An improvement in the Eurozone economy, but its politics remains fragile

The launch of a progamme of quantitative easing by the European Central Bank does seem to have revived business confidence across the Eurozone after a long period of stagnation which saw a sustained fall in bank lending to businesses. Consumers are also now becoming less reluctant to spend, with both retail sales and car registrations up. The weakening Euro is helping Eurozone exporters and with the overall Eurozone annual inflation rate still negative, the increase in the cost of imports (which is the other side of the coin to currency depreciation) does not seem to be causing too many problems. Of course, broad-brush macroeconomic data do not reflect conditions on the ground for some struggling individuals – or indeed, in the case of an 18-country bloc, for some struggling member states – but things are definitely looking up on the economic front after a damaging double-dip recession.

Politically, it is a different story. Greece remains a concern, with still no sign of an imminent agreement with its creditors. The country’s Deputy Prime Minister Yannis Dragasakis told one national Greek daily yesterday that the option of holding a referendum or snap elections exists “in the back of our minds…in the event of an impasse” in talks with creditors. “There’s no way we would cross the red lines that we have set,” he went on to say. EU politicians want to keep Greece in the Eurozone, but not at any cost. In Germany especially, the behaviour of the new Syriza-;led government, with its talk of claims for war reparations, had not gone down well. Since 2011, when “Grexit” last appeared to be a real possibility, banking reforms have been implemented which, so many across the Eurozone believe, would prevent contagion in the event of Greece going bust and its banks collapsing. It is a small player in the Eurozone. If it were to leave or be forced out, life would go on across the rest of the single currency bloc without anyone losing much sleep.

Fair enough, but an important principle will have been violated. Eurozone membership was meant to be irreversible. Suppose it isn’t. At the moment, no one is talking about any other countries reverting to their national currencies and the remaining PIIGS (Portugal, Italy, Ireland and Spain) are not in such dire financial straits as Greece, but what if another crisis flared up? In particular, what if Greece with a new drachma, thrived economically outside the single currency bloc and the weaker countries within struggled? This would make Pexit, Spexit or whatever a more attractive possibility, thus undermining the whole project.

That may be for the future. However, in the present, a General Election was held in Finland on Sunday 19th which saw the eurosceptic Finns (formerly True Finns) become the second largest group in the country’s parliament. It is possible that they may be invited into coalition with the winners, the Centre Party. The Finns oppose any further bailouts to Greece, which could make life interesting given the deteriorating economic situation in Athens. They are also not too keen on immigration, like the Sweden Democrats and the Danish People’s Party. Quite how much influence the party’s 38MPs will be able to influence remains to be seen, but the strong showing of a eurosceptic party, even in a country with serious economic issues, is a reminder that unease at the direction of the EU isn’t going to go away any time soon – in this country or elsewhere.

Photo by Matti Mattila

Germany v Greece – the next instalment

The EU, we are told, is a good thing because it has kept the peace in Europe over the past 70 years. It may be true that the nations of Western Europe have not been at war with one another since 1945 but, quite apart from the credit for peace truly belonging to NATO, the drive towards ever-closer union between the different member states has not by any means ended the tensions between them.

Two recent examples prove the point – one fairly trivial, the other far more serious. A minor tension recently erupted between France and Belgium over plans for a commemorative €2 coin marking the 200th anniversary of the Battle of Waterloo. The battlefield is a few miles from Brussels and the idea to mark this event originated with the Belgians. However, French sensitivities knocked the idea on the head on the grounds that glorifying a time of conflict ran counter to efforts to foster European unity. Ironically, last year France issued a €2 coin last year to mark the 70th anniversary of the Normandy landings. Maybe the real issue for the French is not so much European unity but the simple fact that at Waterloo, they lost!

Outside the Eurozone, the UK is not bound by the wishes of other countries and our £5 commemorative coin has already appeared. We actually had a choice of victories to commemorate, as this year also marks the 600th anniversary of the Battle of Agincourt. It also marks the 50th anniversary of the death of Winston Churchill. Anyone with a detailed knowledge of the UK rail network would know that Handborough, the nearest station to Bladon church, where Churchill wished to be buried, is easiest reached from London’s Paddington station, but Churchill insisted that his funeral train was to depart from Waterloo as the very name would irritate his long-time nemesis General de Gaulle.

