While Greece may be out of the immediate headlines, considerable implementation risks remain and we now move on to a new series of challenges….
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From here, while Greece may be out of the immediate headlines, considerable implementation risks remain. This is not peculiar to Greece – most of the eurozone countries face degrees of implementation of agreed fiscal austerity.
Most countries appear to be making reasonable headway on this front. This is in part due to a change of political leadership; Italy handed over the policy reins to a Mario Monti-led technocrat government and Spain elected a conservative led government. Both countries have seen rapid reforms announced and they have begun to be implemented. However, we now move to a new series of challenges: the prioritisation of growth-friendly policies to offset the dampening effects of pro-cyclical fiscal austerity. Here, the political thinking appears to be less advanced.
While monetary policy can in normal environments offset the dampening effects of fiscal contraction, today’s backdrop is far from normal. The banking system is still on life support and proactively attempting to delever its balance sheet at near break-neck speed. Tightening lending standards, in marked contrast to the US, and punitive funding rates are a significant drag on growth. The positive of a cheap exchange rate and associated strong export growth do offer a degree of offset but Europe does indeed face many challenges ahead.
No clear thinking has emerged in terms of growth-boosting strategies among core countries that could loosen the purse strings at the margin.
We also have a significant political test arriving soon in the form of the French Presidential elections. The front runner appears to be in favour of renegotiating the fiscal compact as well as cutting the retirement age, both certain to enrage their German partners if proven to be more than electioneering tactics.
All in all, while spreads on peripheral debt is still some way off the levels associated with any kind of the integration of Europe implied by policy makers’ goals, they no longer appear attractive given the meaningful implementation risks.
France looks set to be the next source of eurozone political fireworks in what will no doubt be a long and testing journey towards a more integrated Europe.
The views and opinions contained herein are those of the Azad Zangana, European Economist and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.
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Source: ETFWorld – Schroders