A deal has been agreed! But before we all pop the champagne corks there is still a final hurdle. The agreement has to be signed off by the Greek parliament and it is unlikely that the governing party will be able to secure enough votes from within their own party, Syriza. Thankfully the formerly mainstream parties were always going to be more friendly towards the Eurozone, so Prime Minister Tsipras will have to lean on this fact to get the bill through. What a sorry state of affairs!
Stepping back from this, I can’t help but opine that the possibility of a future political and fiscal union has received a hammer blow from these recent events. Can you imagine the German electorate (and I’m not even going to bother mentioning the Finns, or Austrians, who are probably more hard-line than Germans) accepting a situation where Greeks and other southern Europeans are permitted direct access to Northern European government coffers? I simply can’t see it. These past few months have exposed the dirty little secret of the European project, as shared as the history is between the various national constituencies of the Eurozone, the cultures are too different, it is almost impossible to envision a time when this will change. Perhaps the British view will finally prevail and a more pragmatic commercialist Eurozone will evolve out of this mess. One can hope!
Let’s quickly run through the anatomy of the agreement:
- This is a 3rd multi-billion euro bailout for Greece, by its Eurozone partners
- Greece will be required to pass into law the terms of the bailout before the funds are released. This is the work that the Greek parliament has to do
- Greece must request continued support from the IMF, whose program was due to end in 2016
- Greece must broaden its tax base and in particular consumer taxes, and generally increase its tax revenue
- The pension system must undergo extensive reforms to make it viable
- Greek statistics agency must be made independent. No more dodgy numbers that got them into the Eurozone in the first place!
- Enact legislation that ensures the labour markets become more flexible. Industrial action, collective bargaining, and collective dismissal laws will have to be looked at
- Enact quasi-automatic fiscal rules to ensure missed budget surpluses are solved with spending cuts
- Reform the civil justice system, and capture cost efficiencies
There’s more, but I’m sure you get the picture. These are all sensible requirements that will give Greece a chance. If these changes are implemented Greece could well become an efficiently governed modern European country. We can all hope.
The currency markets have been reacting predictably to these events. Once the crisis has been shown to be largely behind us, the markets will look to the next major issue. This clearly has to be about general risk sentiment (positive) and US interest rates, these are both US dollar positives. And accordingly the euro and other major currencies have been weakening since Monday morning versus the greenback. I hardly need to tell you that equities have greeted the news with some decent rallies over the last 24hrs. It’s been a good few days and the signs look set for more US dollar strength.
We expect to see some further volatility as the Greek legislature comes to terms with the rather humiliatingly prescriptive nature of the bailout terms, but in the end I would expect these requirements to be signed into law. Northern Europeans will probably see that as an end itself, but call me cynical, it’s not clear to me how effectively these new laws will be applied. Execution is everything! Only time will tell. The point I am trying to make, is that while the recent crisis may well be over, it is not clear to me that this is the last Eurozone crisis, it might not even be the last Greek crisis..
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