On a more serious note, the war of words between Germany and Greece has intensified in the last few days. Firstly, the Greek finance Minister Yanis Varoufakis, accused his German counterpart, Wolfgang Schäuble, of calling him “naïve”, an accusation which Schäuble has emphatically denied. However, Greece’s Syriza-led government then poured fuel on the flames by raising the delicate matter of war reparations, seeking €341 billion from Germany to compensate for the behaviour of the Nazis during their occupation of Greece from 1941 to 1944. Germany has rejected these claims, saying the issue was dealt with in 1960, when a payment was made to the Greek government. Greece’s justice minister, Nikos Paraskevopoulos, then asserted that as Germany has refused to pay anything more, he is about to sign a court order allowing German property in Greece to be seized.

Where this is going to end up is anyone’s guess, but it looks like an amicable parting of the ways may be best for Greece and the Eurozone. Greece’s best chance of recovering from its financial woes is to follow Iceland’s example and default on its debts – a move which could only be accomplished outside the Eurozone. Greek public finances deteriorated during the four years the country was run by a government reasonably committed to the austerity programme demanded by its creditors. The country’s public debt to GDP ratio rose from 129.6% in 2010 to 174.9% between 2010 and 2014. Syriza wants to increase the tax-free allowance and spend more. The likelihood of any improvement in the public finances under the new government is therefore precisely zero. Indeed, Varoufakis has acknowledged the desperate plight his country faces. Greece is “the most bankrupt of any state,” he said, adding, “Clever people in Brussels, in Frankfurt and in Berlin knew back in May 2010 that Greece would never pay back its debts. But they acted as if Greece wasn’t bankrupt, as if it just didn’t have enough liquid funds.”

Statistics for January 2015 from the Greek finance ministry show that he is not exaggerating the plight his country faces. Income tax, which yielded €988 million in January 2014, brought in a paltry €519 million a year later, a drop of over 45% and barely half the €998 million target. VAT revenue also fell from €1,622 million to €1,329 million over the same period, whereas the target was an increase to €1,687 million. The fact that the Greek government managed to run a primary surplus for the month is an indication of the extent to which the austerity programme has forced it to scale back its public spending in order to satisfy its creditors. With public servants to pay and some substantial loan repayments due in a few months’ time, it is hard to see where the money is going to come from. In the past week a desperate search for cash has caused the Greek government to raid the bank deposits of pension funds while delaying payments to its creditors. It has even approached the Greek subsidiaries of multinational companies for short-term loans.

Things clearly are going to come to a head soon, especially as the Germans – both the government and the people at large – have no sympathy whatever for the problems of their fellow eurozone-member: “The Greek government is behaving as if everyone must dance to its tune. But there must be an end to this madness. Europe must not be made to look stupid,” said one German paper.

As a non-Eurozone member, we in the UK may feel that we are observing this tragedy as outsiders. However, Neil Woodford, the head of investment at Woodford Investment Management, a large firm in the City of London, believes that we cannot indefinitely continue to watch from the sidelines. “Ultimately, this country will have to make a choice about whether it is a fully signed-up member of a eurozone project or not,” he said. In other words, adopting the euro or withdrawal are the only long-term options. Whether we consider the curtailment of our freedoms to commemorate our victories over the French or our likely entanglement in the sport of spat going on between Greece and Germany at the moment, it’s pretty clear which would be the best alternative

A rare moment of common sense

The European Court of Justice (ECJ) is a political court. It actually has a most inappropriate name, as justice is not its overarching purpose. It exists rather to further the objectives of ever closer union. It therefore came therefore as something of a shock when the Court recently ruled against the European Central Bank and in favour of the UK government in a dispute about clearing houses. These financial institutions exist to ensure smooth completion of transactions of stocks and bonds. A good number are based in the City of London, even though they deal with transactions across the world in all manner of different currencies. The ECB argued that clearing houses that handle more than €5bn of euro-denominated securities should be based in a Eurozone country. However, the ECJ rejected this argument, saying that such a move goes beyond mere oversight of financial services. The ECB does have certain powers in this area according to the EU treaties, but no power to regulate market infrastructure companies. The court ruled that if the ECB wanted to regulate securities clearing houses, it must request the EU to give it such powers.

So for once, common sense has prevailed and the Government has seen off another threat to the City of London. However, that same quality was distinctly lacking in the comments of Open Europe’s Raoul Ruparel as reported in the Daily Mail. He claimed that “If the ruling had gone against the UK it would have seriously undermined the single market and significantly increased the power of the ECB – and probably would have made Brexit more likely.”

