Over the next few days we will be posting a series of quarterly outlook articles by our analysts from around the globe. Here is the first by Michael Hewson in London. Michael's Twitter handle is @mhewson_CMC
For over five years the turmoils surrounding the Greek economy have been looming over Europe and the euro like a dark shadow.
The original bailout in 2010, while necessary, was done with the sole intention of rescuing banks which had lent far too much money, and preserving the euro. Not enough attention was given to repairing the structural problems of the Greek economy, which were well known with respect to inefficient processes and tax raising powers.
This lack of attention to detail has left us with the scenario we are faced with now and the prospect of a Greek exit from the euro.
Whether or not Greece remains in the euro, is now beside the point. The last few weeks have been extremely damaging in terms of the relationships between the various protagonists.
The stubborn refusal of EU creditors to countenance any form of debt restructuring is a complete denial of the facts at hand, and to insist on more austerity in an economy already on its knees is tantamount to economic vandalism.
The drag that these events have had on the prospect of the various economies in Europe isn’t hard to see, with some evidence of a plateauing of the recent rebound seen in Q1.
On the plus side there does appear to be a rebound in inflationary pressures within the region, with EU CPI rebounding from the lows of -0.6% at the beginning of this year to levels of 0.3%, suggesting that recent fears about deflation may have been overblown.
Problems still remain, notably with the French economy where the private sector continues to struggle. The recent recovery in Spain could also well be starting to run out of steam after some pretty impressive growth so far this year.
What can’t be assessed is what damage recent events have done to confidence amongst consumers within the euro area.
Retail sales in recent months have been notable thus far this year by showing some fairly good gains, but there is a danger that the fallout over events in Greece could spill into a slowdown in the second half of the year.
Despite concerns about a Greek exit the euro appears to have carved out a medium term base at 1.0500. It could well start to head back towards 1.2000 which, given the fragility of certain parts of the EU economy, may not be the most desirable outcome.
Unfortunately this rebound in the euro is more about a weakening of the US dollar than any confidence that we are over the worst vis-à-vis the crisis in Greece.
Even if we get some form of deal in the coming days, the reality remains that Greece’s problems will need to be dealt with by EU leaders whether or not it remains in the euro.
What to look out for in the second half of 2015
Given the events of recent months, the second half of 2015 has the potential to be a significant footnote in the history of the European project, with the possible effects rippling out through the rest of the decade.
While Greece may be relatively unimportant in terms of economic output, its geographical location with respect to the Middle East, its membership of NATO and its links to Russia make it an extremely important player politically within the EU and Europe as a whole, which is why the US has been looking on with increasing alarm at how events have unfolded in recent months.
How EU leaders deal with these various economic and political questions in the coming weeks could well determine the long term viability and sustainability of monetary union.
The words of the Eagles hit Hotel California have often been quoted to sum up what monetary union means for countries that join. “You can check-out any time you like, but you can never leave!”
A Greek exit could blow a giant hole in that perception. We live in interesting times.