Greece has struck a deal with its creditors on reforms the country must carry out in exchange for continuing to receive money from its €86bn bailout programme.
The deal, which encompasses pension cuts, a widening of the tax base, and other reforms has been months in the making and was closed during intensive talks this week.
…Further difficult hurdles must still be cleared, however, before the IMF will join the programme, notably political sensitive negotiations on debt relief, meaning it’s still not clear when Greece will get the next tranche of bailout aid.
EU leaders are preparing a tough opening stance in Brexit talks, explicitly stating that Britain must accept the bloc’s existing laws, court, and budget fees if it seeks a gradual transition out of the single market.
…Most worrying for London, the draft unambiguously spells out conditions for a transition phase, which would minimise disruption until a trade deal is complete. If the EU’s single market legal “acquis” — its body of common rights and obligations — is prolonged at all after Brexit, the guidelines say it requires “existing regulatory, budgetary, supervisory and enforcement instruments and structures to apply”.
The European Union is encircled on the outside, split three ways on the inside, and is saddled with a corrosive currency union that is still not established on workable foundations and is likely to lurch from crisis to crisis until patience is exhausted.
Europe’s economic “Lost Decade”, and the strategic consequences that stem partly from this failure, have emboldened enemies and turned the Continent into a dangerous neighbourhood. The EU now badly needs a friend on its Atlantic flank.
While it would be undignified for any British government to exploit these circumstances (and Theresa May is certainly not doing so) this is the diplomatic and military reality as Britain triggers Article 50.
Alberto Bagnai, a professor at Pescara university with a blog called Goofynomics, this week made a typically provocative demand: that there should be a controlled end to the euro.
“Undoing the euro will be costly, though less costly than its alternative, which is protracted stagnation of the European and hence the world economy, and the growing risk of a major financial collapse,” he wrote.
A win for far-right presidential candidate Marine Le Pen would spell the end of the EU – but the French are not crazy enough to let that happen, insists European Commissioner Pierre Moscovici.
“I’m confident. I know my citizens and my compatriots well and know they are not going to elect a candidate who is proposing France exiting (Europe). That would be the end of the European project,” Moscovici, who is European Commissioner for Economic and Financial Affairs, told CNBC Monday.
…”I cannot imagine 50 percent of the French are crazy enough to vote for her,” he said.
PG View: Where have we heard wishful thinking like that before? Moscovici points out that Le Pen has “never even ever won a regional election.” Clearly that’s no long a prerequisite . . .
No one wants another Greek debt crisis, least of all just ahead of a series of knife-edge elections in Europe. No one this time is trying to push Greece out of the eurozone. No one thinks what Greece needs now after eight years of acute depression is another dose of austerity. Nor does anyone seriously think Greece’s current debt burden is sustainable. So why is Greece once again back in the headlines, its future in the eurozone again called into question amid yet another standoff with its creditors?
The official explanation is that Greece’s bailout program is being held up by a dispute over the country’s fiscal targets. Under the deal struck in 2015, Greece is supposed to achieve a primary surplus before interest payments in 2018 of 3.5% and maintain this surplus for the medium term. Germany says medium term should mean 10 years; the European Commission would prefer it to mean one or two years. This matters because Germany has said it would only continue to fund Greece’s bailout if the International Monetary Fund puts money in too—and the IMF will only participate if the numbers add up. The lower the surplus target, the bigger the debt relief needed to make the numbers add up. That is a problem for Germany.
Germany’s trade surplus climbed to a record high in 2016, official data showed on Thursday, days after U.S. President Donald Trump’s top trade adviser accused Berlin of exploiting a “grossly undervalued” euro to its advantage.
The surplus is likely to worsen tension between Washington and Berlin, which is trying to safeguard global free trade this year during its presidency of the Group of 20 leading economies, adopting the motto “Shaping an Interconnected World”.
PG View: Germany should be more concerned about the tensions building within the EU.
WSJ/Todd Buell & William Horobin/02-07-17
Remaining in the eurozone is France’s best protection over the long term, the country’s central bank governor said Tuesday, firmly pushing back against nationalist political sentiment that threatens to yank his country out of the 19-country currency bloc and upend nearly 70 years of European integration.
PG View: When a central banker inserts himself into the Presidential election, you know the threat of dissolution of the eurozone is real.
National Front leader Marine Le Pen will take back control of the central bank and fire up the printing presses as she leads France out of the euro if she wins the presidential election in May, her chief economic adviser said.
Le Pen is making a “return to monetary sovereignty” a key plank of her policy platform as she seeks to replicate the populist victory of Donald Trump in the U.S. and has set up a task force to prepare, her adviser Bernard Monot said, as he explained the details of her plan on the sidelines of a rally in Lyon Saturday.
PG View: If Le Pen wins the election this year, it really could spell then end of the Great Experiment. In Davos several weeks ago French PM Valls warned “the project could die quickly.” German Finance Minister Wolfgang Schaeuble said, “Things could fall apart within months.”