Well, if the ECB had won, perhaps a few employees of clearing houses might have been converted to outright withdrawalism, but is the issue of who supervises clearing houses really going to be the crunch issue in the electorate’s decision as to whether we leave the EU or not? Think of Peter Baldwin, the electrician in an aircraft factory who told Ed Miliband recently that working class people were leaning towards UKIP because of Labour’s refusal to offer a referendum on EU membership. Is this setback for the ECB in its desire to increase its control of financial services regulation likely to change the mind of this man or his colleagues?

Even within the City of London, clearing houses are only one part of the UK’s financial services sector. There are plenty of other people – stockbrokers, fund managers, investment bankers and so on. The EU is still keen to wrap its tentacles round this vital sector of the UK economy and will unquestionable try to do so in other ways. To think that a rebuff by one its institutions to another has been the knockout blow that will keep the UK in the EU is naïve in the extreme. There are hundreds of other reasons why we should seek our independence.

Photo by Cédric Puisney

Rising support for alternative parties

The daily round-robin e-mail from Open Europe on Monday 2nd March would have been unhappy reading for what might be termed the “EU mainstream.” No fewer than four of the eleven items featured discussed political parties in different countries which either are gaining or have gained support because of opposition to the Euro or to the EU itself.

Firstly, there is Syriza in Greece. The party leadership may have rolled over in the face of German intransigence over the bailout, but their climbdown has left a smouldering legacy within the party. A motion to oppose the bailout, put forward by one of the most left-wing factions, was defeated, but only narrowly. Furthermore, Prime Minister Alexis Tsipras insisted that there would be no third bailout. He also hit out at Spain’s Prime Minister Mariano Rajoy, saying that Spain wanted “unconditional surrender.” Rajoy replied that, “We’re not responsible for the frustration generated by the Greek radical left, which promised the Greeks what they knew they couldn’t keep – as it’s now been proved.” Although Syriza has managed to maintain a very high approval rating among the electorate even after the humiliating agreement with the Troika, the violent demonstrations in Athens last Friday suggests that sections of the Greek electorate may soon switch allegiance to other more anti-EU parties if the new government is not seen to make a difference to their everyday lives, something which will not be easy in view of the stark financial statistics. It looks likely that the main pro-EU mainstream parties in Greece will be relegated to the margins for some time yet, during which time anything, including government insolvency or an exit from the Euro, could be on the cards.

Meanwhile, in France, Nicolas Sarkozy’s attempts at a political comeback have continued with a fierce attack on Marine le Pen’s Front National. Sarkozy, who said that Tsipras had had to “eat his hat”, warned that voting for the FN would lead to a similar scenario in France. Such rhetoric, however, has not impressed the electorate. Latest opinion polls show the FN leading on 33%, with the beleaguered Socialists in third place, down to a paltry 19%. As in Greece, another pro-EU mainstream party has taken a hammering.

February ended in Rome with a rally in Rome in support of Italy’s Lega Nord, a one-time partner of UKIP in the European Parliament. Like the FN in France, the Lega is not a party that fits into a tidy pigeonhole. Accounts abound of some pretty unsavoury statements by some senior figures in the party, but its leader Matteo Salvini is gaining in popularity by attacking austerity and labelling Matteo Renzi, the current Italian Prime Minister, a “dumb slave”, the “foolish servant of Brussels”. Opinion polls put the party in third place, quite a comeback for a party that polled a mere 6.2% in last year’s European Parliamentary elections. The party was founded to campaign for a separation of the northern part of Italy (Padania) from the rest of the country. Its revival, according to some commentators, has been built of switching its focus from Rome to Brussels as the source of all evil. Given the continuing popularity of Beppe Grillo’s Five Star movement, Italy too looks likely to drift further away from the pro-EU mainstream.

Then finally, there is Germany. This weekend, the anti-Euro Alternative für Deutschland party held a convention. Founded by a university professor, Bernd Lucke, AfD seemed a million miles away from the populist parties of the Mediterranean countries at its inception. Unlike Lega Nord or the Front National, AfD has never talked of withdrawal from the EU, but its recent embrace of the Pegida movement is pushing it further away from the bland centre of EU politics. Lucke’s statement that “Islam is foreign to most, or almost all Germans” is remarkably politically incorrect and the prevailing mood of the party delegates appears to be very much on the same lines as that of its leader. They voted by a large majority for a general ban on minarets and burquas.

