The real cost of the Greek crisis

Recent headlines, which pointed to Greece being the first ‘developed world’ economy to default on a payment to the International Monetary Fund, illustrate why the country’s plight matters. The concern is that it might indicate where other first world economies with large welfare states, huge debts and a dependency on imports might be going: headlong towards a process of deleveraging that becomes contagious. In Europe, this is the case even for signatories of the Stability and Growth Pact, the legal framework established in 1997 as a prelude to introduction of the single currency to ensure fiscal responsibility in the European Union [1] . For this reason, markets, which seem almost dangerously complacent, may well be right to expect a last-minute fudge on Greece. The risks of a financial accident are rising, however, as the stalemate continues.

Greece’s debt has been unsupportable but it may not be the only economy in such shape. At current growth rates, the debt loads of most western economies (broadly the highest ever seen in peace time) are similarly unsustainable, just less extreme.

Iain Stewart – Newton, a BNY Mellon company

[1] The pact was intended to limit public debt to 60% of GDP and government deficits to 3% of GDP.

Recent headlines, which pointed to Greece being the first ‘developed world’ economy to default on a payment to the International Monetary Fund, illustrate why the country’s plight matters. The concern is that it might indicate where other first world economies with large welfare states, huge debts and a dependency on imports might be going: headlong towards a process of deleveraging … read more

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Can European equities deliver on economic promise?

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph).

Economic data out of Germany have surprised to the upside: the IFO business confidence survey reached a 10-month high in April, and purchasing managers’ surveys also point to a more broad-based recovery across the region. Spain has been improving for some time and now Italy is also making progress. We expect to see further acceleration in growth over this year and next, as Europe will benefit from a number of positive tailwinds, among them improving consumer and business confidence and increased bank lending. While the ECB was widely expected to act, the scale and scope of the QE programme surprised markets and caused a sharp deterioration in the euro against the US dollar. This trend is set to persist as the ECB continues with its QE programme and the US embarks on a rate-hiking cycle. The lagged effect of a weaker currency, together with the lower oil price should further support a eurozone recovery.

Neil Walker – Insight, a BNY Mellon company 

While a few months ago we perhaps looked overly bullish, recent data releases have suggested our above-consensus view on the European growth outlook is well-founded. Indeed, it looks like the European Central Bank (ECB) launched its Q2 quantitative easing (QE) programme just at the point when a cyclical recovery started taking shape in Europe (as shown in the above graph). … read more

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Chinese FDI into Europe has doubled since 2013

Chinese foreign direct investment into Europe hit US$18bn in 2014, almost double 2013’s level. Over the past four years, the average spend in the region by Chinese investors has been US$12bn a year, suggesting a slowdown in Chinese growth has not dented that country’s appetite for international exposure.

Given the recent down-to-the-wire nature of negotiations between Greece and its eurozone creditors, it is not surprising that China has been cited as a possible financier-of-last-resort for Europe’s peripheries in the event of a euro breakup. In one such scenario, China could provide financial assistance in return for ownership in vital infrastructure such as ports and/or use Greece for geopolitical advantage. If that happens, Portugal and Spain might consider going down the same route, as the fear of being able to fund themselves dissipates.

As things stand, we believe by far the most likely outcome is for Greece to achieve an element of debt forgiveness without the need for a euro exit. Nonetheless, the potential China angle may serve to focus minds around the negotiating table in the coming weeks and months.

Nick Clay, Newton

Chinese foreign direct investment into Europe hit US$18bn in 2014, almost double 2013’s level. Over the past four years, the average spend in the region by Chinese investors has been US$12bn a year, suggesting a slowdown in Chinese growth has not dented that country’s appetite for international exposure. Given the recent down-to-the-wire nature of negotiations between Greece and its eurozone … read more

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Germany is no superman for eurozone plight

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick man of Europe, then people began to call it the locomotive of Europe, so the perception went from unrealistically negative to unrealistically optimistic. I don’t see a political willingness to work against its national interest. There may be further infrastructure spending announced, but it won’t be a big programme.

Holger Fahrinkrug, Meriten Investment Management

Right now, Germany is much better off than it was ten years ago. Unemployment is very low and earnings are rising, but there is little inflation. Public finances are in good shape. The trouble in my view is that expectations about what Germany can contribute to the global economy have become unrealistic. Germany used to be viewed as the sick … read more

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