Ten questions on the Eurozone, with ten answers – Q&A with Jorge N. Rodrigues

Euros crisis

1-      Will Greece be “seen out” of the euro during the year, or is a compromise still possible in the euro framework?

A workable compromise is certainly possible and there is no need for Greece to exit the euro. Only Greece needs a government that is genuinely committed to negotiating and drawing lines in the sand thus demanding sensible changes to the rationale of the agreement between Greece, Berlin, Brussels and Frankfurt.

2-      Will Euro area fall into stag-deflation? Will Germany accept a change of policies’ course?

The Euro Area is stagnating already, and doing so quite badly. But this is insufficient to change Germany’s stance. Only a doubling of German unemployment will do this or, more likely, one (or more) government from the Periphery that are prepared to veto the German position in the EU Council.

3-      Will the ECB will go for a full QE?

No. Even if they start buying government bonds, they will do it in a quantity and manner that does not help much.

4-      Sovereign Bond Yields will continue to go down through new historical lows, or is a reversal probable?

The low yields reflect a combination of deflationary expectations and the expectation that Europe will continue quietly to “wither”. If /when either of these expectations change, yields will shoot up.

5-      Will Russia enter full recession and the euro go above 80 roubles?

Russia is in full recession. As for the rubble’s ‘equilibrium’ rate, only fools make predictions.

6-      Can Geopolitical risks go up?

They always do in the wake of a long term deflationary crisis. Just ask yourself: Would Mr Putin have behaved the way he did if Europe had a coherent strategy against its crisis?

7-      Will Brent price go down below 60 dollars, or is a reversal probable?

The macroeconomic outlook supports the prediction of low oil prices for a while. But given the political nature of many of the relevant decisions (e.g. What will Saudi Arabia do? Will Iran be rehabilitated?), price forecasts are bound to be inaccurate.

8-      Will the FED and the Bank of England  delay significantly first move to higher interest rates?

It does not matter much. They will be very cautious, ready to drop them again at the first sign of a downturn.

9-      In the euro area which country is the weakest link?

Italy – in the sense that it manages to have a very healthy primary surplus (and a healthy current account) but still its debt to GDP ratio is rising unsustainable.

10-   Guesses for grey or black swans?

By definition, ‘swans’ are un-guessable. Except to say that the source of the next Euro Area shock will be political (under the strain of deflationary dynamics).

10 Comments

  • “Only Greece needs a government that is genuinely committed to negotiating and drawing lines”. Translation: negotiations about public debt eventually become chicken games. Conclusion: the best thing we can hope for is a chicken game between a) syriza members, who collect votes by promising to make banks “sociable” (whatever that means, I don’t speak “leftish” Greek) and b) the German bankers, distinguished gentlemen who want deflation, no matter what. Please correct me if I ‘m wrong. What will happen in the end of this chicken game doc?And I am not asking “what do you believe will happen” or what you wish for. I am asking what will really happen in the end.

    • Setting aside the “distinguished gentlemen” joke (More like bloody self-righteous morons..) there is a solution for every asymetrical negotiation as the one you are implying. The solution is to constantly up the stakes in every possible issue until there is a stand off and have several options available so as not to be stuck in a corner. You also need to be carefull as to not push the opponent into a corner as well. In Greece’s case the solution is to have all options on the table, meaning Grexit as well. Every technical issue should be well prepared, public opinion managed, necesities covered. Only then would the people at the other end of the table offer something resembling a viable solution. They have to be given incentive, otherwise why bother.

    • Taso, I hope you don’t mind me saying that, I don’t need to look up in the dictionary. I know what “negotiation” means. Dean, I had already read Yanis’ statement at proto thema before I commented here. It was what he said about the ECB not daring to stop liquidity at the banks that reminded me that, public debt negotiations are chicken games. In fact the chicken game has already began. I ask a simple question:”what will happen in the end?”. Since nobody wants to answer that, I will fill the silence. Despite all the controversy, both sides who will “negotiate” will win in the end. Syriza will gain control of the Greek banks, sooner or later, once they go bust. On the other hand, the German bankers will have the stagflation they so desperately want (and not just deflation as I wrongly stated above), sooner or later, once Europe goes bust. As for us people, we won’t even blink until head on collision…

    • @Evaggellos
      Only a clairvoyant could answer your question. Even if Greece did negotiate properly, meaning the people in charge did all those things I described it could go either way. It’s 50-50 the way I see it. The Germans are so stuck up in their narrative that they could very well make a decision that is illogical from a gains vs losses point of view. Greece could stay in the EZ with some modifications to the primary surplus predictions in its program (say down to 2-2,5% instead of the monstrous 4-5%) and the EZ itself could be salvaged with the necessary modifications. What will happen is anyone’s guess at this point. It could collapse in the next few months or continue to drag on for a few more years. As far as the ECB threat, I will side with Yanis on this one. It is an idle threat and in any case the Greek central bank can provide the necessary liquidity through the ELA mechanism. In any case if one is serious about negotiating it needs to be taken seriously as well and measures need to be planned against it beforehand.

