The Year That Was – Eurozone – Struggling Along

If 2014 was chaotic for Eurozone, 2015 was worse when the threat of the collapse of the single-currency union turned real, prompting leaders to deal with it head on. The year also saw the bloc as well as the rest of Europe reeling under the pressure of the huge influx of migrants from the crisis-torn countries in the Middle East and North Africa. The 19-nation economy trudged through the gloom with modest expansion rates, while the central bank was all action as its inflation targets proved ever more elusive.

<b>Surviving Greece</b>

“Make men work together show them that beyond their differences and geographical boundaries there lies a common interest.” – Jean Monnet

Vindicating the words of Jean Monnet, the French diplomat who was the prominent champion of European integration, the theme of “common interest” was the force that brought together Eurozone leaders and policymakers for long huddles several times this year to figure out ways to avoid one of their most feared threat – the exit of Greece from the currency union, dubbed the “Grexit” and the subsequent collapse of the euro area.

The Greek drama played out over the first half of the year and tested the will of the Eurozone leaders and policymakers to the hilt. Greece and its creditors – the International Monetary Fund, the European Commission and the European Central Bank – were engaged in talks to release the remaining funds from a second bailout for the country, after the leftist Syriza party, led by Alexis Tsipras, came to power following a snap election in late January.

Despite marathon meetings and a bevy of proposals, both sides failed to reach an agreement with creditors rejecting Greece’s request for debt relief among others and Greece resisting creditors’ austerity demands mainly on pensions, taxes and public spending. In late June, both sides were torn apart further and talks were stalled after Tsipras surprisingly called for a public referendum on whether to accept or reject creditors’ austerity demands.

Greeks rejected harsh austerity measures demanded by the creditors in the July 5 referendum with a massive margin of over 61 percent.

Without external aid, cash-strapped Greece defaulted on a payment to the IMF that was due at the end of June. It was the first time the country failed to honor a payment to the lender during the five-year long economic crisis.

The Greek economy, which had shown signs of exiting a prolonged recession late last year, literally came to a standstill at the end of June after the government announced a bank holiday, pension rations and capital controls. Weary Greeks lined up in front of cash machines to withdraw their money, subject to a daily limit to EUR 60, as they feared the country would exit the euro area.

The six month-long wranglings and last-minute hiccups put immense pressure on the EU leaders and policymakers as well as Greek authorities. As in any crisis, some key players such as European Commission President Jean-Claude Juncker and German Chancellor Angela Merkel – came to the fore to guide the union through hard times.

Finally, an agreement was reached mid-July to start talks for a EUR 86 billion third bailout program for Greece to last until 2018, empowering the country to battle a severe economic crisis and remain in the single currency bloc. The country has been receiving bailout funds since August after Syriza won parliament approval for the deal with support from the opposition.

<b>Migrant Pressure</b>

There was no respite for European leaders from major crises this year. As soon as many heaved a sigh of relief on Greece, the migrant crisis dominated the socio-political scene. A dramatic number of refugees from war-ravaged Middle Eastern countries such as Syria and Iraq, and crisis-torn African nations such as Somalia and Nigeria, crossed the Mediterranean Sea, often using dangerous means such as dinghies and inflated rubber boats, to seek refuge in Europe. Many lives were lost as boats collapsed in rough seas.

While Greece became the primary point of arrival for migrants, Germany was the top destination. As countries across the continent reeled under the pressure of the huge refugee influx, many closed their borders, leading to tensions between the EU countries.

Thanks to Merkel’s open-door policy, Germany has thus far welcomed the maximum number of migrants than any other EU state. While the pro-active role played in the Greece and migrant crises won her many laurels, the waning popularity among Germans prompted Merkel to announce measures to reduce the influx of migrants.

According to a report in the Saechsische Zeitung daily this week, Germany took in more than a million refugees this year, five times greater than last year’s figure, and the biggest since reunification in 1990. Meanwhile, rising social tensions following the Paris terror attacks in November and questions over the economic viability of the open-door policy clouds the outlook.

Policymakers are yet to assess the economic impact that the migration has on the euro area economy, though some German lawmakers see the rising number as a blessing to tackle the skills shortage and a labor force shrinkage in future.

<b>Stimulus Punch</b>

The European Central Bank kicked off an year of action by announcing a massive quantitative easing program in January, determined to combat the threat of deflation and revive the euro area economy. Subsequently, the EUR 1.1 trillion asset purchase programme (APP) was launched in March that fixed monthly asset purchases at EUR 60 billion until September 2016.

While ECB President Mario Draghi crossed the rubicon to join ECB’s peers US Federal Reserve and Bank of Japan who took the QE route long back, the stimulus firepower proved inadequate to boost inflation and growth in the euro area economy.

