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 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. (Chart source: CMC Markets) 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. If the Greeks leave then EU leaders will have to confront the reality of the liabilities and exposure they have to the Greek banking system as well as the fact that most of the €240 billion in bailout loans could well go up in smoke, causing significant turmoil in the European banking sector. If the Greeks stay then EU leaders, while deferring the prospect of recognising their losses on the bailout loans, still need to construct a plan or narrative that can put the country back on its feet and towards a sustainable path. That's of course assuming that both sides can sell the narrative to their respective electorates, which is by no means certain. 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. CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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