London - Greece's election has averted the immediate threat
of a euro breakup, but it does nothing to restore the magic ingredient missing
in the European and global economies - confidence.
Investors and corporate executives are paid to calculate
But they cope badly with uncertainty, and the poll has
swapped one big fat risk - a victory for radical leftists opposed to the
bailout programme keeping Greece afloat - for a fresh dose of uncertainty: what
changes to the plan will be sought by Greek conservative leader Antonis
Samaras, the narrow election winner, and how will the rest of the eurozone
Add in sluggish growth in the United States and China, which
are also in a year of political change, and it is no wonder that animal
spirits, or confidence, which Keynes identified as the intangible elixir of
growth, is conspicuous by its absence.
"Undoubtedly the outcome is better than it could have
been, but all of the issues about renegotiations, fragile coalitions and
uncertainty about growth programs are still there," said Andrew Milligan,
head of global strategy at Standard Life Investments in Edinburgh.
He said the eurozone's travails were like Britain's weather
of late - dark and depressing interspersed with the odd ray of sunshine.
"Businessmen want to feel that the world economy is
growing and that they should be thinking optimistically about how to expand,
hire and invest," Milligan said.
Instead, companies are hunkering down.
World No 2 truck maker Volvo is having second thoughts about
ramping up output in Europe. "Given the current economic development in
Europe, we are evaluating if the announced increases in production rates will
be implemented as planned," the company said on Monday.
Volvo was echoing another Swedish industrial bellwether, SKF
AB. The world's leading bearings maker said last week that the euro crisis,
coupled with a slowdown in China, was sapping confidence and demand.
Consistent with their gloomy assessments, car sales are
falling not just in France but also in more resilient Germany.
"The global economy is slowing, and is slowing at a
time when you have got such policy indecision that it's making investment very
difficult," said Sean Darby, Hong Kong-based chief global equity
strategist for Jefferies, an investment bank.
Where's the growth?
China is easing some policies but keeping a tight grip in
other areas, the United States faces a fiscal tightening next year and the
eurozone is wedded to austerity, Darby said.
"I cannot find an economy at the moment where there's a
natural pro-growth policy. There isn't one."
Investors are struggling to price in the implications of
competitive currency devaluations that many governments are encouraging, while
Madrid's abrupt admission this month that it needed outside help to clean up
its banks has compounded uncertainty over the extent of the eurozone's woes,
"The fact that a country like Spain can deny how bad
the problems are and suddenly get a bank bailout for €100bn must worry
participants that there's a whole lot of other stuff that's being covered up as
well," he said.
The owners of German chemical company Evonik RAGES.UL on
Monday blamed the high level of market uncertainty, especially in the eurozone,
for their decision to scrap what could have been Europe's biggest initial
public offering in more than a year.
Motor sport racing company Formula One and London luxury
jeweller Graff have also put their IPOs on ice.
So what is needed to revive confidence?
Beyond evidence that Greece is finally addressing its
deep-seated problems and regaining the trust of its creditors, markets are
clamouring for a roadmap leading to the closer fiscal, banking and political
integration needed to underpin the single currency.
That's why the European Union summit on June 28/29 looms
Without an assurance that the eurozone is contemplating some
way of eventually mutualising the debt issued by the currency bloc's members,
bond investors may well continue to flee Italy and Spain and propel yields on
their debt to levels at which they cannot refinance themselves in the market.
At that point, Europe's third- and fourth-largest economies
would have to ape Greece, Portugal and Ireland and turn to the International
Monetary Fund and the European Union for emergency loans.
Yields on Spanish debt surged on Monday to a euro-era high
as a post-election relief rally petered out within hours. Italian yields also
What's to be done?
Ian Harnett, managing director at Absolute Strategy
Research, a London consultancy, expects Greece will still be in the euro at the
end of 2012. It was time, he said, for markets to recognise that the political
will exists in the eurozone to do all that is needed to keep the single
To that end, Harnett believes the minimum requirement over
coming weeks is to flesh out the idea of euro-wide bank deposit insurance to
forestall the risk of destructive bank runs.
"It strikes us that if you don't have deposit insurance
you will have to have capital controls. Which would you prefer?" Harnett
Willem Buiter, chief economist at Citi, agreed that a
blueprint for a banking union, of which a deposit guarantee scheme would be one
component, could emerge as soon as at next week's summit.
He also expects the eurozone in due course to beef up the
role played by its embryonic rescue fund, the European Stability Mechanism
(ESM), so it can help reschedule eurozone government debt.
But Buiter, who coined the term "Grexit", still
thinks Greece is headed for the euro exit at some point.
"Ultimately we anticipate that a mixture of banking
union and expanded ESM and a sovereign debt restructuring mechanism should be
enough to keep a 16-nation euro area on the road," he told a conference
Buiter favours granting the €500bn ESM a banking licence so
it has more financial firepower, but he said there was not yet enough support
for the idea.
"It will probably take another couple of panics to get
that implemented against continuing German and European Central Bank
opposition," Buiter said.
That comment goes to the heart of the frustrations of many
academics and policymakers outside Europe: not until the eurozone is staring
into the abyss do its leaders contemplate radical steps to put their currency
on a solid footing.
"In the eurozone and other advanced economies,
politicians seem unable to come to terms with the need for decisive policy
actions, instead settling for half-measures and defensive policy interventions
when backed into a corner," said Eswar Prasad, a Cornell University
economics professor and senior fellow at the Brookings Institution in
To rebuild credibility and revive growth, Prasad urged
politicians to summon up the resolve to tackle powerful vested interests and
implement structural reforms to product, labour and financial markets.
This would then create some space for back-loading measures
to bring the rise in public debt under control.
"The global economic recovery is being held hostage by
political brinksmanship that has created policy paralysis, undermined
confidence and stymied the effectiveness of macroeconomic policy tools.
"In the absence of political leadership to undertake
decisive and concerted policy actions, it is hard to see the recovery gaining
traction," Prasad wrote in a Brookings article.
* Alan Wheatley is a Reuters global economics correspondent.