It would be foolish in the extreme to celebrate the ascendancy of any political party purely because of its opposition to the EU. Golden Dawn in Greece and Jobbik in Hungary in particular do seem particularly unsavoury. However, whether these new alternative parties are unpleasant or not, their growing popularity is an indication that the objective of ever close union which lies at the heart of the EU project, is being challenged as never before.

Sometimes, informal discussions between CIB committee members occasionally raise the possibility that we may not have to leave the EU because it may implode from within before we get the chance to vote. While this still remains quite a long shot, recent developments on the Continent suggest it is not perhaps as absurd a scenario as it might sound.

Photo by oscar alexander

Photo by SignorDeFazio

Photo by quapan

Tsipras has taken a quick lesson in Euro-speak

Greece’s new Prime Minister Alexis Tsipras has proved a quick learner. After less than a month in office, he has finally mastered the great quality of fudge necessary for dealing with the EU institutions. Mind you, it remains to be seen how convinced the Greek people will be that his capitulation to the hated “troika” was a victory. Before last Friday’s capitulation, he enjoyed a level of popular support which most Prime Ministers could only dream of – 75%. Unless the Greek people are particularly gullible, it is hard to imagine his government retaining its popularity for long.

Tsipras’ statement on Friday that “We kept Greece standing and dignified” was a masterpiece of Euro-Speak. He went on to say that the agreement with Eurozone finance ministers “cancels austerity” and added: “In a few days we have achieved a lot, but we have a long road. We have taken a decisive step to change course within the euro zone.” Reality is very different. Tsipras declared Greece was “leaving austerity, the bailouts and the troika behind” but has been forced to continue with austerity and extend the bail-out. As for the hated “troika (the ECB, the IMF and the European Commission), Syriza has secured an agreement not to use the name “troika”, but these three bodies, now referred to as “the institutions” will still oversee Greece’s bailout.

It promised to push through a series of anti-austerity measures including upping the minimum wage, scrapping taxes and re-hiring a number of civil servants. Instead, it has had to promise not to roll back the reforms introduced by previous governments or introduce any controversial measures during the four-month period of negotiations on a new long-term deal. Although Syriza has managed to reduce the agreed level of primary surplus it must achieve and has at least been able to suggest which reforms it would like to implement, they must be agreed by the other Eurozone countries. It is, to all intents and purposes, a total capitulation.

Wolfgang Schäuble, the German finance Minister rubbed salt into the wounds when he said, “Being in government is a date with reality, and reality is often not as nice as a dream.” In other words, “this immature group of idealists has had to grow up quickly.” Herein lies Syriza’s problem. The party promised the impossible. The country is bust, its main creditors are fellow-EU member states and the only alternative to years of grinding cuts would have been an Iceland-style banking crash which would have forced Greece out of the Eurozone and possibly the EU as well. It would have meant a spike in inflation and things getting even worse before they got better. Faced with these tough choices, Tsipras and his finance minister Yanis Varoufakis blinked and rolled over.

What this will mean to those many Greeks who celebrated the Syriza victory with such enthusiasm less than a month ago remains to be seen. There may be issues within Syriza itself which, as has been pointed out before, is not a monolithic political party but an association or coalition of left-wing factions, some of which may not be willing to go along with this humiliation. PASOK, which Syriza has replaced as the main party of the left, was soon on the attack. “No propaganda mechanism or pirouette can hide the simple fact that they lied to citizens and sold illusions” said Evangelos Venizelos, the party leader.

In summary, Greece has secured for itself a four-month extension to the current deal at the price of an embarrassing climbdown which the party’s leadership has tried to disguise as a victory. It saves Greece’s banks from collapse for the time being while still leaving the most critical question unanswered:- How is a country that may no longer even be able to achieve a primary surplus bring down its vast debt of 175% of GDP? The markets may be happy at Friday’s deal, but it may yet prove a false dawn – a lull in, rather than a termination of, the Eurozone’s woes.
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Syriza wins in Greece. What are the implications for the Eurozone?

