Eurozone’s troubles ‘almost over’

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Eurozone’s troubles ‘almost over’

The eurozone’s worst macroeconomic strains could be behind it in spite of Greece’s volte-face on implementing economic reforms, Hermes’s Neil Williams has said.

The chief economist said the stark differences between the fortunes of peripheral countries and those in the core was

starting to reduce, potentially leading to a smoother overall picture. This was in spite of recent moves by Greece to go against previously agreed austerity measures.

Last week, the Greek government began to reverse agreements attached to previous bailouts, including a new law which will allow the Syriza government to rehire thousands of public sector workers.

“The mix of reducing strains in the periphery without accompanying improvement in the core means the divergence since 2008 is starting to correct,” said Mr Williams.

“This is not, of course, a sufficient condition for returning to economic health.

“This still rests on its core members, which account for over 80 per cent of eurozone GDP.

“But it is a necessary one. The fact the divergence since 2008 is finally starting to correct should offer a helpful counterweight to the instability from Greece, reinforcing the impact of the European Central Bank’s quantitative easing.”

Mr Williams said he expected Greece to remain in the euro, as trying to refinance its ¤10bn loan repayments by September outside the single currency would be “far harsher”.

“Outside, the excessively high market interest rates needed to prove the creditworthiness of the new, substantially weaker drachma would risk stagflation and escalate the funding costs that would then be on its foreign-currency (euro) debt,” Mr Williams said.

“This would be unsupported by Greece’s former peers.”

The economist also said using a bespoke metric – called ‘misery indices’ – which looks at the levels of economic strain in each eurozone country by analysing levels of inflation and unemployment, those having to focus on austerity were “the most miserable”.

“It’s not surprising to again see as the ‘most miserable’ those members having to run austerity to cut fiscal deficits and debt,” Mr Williams said.

“But their positions are improving, and this should be sustained in 2016.

“Second, the biggest economies – Germany, France and Italy – remain worse than their pre-crisis levels, as intra-regional trade remains subdued.

“This is important given the three account for two-thirds of eurozone GDP.”