Europe – The Economic Reality

Greece has made a €200m IMF repayment but there does not seem to be any move closer to a final agreement. These finances have mostly been from cuts in financial spending and the tightening of taxation. The primary surplus in Greece is set at €1.7bn, which is €1.6bn more than what was forecast. Varoufakis has stated that he has confidence of an agreement after a meeting with the Italian economy minister Pier Carlo Padoan, but we have seen no results. With all that we have discussed so far and the views that we have seen come out across various news streams, it is unlikely that we will see any form of deal reached soon.

There has been news of disagreements between the three competing groups (IMF, ECB and EU) but this has been widely denied. It is true however that even with the payment referred to above, there has been no agreement on 2015 budget figures, pension system viability or labour market deregulation. It is important to understand the backdrop of world economies behind these figures. The most recent figures to come out of the US are the ADP Institute report, showing that 169,000 new private sector positions were created in April, this is set against an estimated number of around 200,000. The ADP numbers in March were also revised down to 175,000 from 189,000.

Within the euro area; the euro has depreciated and the expectations of growth due to lower oil prices and deflation risks have subsided. However, unemployment remains high with expectations that it will only decline slowly.

With the lack of agreement on the horizon, the risk of Greek default is heightened with the possibility of contagion or fallout from the monetary union. Positive views on debt burden in Greece are set at around 180% next year. This is coupled with the fact that on May 12, Greece is set to re-pay €750m to the IMF, and this will be from local finances flowing from core institutions, unless there is a break through with talks.

Over in the UK, millions of people are going to the polls to vote and decide on the economic future of the country. Even when votes are cast, we do not know whether there will be a working government and an actual process can start. It is set to be the closest election in history by some and with uncertainty circling the markets worldwide there is a lot of downside risk and fear being shown by the European markets, which have hit a two year low. This is shown by the resultant drop in sterling.

We hope that the next few weeks will be interesting.