They have started to discuss the technicalities of the Greece debt-problem, which is a huge achievement. They have still not agreed on the principles – the Greeks are insisting to start things from scratch while the Germans seem to maintain that the existing program is the reference for any future deal.
However, they have agreed there should be some kind of a technical-assessment, which clearly shows there is a willingness to negotiate. Both sides started off with a lot of rhetoric, but have toned down since. For the Greek leaders, it makes sense to maintain a tough posture as long as there’s no pressing need for money because they have to cater to their own constituency at home.
For Germany, it will be foolish to concede too much too early because of the possible ramifications in the rest of the peripheral countries. The market is pricing in every move and there’s a growing realization it’s all about giving time to everybody in order to allow them to climb down from initial positions.
They are unlikely to reach an agreement on Monday, but negotiations will continue. The European Central Bank has been instrumental in keeping things together by indicating it would not take any drastic decision, which should keep the big Greek banks functional and allow the conversations to continue, he noted.
Asked how other countries in the periphery – that were put through a similar austerity-driven program, would react to the current development, Gilles said it depends upon perspectives. The current governments in the so-called PIIGS countries (Portugal, Ireland, Italy, Greece and Spain) are already following some of their earlier policies although there was a growing realization that economic reforms were required badly, he observed.
Asked why the peripheral countries would agree to endure the reform pains if they know they can get a better deal, Gilles said there’s no doubt Greece has already been given lot of leeway. Their debt was restructured once already, but no other country demanded a similar deal later because they knew about the consequences (a possible break-up of the euro).
The governments of Portugal, Spain, and Ireland want the European Council to maintain a tough posture because they need to convince their own people about the benefits of enduring the tough economic conditions. The posturing is required to extract a few concessions from Greece, he argued.
Asked if the tide has turned on austerity because growth rates projected earlier were never achieved, Gilles answered in the positive. Spain, for example, was never put in a program for its fiscal policies and was allowed to drift every year that resulted in high fiscal deficits. Actually, Spain is in a fiscal accommodation net on income taxes (low tax compliance) and everyone is looking the other way.
As long as things don’t become too obvious and everybody else allows others a little more room to deliver on their fiscal targets, things will be fine. It’s one thing to try and then fail, and it’s another thing to flatly reject to negotiate at all. Also, every time Greece rakes up the World War reparation story, it creates additional tension in Germany. The tone in negotiations is more important than the actual contents, he noted.
Latest German data showed the country’s GDP grew 0.7 percent in the fourth quarter of last year. Asked to comment, Gilles said Germany has one of the most volatile GDP readings in the world. On average, GDP grew by 0.4 percent in the third and fourth quarter, which is in-line with the 1.6 percent annual pace projected by BofA. Most importantly, Germany seems to have overcome the big-slump that was witnessed last year following sanctions on Russia. The entire eurozone is looking much better now, which is no small matter, he concluded.
You can watch the video here.