– The IMF and the EU have presented Greece with an ultimatum of sorts. The Tsipras government must now choose the lesser evil, and do so quickly. …
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– For the time being uncertainty over Greece does not seem to be weighing decisively on economic activity in the euro area as a whole. The semi-stagnation of euro area industrial production in April hides markedly different individual country performances.
– Another week has gone by, and not only has Greece failed to secure the financial resources necessary to meet its payment commitments over the next few months, but several days have been lost without significant progress being made in the negotiation. The Greek government insists on setting forth debt restructuring proposals that no-one intends to examine in the present phase, whereas it is struggling to present credible measures by which to reach the required fiscal objectives (which now seem ambitious, due to the damage reaped on the economy by the recent months of uncertainty, but which are lower than those proposed in February by the Greek finance minister). What’s worse, a week ago Tsipras managed to alienate the little support he could still count on by using needlessly aggressive words against creditors in a speech before Parliament.
On Thursday, 11 June, the IMF walked away from talks, stating that “major differences” remain with Greece, and that an agreement is “well away”. The Greek negotiators also returned to Athens. On the same day, Juncker met with the Greek prime minister in what one European diplomat called the “last attempt to make a deal possible”, and reasserted that a deal can only be reached based on the document of 3 June. Unlike last week, no further verbal concessions are being made to the Tsipras government with which to induce the Greek people to think that an agreement may be imminent. The immediate collapse of the country is being prevented at present only thanks to the emergency liquidity provided by the ECB, which on Wednesday, 10 June, raised the plafond to 83.0 billion euros, a margin that could disappear rapidly if panic starts to spread. It is unclear how much time is now left to avoid reaching the next payment dates with no financial cover: on a backward timeline, in addition to the time required to approve a hypothetical agreement in Greece and in some creditor countries, Greece will also need time to kick off the legislative process for some measures required ahead of the unfreezing of funds (emergency budget and VAT reform, first among them). In essence, time may have already run out. Therefore, the move made by the IMF and the Europe Union will force Tsipras to abandon the sterile dilatory tactics pursued so far, and to choose between fiscal consolidation (which implies a clash with the radical faction of Syriza acceptance of conditions that may well worse than those proposed in February), and an exit from the Union.
– April industrial output data in the main euro area countries were mixed: quasi stagnation (+0.1% m/m) in the euro area as a whole hides markedly different individual country performances, with a bounce in Germany (+0.9%) and declines in both France and Italy. The drop of the energy component is noteworthy (-1.6% from -1.9% in March for the euro area as a whole), probably tied to higher than average temperatures in the season. The French reading is also distorted by volatility in refining output, due to the shutdown of an important facility, and in mining. In Italy, the decline is also explained by volatile monthly changes in the pharmaceutical sector. Across countries, the production of consumer goods was weak, especially in the non-durable goods segment, whereas positive growth was achieved, with Germany at the fore, in intermediate and instrumental goods segments. This confirms that in the present phase the recovery is being driven more by investments (and exports) than by consumption. In our view, the decline incurred in April by France and Italy could be followed by a rebound in May. Beyond monthly volatility, the surveys are not signalling a significant slowdown in economic activity, and uncertainty over Greece does not seem sufficient to determine a trend reversal. GDP growth in the spring could continue at the 0.4% q/q rate seen at the beginning of the year: while data are not consistent with an acceleration, nor are there any grounds on which to assume a significant slowdown.
Appendix
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