On We Go.....
Once again, it's a big week for Greece and Europe - and the rest of the world. Greek Prime Minister Antonis Samaras (an economist, and the new leader of Greece's fragile, right-left coalition government) travels to Berlin and Paris at the end of this week to meet with the German Chancellor, Angela Merkel, and the French President, Francois Hollande. In preparation, he meets in Athens mid-week with Jean-Claude Juncker, the Luxembourg prime minister and the head of the euro zone finance ministers. And the Greek foreign minister is meeting today in Berlin with his German counterpart.
Out of all this financial diplomacy, Greece has one short-term objective - to extend its current austerity program, from two to at least four years, to mitigate the effects of severe economic contraction. (Here's a quick check of that contraction - the economy has shrunk by 33% since the end of 2008, with only one three-month period of growth, and is estimated to fall a further 7% this year; unemployment is rising, from 22% of the labor force; budget and current account deficits are running at 7-8% of GDP; total outstanding public debt is equivalent to more than 160% of GDP; and the ten-year government bond yield is just under 25%.)
The immediate issue this week is whether Greece will receive the next tranche of US$39 billion of rescue funds, required urgently to complete the re-capitalization of its banks, and to pay some bond interest and some pensions and public-sector salaries. Samaras is hardly negotiating from strength for the extension - he opposed the first Greek bail-out while in opposition in 2010. And, the late-July interim assessment from the "troika" (officials from the EU, IMF and the European Central Bank) is emphasizing yet another shortfall in implementation of privatization and public-sector job cuts promised by two previous Athens governments.
On the other side of the negotiating table, as Greece sinks and most of the rest of southern Europe remains stressed, the northern creditor countries, most importantly Germany, are becoming increasingly impatient and fatigued with a seemingly open-ended commitment to Greece. Chancellor Merkel in particular must be exhausted by the constant need to balance the concerns of her own political coalition and electorate at home, while being looked to as the driver of new measures to save the euro and the European Union. Moreover, the German economy, regarded as Europe's locomotive, is stalling.
To simply let Greece go (the "Grexit" scenario) would be massively disruptive and expensive. The Economist magazine recently guessed that the cost could be nearly US$400 billion, with Germany's share equal to about 4% of the German economy. While a "Grexit" might be preferable to never-ending bailouts, the full economic and political cost would be much larger, with market panic ensuing in Spain, Portugal, Ireland and even Italy. Bond yields would soar, and capital would flee, as investors' belief in an unassailable European financial back-stop was shattered. Depression at least in Europe would loom.
So, much is at stake this week. In this writer's view, however, the outcome by next weekend is not likely to be a dramatic one. Compromise may well be reached to allow the release of the next tranche of financial aid to Greece. And there is expectation right now in the markets that the European Central Bank will resume a sovereign bond-buying program, perhaps linked to a yield ceiling. But, it's the fundamental fixes - such as the issuance of European bonds to replace some individual country debt, and a banking union across Europe - that are unlikely to emerge now, or soon. Without such, Europe, with a common currency but little else in common, will continue to simmer, with flashes of periodic crises. A Greek implosion will remain imminent.
Frankly, I hope I'm wrong. Let's check back early next week.