Economy Greece back as a headache for improving eurozone economy

Greece back as a headache for improving eurozone economy

A Greek national flag flies in the city of Athens, Friday, May 8, 2015. Greece's prime minister Alexis Tsipras said Friday he is optimistic his cash-strapped country will soon reach an agreement with its international creditors, averting a potential default.
A Greek national flag flies in the city of Athens, Friday, May 8, 2015. Greece’s prime minister Alexis Tsipras said Friday he is optimistic his cash-strapped country will soon reach an agreement with its international creditors, averting a potential default.

It may only account for 2 percent of the eurozone economy but Greece has a habit of punching above its weight when it comes to bruising the currency union.

And there are fears it could be once again posing a threat to an otherwise burgeoning recovery.

Official figures on Wednesday are expected to show that the 19-country eurozone grew by 0.4 percent in the first quarter of 2015 from the previous three-month period. That’s up from the 0.3 percent recorded in last quarter of 2014 and would be the eurozone’s highest growth rate since the second quarter of 2013, when it emerged from its longest-ever recession.

In the first quarter, Germany, Europe’s biggest economy, is expected to have led the way, its export-heavy economy prospering from the fall in the value of the euro — Europe’s single currency has fallen to near a decade-low against the dollar in the wake of the European Central Bank’s decision to launch a 1.1 trillion-euro ($1.2 trillion) monetary stimulus. Low oil prices, less stringent budgetary policies around Europe are also helping to shore up the recovery.

Other bright lights include Spain, one of the countries at the forefront of the region’s debt crisis over the past few years that has gained plaudits from European policymakers for reforming its economy, particularly the labor market. Economists think those efforts are now bearing fruit.

“We think that if you look at the current situation in the eurozone it is about as close to being the dream scenario backdrop as anyone could have realistically hoped a year or more ago to help to kick-start a meaningful recovery,” said Ben May, leading eurozone economist at Oxford Economics. May is predicting growth of 0.8 percent, which would be a four-year high and easily outpace levels recorded in the U.S. or Britain, two of the top-performing developed economies over the past year.

Beyond the first quarter, however, May concedes that Greece’s crisis, on top of slower global growth, could mean this is another “false dawn” for the eurozone.

Recent reports suggest that’s possible. Business confidence and retail sales across the eurozone have taken a dent, while surveys of managers suggest business activity has peaked, meaning growth in the rest of the year may not pick up as much as hoped.

“While it is encouraging that the recovery is becoming more broad-based across the euro area, there are clearly still pockets of vulnerability, with Greece an obvious source of concern,” said Timo del Carpio, European economist at RBC Capital Markets, who is forecasting eurozone growth of 0.5 percent in the first quarter.

The headline growth rate, whatever it is, will mask the likely fall back into recession of Greece barely a year after it emerged from one of the developed world’s deepest downturn since World War II. Last week, the European Union slashed its projection for Greek growth this year to just 0.5 percent from 2.5 percent previously — assuming Greece secures a deal with creditors that will help it pay off debts.

The main reason behind Greece’s renewed crisis is the new left-wing government’s pledge to end the hated budget austerity that creditors from the eurozone and International Monetary Fund have insisted upon.

For over three months, talks have dragged on as the Greek government tries to come up with a series of economic and budget reforms that will convince the creditors to pay out 7.2 billion euros ($8 billion) of bailout cash. With every passing day, the uncertainty has sharpened, to the detriment of the Greek economy. Greeks have been pulling money out of banks and investors have shied away from the country.

If the bailout talks fail, the country could default on its debts, have to put limits on the free flow of money and eventually even exit the euro. Most economists think that would cause a massive recession in Greece for at least a year as the country tries to adjust to a new, weaker currency.

Though the eurozone has shored up its defenses against such a worst-case scenario, a Greek exit would stoke jitters in the markets about which country could be headed for the door next.

Pierre Moscovici, the European Commission’s top economy official, admitted as much last week. “Once you have one country leaving, the next question is who’s next, so you lose status and you lose force,” he said.

The repercussions of a so-called Grexit could be far and wide — a hit to confidence could limit investment and consumer spending.

Moody’s Investor Services, which last month cut Greece’s credit rating further into junk status, said the risks to the eurozone should not be underestimated.

“The direct impact might be limited because of Greece’s limited trade links and lower financial market exposure to Greece in other euro area countries, but its exit could nevertheless cause a confidence shock and disrupt government debt markets,” said Alastair Wilson, Moody’s managing director for global sovereign risk.

But we’re not there yet.

And if officials from Greece and the creditors are to be believed, progress is being made. Whether there’s enough to secure a deal at a meeting Monday of eurozone finance ministers remains an open question.

A deal would allow Greece to meet a debt repayment of about 770 million euros to the IMF on Tuesday. Without the bailout cash, Greece will have to scrape together all its reserves to make that payment and would struggle to meet pensions and salaries due later in the week.

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