Macro Weekly – The intellectual glamour of pessimism

by: Han de Jong

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I was involved in a debate last week with former European Commission President Barroso. He is an optimist, but he is cautious on Greece. We have taken the view that negotiations between Greece and its European partners can be concluded with mutually satisfactory results within a relative short period. We stick to this view, but the pressure is on. Meanwhile, European economic data continues to beat expectations while US data has recently been unconvincing. No need to change any of our economic and market views.

Barroso as our speaker

Jose Manuel Barroso was the keynote speaker at a seminar about the future of the EU we organised a couple of days ago in Rotterdam at the ATP tennis tournament there. I had never heard him speak before and was pleasantly surprised. Barroso spoke with lots of passion and humour and the fact that there was a lot of noise from another room did not seem to bother him. He and I turn out to share the view that pessimistic stories tend to have much more appeal to many people than optimistic ones. I always think that pessimism sounds more intelligent. Barroso had a beautiful way of expressing that phenomenon: he called it the “intellectual glamour of pessimism”. Brilliant!

Grexit now more likely?

Needless to say that Barroso stressed the achievements of the European Union and the battles that were fought (and won!) in recent years. He expressed concern over Greece, saying that the new Greek government is playing with fire. He surprised many when he said that the risk of a Greek departure from the euro was now higher than in 2011//2012. His argument was that a Grexit would have had huge contagion effects in 2012, while the risk of contagion now is considerably smaller. The result is, according to Barroso, that other European leaders were willing to pull out all the stops to prevent a departure of Greece from the euro in 2012. They are, allegedly, not so willing today.

A deal is likely

That is an interesting argument, but we are happy to stick to our view that differences between the Greek government and its European partners can be overcome. Syriza won the elections (convincingly) by making a lot of noise, so it cannot be a surprise that they have not done a U-turn on their election promises. It is equally unsurprising that Europe isn’t immediately bowing to Greek demands. But that does not mean there is no room for negotiations. The Greek government is surely correct that austerity has been extreme and that something has to change. More importantly, Greece has gone through an incredible fiscal adjustment and its budget deficit is now modest. The country is even running a sizeable primary surplus. So there is no need for much further austerity. The new government is looking for debt relief. A writedown of Greek debt is unlikely as it is unacceptable politically, but an extension of maturities and perhaps a grace period, or a further lowering of the interest charged, will have the same effect for Greece. And on the reform side, we suspect that a Syriza government may be willing to implement reform in areas where Europe would like to see reform, for example corruption.

Greece’s finance minister was on Dutch TV recently, saying that the most important thing is to get Greece back on a growth path. Actually, the economy was already on a growth path before the recent unrest. So it is a matter of not rocking the boat too much and making sure growth continues. That is in the interest of everybody. Renewed chaos will do Syriza no favours, growth is the best way to increase the pay-back capacity of the economy, which is what creditors want and there can be little doubt where the interests of the Greek people lie. Our verdict is that it can be a noisy process but it is in everybody’s interest to get to a negotiated settlement and both parties can offer each other things that should facilitate a deal.

Last, but not least, the Greek population is overwhelmingly in favour of staying in the eurozone. As a result, the Syriza government does not have a mandate to take Greece out of the euro.

Better GDP growth in the eurozone

The eurozone economy grew at a slightly faster pace in Q4 last year than expected: 0.3% qoq. Germany, in particular, beat expectations: 0.7% qoq. That was a lot faster than the two preceding quarters of –0.1% and +0.1%. We had long argued that the weakness over the summer was largely due to temporary factors and that an acceleration of German growth was likely. So we were very happy with the data. Although no details have been released, it would seem that lower oil prices have boosted consumer spending power. The German labour market is also improving and wage increases are strengthening. This is all good news, not least because it reduces the risk of deflation in the biggest economy in the eurozone. The GDP data for Italy (0.0% qoq), France (0.1% qoq) and Greece (-0.2% qoq, though +1.5% yoy) were weak, while Dutch GDP grew a little faster than expected (0.5%).

US shoppers in hiding

US data was more mixed last week. January retail sales were soft, following also soft data in December. We think weakness is temporary. Employment gains are strong, consumer confidence is high and falling inflation is boosting real spending power. It can only be a matter of time before growth of retail sales accelerates again.

150213 - Weekly table