As widely expected, the anti-austerity Syriza alliance won the Greek General Election on 25th January. Syriza fell just short of an overall majority, but appears to have secured a deal with the Independent Greeks party to form a new government. This is an unlikely alliance, as this small party is right of centre and agrees with Syriza only on its opposition to the austerity measures imposed on Greece as a condition for a bailout by the so-called “Troika” – the European Central Bank, the European Commission and the International Monetary Fund. However, for better or worse, Greece now has a government which has pledged to stand up to its creditors and seek at least a partial forgiveness – or write-off – for the country’s debt, which stands at a staggering 175% of GDP. Given that the Greek people have been through a recession worse than the 1930s and seen GDP shrink by almost 25% in five years, they can hardly be blamed for turning to anyone who promises to offer some hope for the future.

But what are the implications for the country and the eurozone as a whole? The first question is whether the coalition will hold. While Germany is government by a “grand coalition” of left and right, Syriza is not a “mainstream” centre-left social democratic party like Germany’s SPD but an association of Maoists, Trotskyists, Marxists and Greens. It is probably the most left-wing party to have been voted into power in Western Europe since the fall of the Berlin Wall. The Independent Greeks, being conservative and nationalistic, are hardly the most obvious or suitable bedfellows for such a party. Any hint that the coalition may collapse before it has even got off the ground will only plunge the country into insecurity and talk of fresh elections. If it does hold, will Alexis Tspiras and his enthusiastic but inexperienced team be able to turn Greece around? Given the amount of ideological far-left baggage the party brings with it into government, this is unlikely. Let’s face it, Marxists, Maoists and Trotskyites don’t have a particularly good record at creating successful, prosperous economies. Venezuela, which boasts one of the world’s most left-wing administrations to have gained power through a (reasonably) democratic process, is currently suffering from an annual inflation rate of over 60% and has had to raise interest rates to over 19% to prevent a currency collapse.

Then comes the tricky question of the relationship with the rest of the EU. Comments on the election results from Northern European Eurozone members have been very stern in tone and quite uncompromising. Angela Merkel has insisted that the new Greek government must stick to the commitments made by its predecessors. Jeroen Dijsselbloem, the Dutch finance minister and chairman of the Euro Group was equally forthright. He stated that he would work with the new Greek government but there would be no softening of the line on austerity. “Membership of the eurozone also means you comply with all that we have agreed with each other,” he insisted.

Will there be any give and take on either side? Fudge and compromise are part and parcel of EU horse trading. For established political parties and their leaders, it is grist to the mill, but what of a party that has never been in government before? – especially a party that won a victory pledging NOT to compromise? Tsipras’ rhetoric in his victory speech is not the sort of language Brussels likes to hear:- “Greece is leaving behind the destructive austerity, fear and authoritarianism. It is leaving behind five years of humiliation and pain…The verdict of the Greek people, your verdict, annuls today in an indisputable fashion the bailout agreements of austerity and disaster…The verdict of the Greek people renders the troika a thing of the past for our common European framework.” It’s pretty uncompromising stuff, but what if it comes to a standoff? Syriza, like most left-of-centre-parties, claims to be strongly pro-EU, but will Syriza’s more hard-line members and supporters allow Tsipras to be bulldozed buy the EU juggernaut? What if he stands his ground and Greece is expelled from the Eurozone?

While unofficially, some politicians, especially in Germany, state that life would carry on for the other 18 countries without Greece and that a default would not cause the same problems as would have been the case at the height of the Greek debt crisis in 2010-12. But what if Greece then prospers outside the Eurozone? Admittedly, as has been stated, this looks pretty unlikely, but suppose after expulsion Greece, in a subsequent election, voted in a different party that turned the Greek economy around. Would other nations be tempted to leave too?

It is hard to say. Norway and Switzerland have shone for many years as a beacon of light showing how well a nation can do outside the EU completely, but so far, only in the UK are there many people keen to point this out and to suggest that their country ought to follow suit. However, as last May’s European Parliamentary election shows, increasing numbers of people are across the entire continent falling out of love with the EU. Once a nation effects a successful exit from the EU or even the Eurozone, the failure of the whole EU project will become apparent to all and sundry. That is inevitably going to cause a few worries in Brussels, but after years of ignoring referendum results that go the “wrong” way, can the EU élite really be surprised if voters discover other ways of expressing their discontent? General elections are due this year not just on the UK but also in Denmark, Poland, Estonia, Finland Portugal and Spain. In the latter country, a similar hard-left party, Podemos, has been rising in the polls and has also been closely watching Syriza’s progress. “Greeks finally have a government, not a Merkel envoy” was the reaction of one Podemos official to the result. Interesting times ahead, indeed!