French finance newspaper Les Échos recently got a hold of Goldman Sachs Chief Economist Huw Pill for an update the Euro debt crisis.
Pill’s verdit: it’s far from over.
To avert the deflationary effects of an austerity-led adjustment, he says, core Eurozone countries need to begin expanding their tradeable goods sectors. This will take a decade, at least.
“If France fails to make these changes, its economy will become more dependent on Germany and this will be reflected in its political position relative to its partner. It is certainly politically difficult to reach these objectives. However, Spain and Italy already work in this direction. This will take the time of a generation since the entire society in the two countries must transform.”
Meanwhile in the short-term, the rest of Europe will prove more than happy to watch Greece burn itself to the ground, Pill says, until the country accepts the agreement its government signed with the IMF, ECB and EU troika.
“…as the ongoing electoral campaign demonstrates, Greece is not prepared to keep quiet and simply accept the troika terms in return for further financial support. Europe is prepared to stand firm in the face of requests to renegotiate the second financing programme. It is unlikely that the election held next Sunday should bring the stability that the institutional creditors wish for. The Europeans are prepared to let Greece descend towards chaos until the Greek politicians and public get reasonable and accept the memorandum their government has signed.“
Finally, while Pill does not completely rule out the country leaving the Eurozone, he says the more likely outcome is that international creditors will keep the country on life support to avoid a messy default.
“Athens probably has enough money in its coffers to last until August. It can also go on without paying its suppliers, postponing the financing of, for example, energy firms, etc. In the meanwhile, the international creditors will dribble loans to avert a default on the debt. If such is the case, Greece will not exit the eurozone, the (relatively limited) lossed directly linked to this outcome will be avoided and the (much more expensive) contagion that people fear so much will not happen.”