Yves here. Yanis Varoufakis’ discussion today focuses on hot-button issues in the Eurozone, which isn’t getting the attention it warrants in the US press right now, given the competition from so many stories closer to home, such as the oil price collapse to sustained protests over police brutality to the CIA torture report.
Admittedly, while a crisis looks inevitable, with Germany committed to incompatible goals (continuing to be export-driven but not lending to its trade partners), the Troika has made kicking the can down the road into such an art form so as to have dulled the interest of most Eurozone watchers. But there’s been a bit of a wake-up call with the possibility that Greek prime minister Antonis Samaras’ gambit of calling for a presidential snap election (which is a vote within the legislature) will fail, leading to general elections. A general election is widely expected to produce a victory for the leftist party Syriza, which is opposed to more bailouts, and one is scheduled to be wrapped up within the next couple of months. Syriza wants the debts restructured and also wants to be allowed to deficit spend, which in an economy so slack, would reduce debt to GDP ratio over time (the austerians keep ignoring the results of their failed experiments: when you cut government spending, the economy shrinks disproportionately. As a result, this misguided method for putting finances on a sounder footing makes matters worse as government debt to GDP ratios rise as a direct result of spending cuts).
As much as the Syriza leader, Alexis Tsipras, has spoken against bailouts, even if he comes into power, it’s not clear that he has the resolve to bluff the Troika successfully. International lenders will rely on the notion that Tsipras can’t afford to threaten a default, since that could trigger bank runs and potentially rescues via depositor bail-ins and are likely to push back hard. But the spike up in Greek government bond yields and the near 12% plunge in the Greek stock market yesterday says investors are plenty worried about the possibility of brinksmanship, and the tail risk that Greece might actually default and print drachmas to fund its government budget, which would be grounds for kicking it out of the Eurozone.
By Yanis Varoufakis, a professor of economics at the University of Athens. Originally published at his website. From an interview with Jorge N. Rodrigues
1- Will Greece be “seen out” of the euro during the year, or is a compromise still possible in the euro framework?
A workable compromise is certainly possible and there is no need for Greece to exit the euro. Only Greece needs a government that is genuinely committed to negotiating and drawing lines in the sand thus demanding sensible changes to the rationale of the agreement between Greece, Berlin, Brussels and Frankfurt.
2- Will Euro area fall into stag-deflation? Will Germany accept a change of policies’ course?
The Euro Area is stagnating already, and doing so quite badly. But this is insufficient to change Germany’s stance. Only a doubling of German unemployment will do this or, more likely, one (or more) government from the Periphery that are prepared to veto the German position in the EU Council.
3- Will the ECB will go for a full QE?
No. Even if they start buying government bonds, they will do it in a quantity and manner that does not help much.
4- Sovereign Bond Yields will continue to go down through new historical lows, or is a reversal probable?
The low yields reflect a combination of deflationary expectations and the expectation that Europe will continue quietly to “wither”. If /when either of these expectations change, yields will shoot up.
5- Will Russia enter full recession and the euro go above 80 roubles?
Russia is in full recession. As for the rubble’s ‘equilibrium’ rate, only fools make predictions.
6- Can geopolitical risks go up?
They always do in the wake of a long term deflationary crisis. Just ask yourself: Would Mr Putin have behaved the way he did if Europe had a coherent strategy against its crisis?
7- Will Brent price go down below 60 dollars, or is a reversal probable?
The macroeconomic outlook supports the prediction of low oil prices for a while. But given the political nature of many of the relevant decisions (e.g. What will Saudi Arabia do? Will Iran be rehabilitated?), price forecasts are bound to be inaccurate.
8- Will the FED and the Bank of England delay significantly first move to higher interest rates?
It does not matter much. They will be very cautious, ready to drop them again at the first sign of a downturn.
9- In the euro area which country is the weakest link?
Italy – in the sense that it manages to have a very healthy primary surplus (and a healthy current account) but still its debt to GDP ratio is rising unsustainable.
10- Guesses for grey or black swans?
By definition, ‘swans’ are un-guessable. Except to say that the source of the next Euro Area shock will be political (under the strain of deflationary dynamics).