19th August 2015
Stuart Mitchell of S. W. Mitchell Capital and fund manager of the St. James’s Place Continental European, and joint manager of Greater European and Greater European Progressive funds argues that the implications of the Greek crisis have been exaggerated…
The beleaguered country agreed terms to receive up to €85 billion (£61 billion) in loans over the next three years, in return for tax rises and spending cuts. The initial tranche will be €26 billion, including an immediate €10 billion to recapitalise Greek banks. However, the International Monetary Fund warned that the debt was unsustainable, calling on Eurozone ministers to offer debt relief to the Greeks – a consideration that is highly likely to be discussed by ministers in the autumn.
We have always felt that the possible implications of the Greek crisis have been wildly exaggerated by most commentators. At the end of the day, what most people forget is that the overwhelming majority of Greeks want to stay within the Eurozone, therefore a deal was always going to be struck. Prime Minister Tsipras was only empowered to get the best possible compromise that he could. We now have a ‘technical agreement’ between the Greek government, IMF, ECB and ESM [European Stability Mechanism], and it’s not a bad deal for the Greeks: an €85 billion package which requires only a 3.5% primary surplus by 2018, no new austerity measures, raising the pension age to 67 by 2022 and deregulation of the gas market by 2018.
The Greek debt package is just one small part in the ongoing move towards economic normalisation across the Eurozone. Most commentators have struggled to accept how deeply companies and governments have restructured elsewhere at the periphery of Europe. Just look, for example, at the 40% reduction in costs that the airline IAG achieved [in its Iberia brand]. At the same time, German wage growth is beginning to accelerate quite quickly. The recent 3.4% pay award struck by employers and the highly influential IG Metall trade union is the highest since 2007. In fact, a significant proportion of peripheral Europe’s productivity gap with Germany has now been eliminated over the past few years. Closer to the core, furthermore, Matteo Renzi and François Hollande are beginning to make real progress with reform. We will look back at this time as the moment when Europe made the necessary adjustments to secure the future of the currency.