closed airports, hospitals and schools whilst European leaders pedalled hard to keep up with developments.

Both Mrs Merkel and Mr Trichet, the ‘arch conciliators’ of Europe’, moved rapidly from positions of polite opposition to a European Monetary Fund to cautious support and, in return, Mr Sarkozy publicly mused that a strong euro was perhaps not such a bad thing after all. All very cosy but the Greeks are facing more strikes whilst having another ?20bn to refinance in April and May and other countries are starting to wobble (or rather denying they are wobbling, which is usually the same thing). There was only one thing for it: call an emergency meeting of finance ministers in Brussels of the eurozone on Monday 15 March and of all EU members on the next day.

However, an EMF would, as Mrs Merkel has pointed out, require a new treaty and countries such as Denmark, Sweden and the UK are hardly likely to sign up. The most likely short term solution, therefore, will be some form of guarantee of Greek sovereign debt. If conditions of ‘good behaviour’ (i.e. no giving in to strikers) are attached then the guarantees may not offer lenders much comfort. This is especially true of any German involvement as its Constitution prevents direct government guarantees and so the large banks will have to be persuaded by ‘other means’ to step up. In any case, a rescue will have to be sold to German and French taxpayers. Despite all the brave sentiments, the discussions are looking increasingly like panic.

The Greek crisis seems to be less and less about Greece. Despite the strikes, the latest Opinion Poll recorded 60% support for the Government, albeit that 52% of respondents do not think the deficit reduction programme will work. S & P are more sanguine and have affirmed a BBB+ rating and taken Greece off ratings watch for a downgrade. The praise from EU leaders and the ECB has been lavish and it is clear that they now hope that their message of support will be enough to make the problem go away.

However, far from going away the EMF hare has started running. The Germans (even Mr Stark at the ECB) have realised that it could promote greater discipline. Finance Minister Schaeuble rose from his hospital bed to argue for the idea to be pursued and raised the stakes by suggesting backsliding countries could be forced out of the eurozone. The French are cooling as they were originally interested in an EMF as a means of using German money to prop up weaker (southern) countries and keeping the IMF out. Mr Schaeuble in return says the IMF could still get involved. The briefings coming out of the emergency meeting in Brussels do not help much: Germany cannot (as well as will not) provide direct bilateral loans or guarantees but other countries may be willing to do so. One possibility is pooling of loans through the intermediation of banks. Although such ‘technicalities’ were ‘discussed’ it seems nothing will be agreed until April or even May. This suggests that some countries may support (France?) in proposing bending the rules whilst Germany wants to see them changed and tightened

Otherwise, there was mild optimism that, although jobs are still being lost, the rate at which this happening is diminishing. Similarly, the ‘half full glass’ view was that the ZEW survey of Economic Sentiment could have been a lot worse but, understandably, there is quite a lot of uneasiness in the eurozone. One piece of good news for a rattled, if not beleaguered, Mr Trichet at the ECB is that inflation remains very subdued.