Donald Trump has joined Russia, China and radical Islam as a threat to the European Union, EU leaders were told on Tuesday by the man chairing a summit where they will debate relations with the United States.
…In vivid language that reflects deep concern in Europe at the new U.S. president’s support for Brexit, as well as his ban on refugees and people from several Muslim countries, Tusk called on Europeans to rally against eurosceptic nationalists at home and take “spectacular steps” to deepen the continent’s integration.
“…worrying declarations by the new American administration, all make our future highly unpredictable,” he said.
Greece’s benchmark government bond yields have hit their highest level in two months amid concerns the International Monetary Fund is poised to exit its involvement in the country after more than six years of bailouts.
…Investors are dumping the bonds after a leaked IMF report laid bare the schism between the fund and the EU over Greece’s economic health after 2018.
…The Washington-based fund has a far more pessimistic outlook on the health of the Greek economy, warning of “explosive” debt dynamics if the EU does not provide a major debt restructuring for the country.
PG View: If the IMF pulls the plug, one has to wonder what the EU and the ECB will do . . . Will the term Grexit come to the fore once again?
Europe’s leaders lashed out at each other in Davos in an inflamed dispute over how to stop the EU collapsing, laying bare the festering divisions that will plague the European project long after British withdrawal.
“The whole idea of an ever-closer Europe has gone, it’s buried,” said Dutch premier Mark Rutte, dismissing calls for full political union as a dangerous romantic fantasy.
“The fastest way to dismantle the EU is to continue talking about a step-by-step move towards some sort of superstate,” he said at the World Economic Forum.
PG View: The elections this year in France and Germany, as well as a likely election in Italy, may push the EU further along the path to dissolution.
“He also said a precautionary state recapitalization of banks can only be part of a solution in exceptional cases and under strict conditions and that owners and creditors must be among the first to suffer losses. The bank must be solvent, he added and state money must not be used to cover losses.”
PG View: Monte Paschi remains on the brink and Germany’s hard-line certainly is not going to help pull the bank back from the edge. In fact, the ECB is now saying Monte Paschi needs to raise $9.2 bln, nearly twice as much as the ongoing effort seeks to raise. That’s going to smart twice as much for those owners and creditors . . .
“The euro tested fresh 14-year lows against the U.S. dollar Tuesday as investors reacted to a trio of terrorist incidents around the region yesterday that have rattled confidence and raised questions about geopolitical risks in the months ahead.”
PG View: There’s a lot more going on in Europe than the recent attacks. The attempt to rescue Monte dei Paschi via a private deal looks to be falling apart. If that happens, the Italian government will have to step in to bailout the world’s oldest surviving bank and Italy’s 3rd largest lender. That will likely mean the bank’s creditors will likely experience considerable losses. The risks to the broader Italian, European and global banking systems are considerable. And that’s not to mention the current political turmoil in Italy that may at some point lead to a referendum on exiting the EU.
15-Dec (FT) — Tensions between the International Monetary Fund and eurozone policymakers over a Greek bailout erupted into a full online showdown on Thursday, raising questions over whether the IMF will join the latest €86bn rescue.
PG View: Lest we forget: Greece is still being bailed out . . .
11-Dec (Bloomberg) — Banca Monte dei Paschi di Siena SpA is making a last-ditch effort to raise funds as the prospect of a state rescue looms.
After regulators rebuffed its request for an extension, the world’s oldest bank said it will press ahead with a plan to raise 5 billion euros ($5.3 billion) from investors in the next 19 days. As the odds of attracting fresh investment lengthened, the chance of a government bailout that will impose losses on bondholders grew.
09-Dec (FT) — The European Central Bank’s supervisory arm has rejected a request from Rome to delay a private sector-led rescue for Monte dei Paschi di Siena, leaving Italy little option but trigger a government bailout and impose losses on creditors.
07-Dec (Reuters) — The euro zone bailout fund has not received any request and has not discussed with Italy a possible programme of financial support for its ailing banking sector, a spokesman for the fund said on Wednesday.
“There is no request and there are no discussions with the Italian authorities on an ESM loan,” a spokesman for the European Stability Mechanism told Reuters in an emailed statement.
06-Dec (FT) — Bankers are running out of private-sector solutions for Monte dei Paschi di Siena and have told the Italian lender to prepare for a state bailout this weekend after prime minister Matteo Renzi was felled by a referendum defeat.
05-Dec (FT) — Europe’s fightback against populism was going well for a couple of hours. On Sunday afternoon, it emerged that the far-right candidate had lost the Austrian presidential election. But the good news from Austria was drowned out by bad news that same evening, from the other side of the Alps. Matteo Renzi, the Italian prime minister, had lost his referendum on constitutional reform and confirmed that he will resign.
The consequences for Europe of Italy’s referendum result are not as obviously dramatic as those of Britain’s referendum in June. The British voted to leave the EU. The Italians have simply rejected some complex constitutional changes, which many experts regarded as ill conceived in the first place.
