Over the weekend, European leaders showed why the recovery road will be full of pot-holes. First, a German politician stated they are losing patience with Spain’s reluctance to ask for a full bailout. Next, Merkel and Hollande disagreed over when the ECB should begin to supervise European banks. Finally, Der Spiegel ran an article over the weekend suggesting the Greek budget hole is twice the size (E20billion) that had been anticipated and the Troika said they are taking a break from Greek negotiations for releasing bailout money. Remember, this week we’re going to get additional information from Spain on their budget problems and Moody’s could announce a downgrade as well. The EURUSD dropped around 100 points overnight on this news.
One more point on Greece
Politically, rhetorical support for keeping Greece in the Eurozone has never been clearer. While the Germans and French may disagree about extending the austerity timetable, they remain fundamentally in support of keeping Greece “in.” Unfortunately, in light of the recent, tense Troika review meetings, as news surfaces of bigger deficits and calls for further debt write-downs, Greece’s finances deteriorate faster than political solutions can take hold. As I wrote in August’s GPS report:
“Given the Greek socialist economic model, there are too many barriers to growth to increase employment through rapid reforms. It will simply take too much time to get the reforms in place to evoke change. The easiest path for Greece to restart growth is to devalue their currency to make their exports grow, make the country’s production costs decline to encourage foreign investment, and boost the tourism industry, which itself accounts for 18% of Greece’s GDP. Sadly, Greece can’t devalue because they are tied to the euro. The point of this exercise is to show that the only way Greece can continue to function is at the behest of its paymasters, the Troika.”Keep in mind the increasing likelihood that more concessions will be necessary if Germany is serious about keeping Greece on the euro. But also keep in mind that the Greek public may force the exit issue unless concessions are enough to ease the social burdens of the austerity program.
