Bill Jamieson Eurozone: where ‘recovery’ makes things worse

COMMENT

BILLJAMIESON | Executive Editor of The Scotsman

Eurozone: where ‘recovery’ makes things worse

Beware of greeting a troubled old acquaintance with a presumption of better news.

Icaught up with some business contacts recently back from Greece and had hoped to hear whether EU agreement on the latest tranche of the bail-out signified an improvement in conditions on the ground. I was soon disabused.

Large parts of the country have been able to maintain an outward appearance of normality. But in daily business, life continues to deteriorate. Far from falling prices helping to bring a better match between desperate seller and apprehensive buyer, the cost of many basic commodities has continued to rise. In dealings with many public services there is still the expectation of the small white envelope or ‘paper flower’ to help facilitate transactions. And dealings with the tax authorities are nasty when not hopelessly labyrinthine.

Greece is in the grip of a bureaucracy that would make the former Soviet Union look a model of streamlined efficiency. My contact recounted a recent incident when out of the blue he was sent an unexplained tax demand for a business he did not own. He went to the tax office to explain but found the process inexplicable when not threatening and unpleasant.

He took a leaf out of local custom and returned some days later with a Greek ‘friend’, more versed in the ways of Greek administration who acted as a go-between. After a lengthy, at times frenzied, and incomprehensible series of exchanges, a settlement was finally arrived at. There had been an administrative muddle at the tax office. Two quite separate businesses had become confused. The tax demand should never have been sent. The demand would be withdrawn. My contact need worry no more … save for the payment of 60 euros. This being a fraction of the amount originally demanded, my contact was only too ready to pay even though the payment had no legal basis whatever. The currency trap

Meanwhile, daily life in Greece continues its trajectory from desperation to despair. The flow of more reassuring news from the eurozone – it is in recession but the constant rounds of standstill ‘summits’, deferments and postponments give an appearance of progress towards resolution – has brought a strengthening of the euro currency. It recently surged to its highest point since last May against the dollar, strengthening 1.8 per cent in the space of one week.

To an outsider, good news, it would seem. But it is exactly the opposite of good news in Greece and the eurozone’s other stricken economies. What they desperately need is a sharply lower currency to help their economies off the floor and to encourage a resurgence in their tourist industries. Instead, the vice is squeezed even tighter. Prices continue to rise, Greece loses its competitive attractions as a tourist destination and life gets worse. Greek voters see no way out of their fate, because agreement on further tranches of the rescue bail-out is of course conditional on IMF vetting and a commitment to staying within the single currency. It is a circle of entrapment that seems inconceivable in modern-day Europe. But that is the tragedy behind the euro-mess.

Meanwhile the endless round of euro summits carries on with as yet no gamechanging breakthrough. The outcome of the recent meeting of the 27 EU Heads of State and Government on the future of the monetary union was even weaker than suggested in the draft conclusions that were circulated for press consumption. Instead of approving at the December summit a ‘specific and time-bound roadmap’ for completing EMU, as announced at the June 2012 summit, the EU leaders postponed a decision on the roadmap – until the June 2013 summit.

A Franz Kafka novel would struggle to capture the sense of a maze with no exit. The list of items discussed referred only to ‘solidarity mechanisms that can enhance the efforts made by the member states that enter into such contractual arrangements for competitiveness and growth’ – whatever that means. In their statement after the Summit EU Council, President van Rompuy and EU Commission President Barroso stressed that in respect of the future of the euro area all doors remain open. What meaningless vacuity.

Elsewhere however, there were flickers of hope. Latest ‘flash’ estimates for the composite eurozone Purchasing Managers Index showed an increase from 46.5 in November to 47.3 in December. This second consecutive gain was above the consensus forecast of 46.9. While the manufacturing PMI declined only slightly by 0.1 points to 46.3, the services PMI was up by 1.1points to 47.8. The available country split for Germany and France shows an increase in the composite PMI in both countries.

This is better news. But compared to the pace of recovery in the US it is glacial and suggests that the eurozone will continue to be hard going for UK exporters. Britain’s economic hopes for recovery in the year ahead are pinned on an improvement in net trade, so we have a keen interest in seeing a demand recovery in the eurozone. A stronger euro against the pound may help provide an extra competitive edge. But this looks to be a war that will continue to be won on delivery, reliability – and quality. Plus ca change here. n

Greece is in the grip of a bureaucracy that would make the former Soviet Union look a model of streamlined efficiency.