And yet Brexit and the Renzi resignation do form part of the same story. The European project is under unprecedented strain. Britain’s decision to leave is the most striking evidence of this. But, in the long run, the unfolding crisis in Italy could pose a more severe threat to the survival of the EU. The reasons for this are political, economic and even geographic.
05-Dec (Reuters) — Italian Prime Minister Matteo Renzi is set to resign on Monday after suffering a crushing defeat in a referendum over constitutional reform, tipping the euro zone’s third-largest economy into political turmoil.
His decision to quit after just two-and-a-half years in office deals a blow to the European Union, already reeling from multiple crises and struggling to overcome anti-establishment forces that have battered the Western world this year.
Renzi’s emotional, midnight resignation announcement sent the euro lower and jolted stock and bond markets on concerns that early elections could follow, possibly paving the way for an anti-euro party, the 5-Star Movement, to come to power.
But financial markets bounced back later in the morning as European officials played down the prospect of a broader euro zone crisis.
02-Dec (NYT) — Italy’s prime minister, Matteo Renzi, only 41, once seemed to have solved the riddle of how to survive Europe’s populist, anti-establishment tempest. But with a critical national referendum on Sunday, the populist wave is now threatening to crush him and plunge Italy into a political crisis when the European Union is already reeling.
From Washington to Brussels to Berlin, fears are rising that Italy may be stumbling into its own “Brexit” moment. What should be an inward-looking referendum on whether to overhaul Italy’s ossified political and electoral system has taken on much broader import. Financial analysts warn of a potential banking crisis, and pro-Europe supporters fear that a “no” vote in the referendum could accelerate the populist movement across the European bloc.
…If Mr. Renzi does step aside, it could open the way for opponents who have threatened to carry the Continent’s fourth-largest economy out of the euro currency zone.
30-Nov (DerSpiegel) — Italian Prime Minister Matteo Renzi may be facing defeat in a game of high-stakes poker with the electorate. If the Dec. 4 constitutional referendum fails, there are dark clouds on the horizon for Europe’s future. The country is in poor economic shape and financial markets are alarmed.
…If the government were to fall, it would hit highly indebted Italy, a core EU member state, at a sensitive time. The Italian central bank in Rome has already registered a “strong increase in uncertainty” on financial markets. The risk premium on Italian sovereign bonds relative to the interest rate Germany must pay its creditors has doubled since the beginning of the year, as trust in Italy had declined among investors. Economists like Nobel laureate Joseph Stiglitz and Germany’s Hans-Werner Sinn are already speculating over the possibility Italy will leave the eurozone.
…If Italy, the third-largest economy in the currency union, were to leave, it would mean doom not only for the euro. It could put the entire European Union at risk.
28-Nov (FT) — Up to eight of Italy’s troubled banks risk failing if prime minister Matteo Renzi loses a constitutional referendum next weekend and ensuing market turbulence deters investors from recapitalising them, officials and senior bankers say.
Mr Renzi, who says he will quit if he loses the referendum, had championed a market solution to solve the problems of Italy’s €4tn banking system and avoid a vote-losing “resolution” of Italian banks under new EU rules.
Resolution, a new regulatory mechanism, restructures and, if necessary, winds up a bank by imposing losses on both equity and debt investors, particularly controversial in Italy, where millions of individual investors have bought bank bonds.
21-Nov (WSJ) — If the European dream is to die, it may be the Netherlands that delivers the fatal blow. The Dutch general election in March is shaping up to be a defining moment for the European project.
…Instead, the risk to the EU comes from a new generation of Dutch euroskeptics who are less divisive and concerned about immigration but more focused on questions of sovereignty—and utterly committed to the destruction of the EU. Its leading figures are Thierry Baudet and Jan Roos, who have close links to British euroskeptics. They have already scored one significant success: In 2015, they persuaded the Dutch parliament to adopt a law that requires the government to hold a referendum on any law if 300,000 citizens request it. They then took advantage of this law at the first opportunity to secure a vote that rejected the EU’s proposed trade and economic pact with Ukraine, which Brussels saw as a vital step in supporting a strategically important neighbor.
PG View: The harbingers of Brexit and Trump suggest the experiment that is the eurozone may truly be on the ropes.
21-Nov (FT) — After Brexit and Donald Trump, prepare for the return of the eurozone crisis. If Matteo Renzi, Italian prime minister, loses his constitutional referendum on December 4, I would expect a sequence of events that would raise questions of Italy’s participation in the eurozone.
…The referendum matters as it could accelerate the path towards euro exit. If Mr Renzi loses, he has said he would resign, leading to political chaos. Investors might conclude the game is up. On December 5, Europe could wake up to an immediate threat of disintegration.
PG View: The FT points out that Marine Le Pen is no longer a long-shot to be the next President of France and she has promised to hold a Frexit referendum if elected.