    • Dean, I wish a black dog ate this man’s tongue. Taso, being no clairvoyant, I’ll tell you this: those who will take part in the debt negotiations, will use them to strengthen their image. In the end they will agree that… they disagree and split ways.

  • Greece just allowed a 22 year old terrorist/bank robber to leave jail to attend the University.
    This was after tremendous push from Syriza, the party that will soon be in government.

    Why do you all think that Germany will negotiate with that?

    We all have to realize that there is a level of immaturity in Greek politics that is incomprehensible
    to most other countries and very damaging to Greek people.

  • “It is impossible to exaggerate the arrogance, the bone-headed stupidity and above all the brutality and callousness of these Europhiles. Their demented attempt to impose a new economic model on an unworkable political structure has already caused untold suffering. At the heart of their project is an audacious attempt to prove the primacy of politics over economics. Bear in mind that it is an experiment for which the European elite personally do not have to pay a price.

    Their experiment has caused depression (not recession as inaccurately reported by pro-European journalists at the BBC and elsewhere) across much of Europe.

    This is getting worse. The Italian economy is moribund, social cohesion has vanished and Italians are starting to turn venomously on immigrants. The Greek economy has shrunk by 30 per cent, and one quarter of the population is out of work. Youth unemployment in Spain stands at an unspeakable 50 per cent.

    We are talking about tens of millions of ruined lives, and busted dreams. This reality has already brought about a convulsion in Europe. Entirely new political parties have emerged, from the far-Left and far-Right, brought into existence by a common scream of despair against a broken system.

    For the time being, the former political class remains in charge. It has as much legitimacy as the ancien regime in pre-revolutionary France, with the same moral bankruptcy, calculating venality and profound sense of entitlement. This elite has the same distaste for democracy as 18th-century lords, and over the long term the same chances of survival. In its dying convulsions, Jean-Claude Juncker’s political class has abolished democracy. Italy has had three consecutive unelected prime ministers since Silvio Berlusconi’s scepticism about the euro caused the EU elite to recruit an unscrupulous cabal of bankers to remove him (former US Treasury Secretary Tim Geithner gives a gripping account of this unwholesome manoeuvre in his recent memoir).

    That it has survived so far is thanks to a series of financial confidence tricks, of which the latest example is Juncker’s implausible scheme to convert €21 billion of equity into a €315 billion slush fund to relaunch the European economy. This amounts to no more than wishful ravings, though it would be financially disastrous if by some malign chance it were put into effect.

    Things cannot go on like this, and this month we have witnessed a series of telling signs that the eurozone has turned back into a danger zone. On Monday, we learnt that France and Italy will soon breach their fiscal limits. There are signs of disharmony at the European Central Bank – yet more proof that no central bank can exert real authority without a state behind it.

    The ECB is racking up worthless sovereign debt and bank loans in its doomed battle to save the eurozone: in due course there will be an almighty row about who will pay up for the black hole.

    Hopes that economic growth will float the eurozone off the rocks have been extinguished by forecasts of stagnation from the cruelly realistic ECB.

    Meanwhile the eurozone has been plunged into deflation, meaning that in real terms the value of debt will rise, a chilling repeat of the European experience of the Thirties.

    Most deadly of all is the resurrection of the Greek debt horror. The country is ungovernable and on Tuesday the president was (quite rightly) sacked, opening up the possibility of a spring general election, and thus causing the biggest collapse on the Athens stock market in 27 years.

    We are very close now to Karl Marx’s moment of alignment. The political structure must be made to fit the economic reality, or vice versa. Bear in mind that the single currency will only work with a single economic policy, a single treasury, a single system of taxation and spending, a single national parliament and single political identity.

    Europe’s incapable leadership have been trying to avoid this inevitable outcome. But the looming financial catastrophe will force them to confront it. It will be very frightening indeed for tens of millions of families, all the more so because Europe’s self-imposed economic disaster has destroyed the authority of mainstream parties, politicians and democratic institutions.

    I guess that two things will emerge, along with a new social order, out of the chaos. Many countries – Greece and Italy among them – will abandon the lunacy of the euro. ”

    http://www.telegraph.co.uk/news/worldnews/europe/eu/11286161/The-euro-is-heading-for-disaster-what-luck-for-David-Cameron.html

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