The Week Ahead,
As the week comes to a close, Greece is still at odds with European finance ministers on whether or not they have done enough to get their next cheque. In all likelihood, while the details from Greece’s political agreement won’t meet European and IMF demands to the letter, once approved by the Greek parliament, European finance ministers won’t be so stubborn as to quibble about the details before releasing the next tranche.
After all, earlier rescue euros were passed on even amidst evident doubts that Greece would hit any of its targets. Our long held view has been that, at the end of the day, European governments will do what it takes to prevent a massive blow up of the region’s banking system, even if it entails losing some public funds in the process. All that’s needed is a cover for their home voters, in the form of paperwork that makes it appear that they aren’t throwing money at banks via aid to weaker sovereigns. More recently, banks have also had to make their offering at the altar of “private sector participation” to prove they aren’t getting off scot free. But even if the market’s worst fears are ultimately avoided, that needn’t mean that Europe’s healing process will be one of steady improvement in financial or economic well being. Bumps on the road from where we are now to the final resolution will renew jitters in risk assets and the euro at various points in the coming year.
First up are elections in Greece and France. The pattern in Europe has been to turf incumbent governments since the crisis began. Witness government turns in the UK, Ireland, Spain and Portugal. Polls show growing support for the very parties in Greece that were opposed to the current austerity pact measures (Chart), and Sarkozy is under siege in France by a socialist party that will be less keen on fiscal austerity. There’s no way that Greece can meet Europe’s demands to somehow legally bind the future parliament to staying on the austerity road. More challenging, we expect economic news to continue to darken as fiscal restraint bites.
We’re sure Greeks noticed the sharp jump that took unemployment above 20%, joining Spain in that territory. So both politically and economically, adherence to austerity and deficit targets will be subject to market doubts in the months ahead. That will have one silver lining for Europe. It will stall a dangerous tightening in monetary policy through the currency by sending the euro a bit weaker. As well, the ECB might be more inclined to give growth some additional support through a further rate cut. Even if austerity packages aren’t fully delivered, they will still be enough to keep Europe in recession through much of 2012.
BY AVERY SHENFELD CIBC Economist