As Greece teeters, France and Italy talk reform

December 10, 2014

France's President Hollande talks with Italy's Prime Minister Renzi during the Asia-Europe Meeting (ASEM) in Milan

With the Greek government again in peril and Italy flirting with a junk credit rating, it’s all starting to feel a bit familiar.
Greek stocks suffered their steepest daily fall in more than a quarter century on Tuesday after Prime Minister Antonis Samaras brought forward a presidential election.

But there is one big difference from 2011/2012. With markets convinced that the European Central Bank will launch a sovereign bond-buying programme with new money early next year, there is little chance of an attack on all peripheral euro zone debt driving yields up to levels that would threaten default – one of the most dangerous elements of the euro zone crisis 1.0.

Greek 10-year bond yields may have jumped back to an unsustainable eight percent but Italy can still borrow at 2 percent for a decade.

ECB chief economist Peter Praet did nothing to deflate expectations of quantitative easing last night, telling a Washington audience that one precondition for such a step, a weakening in the euro zone economy, was already met. The other was a view that tools already in use were losing effectiveness. His ECB colleague, Benoit Coeure, speaks in Brussels today.

IMF chief Christine Lagarde meets Italian premier Matteo Renzi after euro zone finance ministers told Paris and Rome to take to bring their deficits more in line with EU rules by March, threatening disciplinary action but also indicating some wiggle room. Germany’s Angela Merkel delivered a more uncompromising message over the weekend.

Lagarde said on Tuesday Italian economic reforms would count for little without growth-boosting measures at a euro zone level. She said the pledge by the ECB to purchase euro zone sovereign assets if needed was welcome. However, the IMF head also said Rome must reform its justice system, clean up its banks’ balance sheets and cut levies on workers and companies which are far above the European average and throttle investment. Sounds about right but far easier said than done.

France’s new economy minister, Emmanuel Macron, will unveil the government’s much-vaunted deregulation bill which it says will meet EU demands for reforms to help lift the euro zone’s second-largest economy out of stagnation.

If so, it could win Paris some leeway on its excessive budget deficit. Measures are expected to include allowing shops to open more often on Sundays, opening up closed legal professions which have a monopoly on house purchase transactions and cutting red tape on construction. There may be trouble ahead though. Left-wing members of the ruling Socialist Party are threatening to vote against the bill if it is not watered down.

As for Greece, all bets are off until a third parliamentary vote on a new president on Dec. 29. Fail to get a 60 percent majority and the coalition government will fall and trigger snap elections which anti-bailout, anti-austerity Syriza is favourite to win according to the opinion polls. Prime Minister Antonis Samaras didn’t have to have this fight for two months so does he know something we don’t?

His task is to win over 25 or so independent lawmakers which will just give him sufficient numbers. One reason to go now is that the exit from Greece’s hated bailout is still in train. Samaras can pose the question – do you want me to finish the job of getting Greece back on its feet or hand it to Syriza which says it will abandon any cooperation with EU/IMF lenders and reverse years of austerity just as the economy returns to growth. That could see Greece shut out of the markets and put it back to square one.

Turkey’s central bank will announce its 2015 monetary and exchange rate policy. It kept interest rates on hold last week, saying it would keep policy tight until the inflation outlook improves significantly, hinting that no cuts are likely until next year despite pressure from the government to lower rates. We will also get third quarter Turkish GDP data.

A meeting of Gulf Arab states is expected to try to seal reconciliation between Qatar and other members of the alliance. Saudi Arabia, Bahrain and the UAE withdrew their ambassadors in March in protest at what they said was Qatar’s attempts to interfere in their internal affairs through its contacts with Islamists.

After firing his deputy, 90-year-old Zimbabwe leader Robert Mugabe is expected to name his vice-president and de facto successor. All signs are that it will go to Justice Minister Emmerson ‘The Crocodile’ Mnangagwa, one of Mugabe’s most loyal lieutenants and a hardliner unlikely to go out of his way to patch up relations with the outside world.

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