28th Jun 2022

Ailing eurozone back on markets' radar

  • Markets don't like what they are seeing in the eurozone (Photo: Travel Aficionado)

The eurozone appears to have come back onto the markets' radar amid low inflation, poor economic news from Germany, and Greece's bailout exit plans.

Greece's long-term borrowing costs went above 8 percent on Thursday (16 October) - their highest for almost a year - as investors took fright at the fragile political situation in the country.

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The government in Athens has tried to shore up popular support by suggesting it will exit its bailout programme with the International Monetary fund more than a year early.

But the recent announcement spooked investors, unconvinced that Greece can stand alone. Long-term borrowing costs also jumped in the weak periphery states, Spain, Italy, and Portugal.

The market jitters - while not comparable to the height of the eurozone crisis in 2011 and 2012 - come as the eurozone's main economies are once again at odds over policy responses.

Germany continues to insist that the euro rules on debt and deficits ceilings must be adhered to.

Chancellor Angela Merkel - in an apparent reference to Paris and Rome - on Thursday said: "All - and I stress here once again - all member states must fully respect the reinforced rules of the stability and growth pact."

But France and Italy are fighting a rearguard action for more flexibility saying budget slashing will condemn them to further low growth.

Paris is on collision course with both Berlin and the European Commission after having indicated that it wants an extra two years to bring its budget deficit to below 3 percent of GDP.

Italy, meanwhile, has submitted a national budget for 2015 which brings the country to the edge of breaking the rules.

The European Commission, which under beefed-up eurozone rules receives national budgets in October each year, will announce its assessment of them by the end of November.

Behind the highly politicised budget drama in Brussels is the wider context of deflation concerns in the eurozone after data published Wednesday showed inflation sank to a five-year low in the 18-country region.

On top of this, Germany earlier this week lowered its growth projections for 2015 from 2 percent to 1.3 percent. It also said it will continue its own austerity policies.

Central banks have been slow to take up the ultra cheap loans offered by the European Central Bank (ECB). And the decision by its chief Mario Draghi to buy repackaged loans from banks to try and counter low inflation has come under strong criticism in Germany.

The ideological differences between Berlin and the ECB on what is the best policy action is weighing down on Draghi's famous promise to "do whatever it takes" to save the euro.

Phillipe Gijsels, chief strategy officer at BNP Paribas bank, told this website markets are reacting to a series of issues including economic worries about the eurozone, as well as the geopolitical situation in the Middle East and spread of the Ebola disease.

In addition investors are questioning Draghi's assertion that "everything would be ok as long as the central bank puts enough money in the system."

The ECB in early October announced it would start buying bank securities worth up to €1 trillion between now and the end of the year, another step in series of measures it has taken to try stimulate lending and counter deflation.

The "eurozone is not necessarily heading to a new crisis" said Gijsels.

But he adds: "The key basis for a still positive view is that the European economy does not go into recession. If that cannot be prevented, and were to happen in 2015, then things might get worse."

ECB announces €1 trillion bond-buying plan

The European Central Bank will start buying bank securities worth up to €1 trillion between now and the end of the year, president Mario Draghi has announced.

EU looking at trillions in shock-and-awe plan to end crisis

A plan involving a multi-trillion euro leveraging of the eurozone's rescue fund via the European Central Bank is under consideration as the EU comes under global pressure to act quickly to prevent the bloc's crisis kicking off a global recession.

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