Draghi concluded the year with an extension and expansion of the APP in December and a 10 basis points cut to its already negative deposit rate. The APP was extended until March 2017 or beyond until inflation reaches the bank’s aim of ‘below, but close to 2 percent’. The bank also included euro-denominated marketable debt instruments issued by regional and local governments in the list of assets for APP.

Market expectations that Draghi will deliver more than what he promised was proven wrong in December as the stimulus measures were less than what analysts expected.

Till December, the ECB had maintained the interest rates unchanged for ten consecutive sessions after reducing them by 10 basis points in September 2014. The main refinancing rate is now at record low 0.05 percent, the deposit rate at -0.30 percent and marginal lending rate at 0.30 percent.

This year, the ECB held only eight rate-setting sessions under a new schedule and the bank also started releasing details of the proceedings which it calls “the accounts” to be published four weeks after each meeting. However, the minutes were silent on the voting pattern within the Governing Council.

ECB policymakers’ closed-door meetings with bankers and hedge fund managers came under the scanner after an incident involved Executive Board member Benoit Coeure revealing market-sensitive information during such a meeting in May. Later in the year, the bank announced it will start publishing its Executive Board members’ diaries on a monthly basis, starting February next year.

In extra duties, the ECB had to repeatedly extend emergency support to the Greek banks during the earlier part of the year as the country’s financial system was on the verge of a collapse.

The ECB also came under attack from anti-austerity protesters earlier this year as the Greek crisis brewed on. In March, activists from the Europe-wide “Blockupy” movement took to streets in the German financial capital Frankfurt with rallies and blockades in protest against the European crisis regime as the bank inaugurated its new headquarters.

Things did not stop there and in April, Draghi’s regular post-meeting press conference was interrupted briefly after a protester jumped onto the podium shouting “End ECB dictatorship”.

<b>Lackluster Growth, Vacillating Inflation</b>

The group of euro countries expanded at the start of the year with the addition of Lithuania as the 19th member.

Eurozone growth remained modest throughout the year amid the slowdown in emerging markets and geopolitical tensions. The pace of growth eased to 0.3 percent in the third quarter from 0.4 percent in the three months to June and 0.5 percent in the first three months of the year.

Germany, Eurozone’s growth engine, also managed mere moderate growth this year amid low inflation, though consumer spending received a boost from robust employment. Unemployment is at a record low though there are fears of joblessness are rising due to the massive refugee intake by the country. The Volkswagen defeat-software scandal, which erupted in the second half of the year, hardly affected business confidence.

In France, growth accelerated in the first quarter, but the momentum could not be maintained in the succeeding quarters. Italy’s growth eased, while Spain was the best performing economy among the big-four with growth ranging between 0.8 percent and 1 percent.

Greece contracted the most among member countries, while Ireland retained its top performer position.

On the back of weaker energy prices, the euro area economy experienced negative inflation this year, mostly in the first few months as continuation of the downturn posted in December 2014. Inflation has been below the ECB’s 2 percent ceiling since early 2013.

Eurozone unemployment rate dropped to a near four-year low in October. Nonetheless, it remains at an elevated level.

<b>Way Forward</b>

Eurozone growth is likely to remain modest throughout 2016 amid lower oil prices, a weaker euro and geopolitical tensions. Slowdown in the emerging markets, especially China, and widening policy gap with the U.S. are also some issues that could keep policymakers busy.

According to the European Commission, Eurozone is set to expand 1.6 percent this year, 1.8 percent the next year and 1.9 percent in 2017. Inflation is expected to improve to 1 percent the next year and 1.6 percent in 2017.

Among the largest four economies of the bloc, Spain is projected to grow the most in 2016. Germany and France are also forecast to expand the next year, so will Italy after a possible exit from this year.

Ireland is set to be the chart-topper through out the forecast horizon, among euro area members. Greece will be the only euro area member to witness recession during the period, which had exited a prolonged recession only last year.

Economists said a return to inflation seems unlikely. The ECB expects inflation to climb to 1 percent in 2016 from just 0.1 percent this year.

IHS Global Insight economist Howard Archer expects the bank to sit tight through 2016.

“However, we suspect that Mario Draghi will want to keep the markets thinking that further ECB stimulative action is a very real possibility in order to particularly try and keep the euro under some pressure,” he added. “We expect the euro to be largely weak through 2016.”

Other topics to dominate talks in 2016 include the UK in-out EU referendum, planned to be held by the end of 2017. The Greek crisis earlier this year and the resultant chaos have won supporters for UK Premier David Cameron’s election promise to hold the plebiscite, considering that there have been lot of changes in the way EU works, which according to critics are hurting the UK and its businesses.

The material has been provided by InstaForex Company –