zone, out? Economists Say Euro Zone Danger Remains

A Handelsblatt poll of 18 European economists finds doubt over whether there has been a real breakthrough in negotiations with Greece. The group also predicted zero inflation this year for the 19-nation euro zone.
The economists are watching the bankers.

The euro group of finance ministers may have agreed to continue rescue measures for Greece, but that doesn’t mean a breakthrough has been achieved just yet.

A Handelsblatt poll of 18 top European economists found unanimous agreement that the extension of a rescue program for Greece has merely bought more time. The question of Greece’s continued participation in the currency union that was launched in 1999 remains open, they said.

The economists are a part of a "shadow council" organized by Handelsblatt to debate decisions made by the European Central Bank, in person or through conference calls, about five times a year. The newspaper publishes the opinions of this group to give its readership a chance to learn about the policies and choices made by the European Central Bank, the ECB, in Frankfurt.

The shadow council meeting comes just days before the ECB's own governing council – the body in charge of setting interest rates for the entire 19-country euro zone – is due to meet in Frankfurt. ECB President Mario Draghi will give the results of that meeting at a press conference Thursday, though no major policy changes are expected.

The central bank in its last meeting in January already launched a massive €1.14 trillion bond-buying program designed to revive the euro zone's economy. The ECB's meeting this Thursday will likely be overshadowed by Greece, which economists warned remains in a precarious financial position despite the temporary lifeline agreed last week.

"A new aid program will have to be agreed in four months at the latest, because Greece won’t have won its way back to the capital markets by then,“ said Sylvain Broyer, chief economist for the euro zone at French bank Natixis.

For the first time in its twelve year history, the economists on the panel gave an average prediction of zero-level inflation for 2015. Willem buiter, citibank economist

That will not necessarily be easy. Greek politicians may feel they won an early victory in Brussels, and that is likely to make them more confident about their chances of winning concessions from European ministers in future negotiations.

"Greece’s liquidity situation is already precarious,“ said Jacques Cailloux, a London-based economist at Nomura in London. That means there will only be a short time before the poker game starts again.

The economists agreed that the ECB should stay out of political questions and decisions surrounding Greece, although they also conceded that this is difficult in practice given its role in financing Greek banks.

"The ECB holds the keys to the solution,“ Mr. Broyer said.

The ECB has to decide whether it will continue to accept Greek bonds as security for regular refinancing operations of banks, and whether it will purchase Greek bonds as part of a massive bond-buying program that started this week.

Furthermore, in its role as a bank supervisor – a job the ECB took over from national regulators in November – the ECB will also have to decide to what extent major Greek banks will be allowed to retain Greek government bonds on their balance sheets without running the risk of collapse. This second decision could determine just how far the Greek banks could help the government in Athens bridge cash flow shortfalls until a final solution is reached with European creditors.

The economists also believed it is unlikely the ECB will buy Greek government bonds as it launches a U.S.-style quantitative easing program this week – a €1.14 trillion effort to stimulate growth in the euro currency zone. While the ECB has said it will buy bonds from every member of the currency bloc, it has also set a strict upper limit for the amount of bonds it can buy from each. Given there is only a small private market for Greek bonds, and given the ECB already holds some Greek bonds from an earlier program, the only possibility would be for it to keep its holdings at a constant level by releasing old bonds and buying new ones.

The Shadow Council was critical of the ECB's wider decision in January to launch a U.S.-style quantitative easing program, and especially of the decision to leave most of the risk stemming from buying bonds with each national central bank, rather than spreading the risk of buying those bonds across the entire euro zone.

"That puts the currency union in danger," said Citigroup’s chief economist and former Bank of England monetary policy chief Willem Buiter.


For the first time in its twelve year history, the economists on the panel gave an average prediction of zero-level inflation for 2015; some members even predicted a negative rate.

The ECB has until now expected an average inflation rate of 0.7 percent for the course of the year, but will release its own updated predictions on Thursday. It is possible therefore that the ECB will revise its predictions downwards.

In any case, inflation in the euro zone is well below the ECB's target level of 2 percent – a key reason that Mr. Draghi has given for the ECB launching its ambitious bond-buying program.

On Monday, the European statistical agency Eurostat registered an annual inflation rate of -0.3 percent for February, following -0.4 percent in January.

The economists raised their growth rate predictions for the year from 1 percent to 1.2 percent because the fall of the oil price – the reason for the most recent drop of the inflation rate below zero – should provide a boost to the economy.

Some experts believed the growth forecast was still too low. They argued cheaper oil is not the only boon to European growth at the moment – it is being accompanied by a falling euro and a slow but steady rise in bank lending across the continent.


Handelsblatt's Norbert Häring covers banking and monetary policy. To contact the author: [email protected]