Oscar Wilde and the euro zone

By Mike Peacock
July 3, 2013

To paraphrase Oscar Wilde, to lose one looks like misfortune, to lose two smacks of carelessness.
Portugal’s government has been plunged into crisis with the foreign minister resigning a day after the finance minister did, the latter complaining that the public would not tolerate his austerity drive.

Prime Minister Passos Coelho has refused to accept the second departure, essentially putting the government’s survival in the gift of Foreign Minister Paulo Portas, who objected to Treasury Secretary Maria Luis Albuquerque replacing Finance Minister Vitor Gaspar. Portas could pull his rightist CDS-PP party out of the coalition government, which would rob it of a majority. The opposition is calling for early elections, the premier says not.

All this is happening with the next review of Portugal’s bailout progress by its EU and IMF lenders just two weeks away and with euro zone borrowing costs already firmly on the rise again. Portuguese yields lurched higher after Portas’ resignation and doubtless will continue in that direction today.

If Gaspar is right and public opinion turns more hostile, given a deep recession looks unrelenting, things will get even more difficult. Passos Coelho has already said he may seek a further easing of debt-cutting goals for next year. The betting is firming on another bailout being required.

EU officials are increasingly concerned that the crisis is back after 10 months of calm. The markets are reflecting that very concern. German Bund futures have jumped almost half a point at the open and Italian bond futures have fallen by three quarters of a point.

Greece is almost as worrying as Portugal. Thanks to our exclusive yesterday, we know the euro zone has given Athens until Friday to come up with a more convincing reform programme.
Its privatization process, which was supposed to help bring Greece’s debt mountain down, has stalled and progress on public sector reform is faltering.

Prime Minister Antonis Samaras has ruled out a fresh round of cuts but his government is seeking to lower its privatization revenue target after failing to sell its natural gas operation and there is a 1 billion euros black hole in the state-run health insurer, so its lenders may demand measures to fill that.

There are some suggestions that the EU and IMF may refuse to pay at least some of the 8.1 billion euros tranche on offer and dribble it out month by month instead in order to focus minds in Athens. Anything more dramatic would be risky since Greece faces big bond redemptions next month and nobody wants a default. German Foreign Minister Guido Westerwelle begins a two-day visit to Athens.

There is no chance of the euro zone pulling the plug – for reasons of self-preservation – but the if the talks fail, the International Monetary Fund might have to withdraw from Greece’s rescue to avoid violating its own rules. For that reason, the working assumption is the talks won’t be allowed to fail.

It looks like we’re back to the diplomatic dance of “extend and pretend”. After months of complacent assumptions (helped by the European Central Bank’s backstopping of the currency bloc) that Athens was on the right track, it is now clear that everything is far from well.

On the other side of the ledger there are glimmers of hope in some economic data (although not for Greece or Portugal). Euro zone service sector PMIs will be market movers as usual. Interesting to see if the Italian and Spanish reports follow the improvement seen in their manufacturing surveys earlier in the week.

We’ve already had flash reports for Germany, France and the euro zone, which may be revised a little, but Britain’s bears particularly close scrutiny. Data in recent weeks have suggested the economy is finally picking itself up off the bottom. Monday’s manufacturing PMI posted the strongest growth in more than two years and mortgage approvals hit their highest level since December 2009.

All the talk has been of Mark Carney, in his first week at the helm of the Bank of England, coming into kick start the economy (or reach “escape velocity” as he has put it). But if a rebound takes hold, and given inflation is still well above the two percent target, he may have to start considering the opposite policy response.

Our central banks week continues. Thursday is the big day with both the European Central Bank and Bank of England meeting. Today it’s the turn of Sweden and Poland who offer interesting contrasts in relation to the market turbulence in response to the Federal Reserve’s announcement of a QE exit strategy.

Poland is likely to cut interest rates for the last time in this cycle to 2.5 percent, although its zloty currency has been battered by the recent backwash which has hit emerging markets first and foremost.
That will give policymakers pause for thought despite an economy flirting with a recession it has been alone in Europe in avoiding so far. Sweden’s Riksbank is expected to keep rates on hold but – given its country was something of a safe haven in the past – it will be keeping a wary eye on its currency too.

After an EU summit which focused on how to alleviate chronic levels of youth unemployment, Angela Merkel holds another meeting in Berlin on the issue with France’s Francois Hollande expected to attend along with Herman van Rompuy and Jose Manuel Barroso from Brussels.

I bow to no one in putting the threat of a lost generation of workers at the top of the euro zone’s worry list but this has a whiff of PR ahead of Germany’s September elections. It also looks to be part of some carefully repositioning by the German chancellor. Sources have told us there is a high degree of alarm in Berlin at the way the rest of the euro zone has viewed its insistence on austerity as the path back to prosperity.

Last week’s summit agreed new steps to fight youth unemployment and promote lending to credit-starved small business, good news though the six billion euros to be spent on job creation and training over the next two years is a vanishingly small sum in the greater scheme of things. In the end, the only thing that is going to slash sky high unemployment rates in the hardest hit parts of the euro zone is a return to solid economic growth.

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