Crisis-Plagued Europe Sees a New Dawn After Greek Market Return

  • Greece lures bond investors, after years in the wilderness
  • Gradual return to normalcy could mark symbolic end of an era

Hans Humes, Krishna Memani See Opportunity in Greece

Five years after the sovereign debt crisis nearly tore the euro area apart, the currency bloc’s biggest problem child appears on the road to recovery as the region continues to tick off boxes underscoring its revival.

Greece sold 3 billion euros ($3.5 billion) of bonds this week for the first time since 2014, when the prospect of Alexis Tsipras’s election catapulted borrowing costs to unsustainable levels. The country’s return from the wilderness comes as a new French president has raised expectations about deeper economic integration following successive defeats of europhobic parties.

While there are still uncertainties clouding the euro area’s outlook, Greece’s rebound draws a line under a seven-year crisis, when the fight to preserve the currency union had become a daily routine.

“The euro zone’s recovery is real and political risk has receded,” said Manolis Galenianos, a professor of economics at the Royal Holloway, University of London. “This is not a facade.”

Also this week, the International Monetary Fund boosted its projections for euro-area growth while downgrading its forecast for the U.S. and the U.K. And even though Athens still relies on an 86 billion-euro bailout, its success raising funds is another shot in the arm for the common-currency bloc, adding to signs of a European revival.

In May, France elected the pro-EU Emmanuel Macron as president over the National Front candidate Marine Le Pen, tamping down a wave of nationalism that had been threatening the region. Macron’s victory -- ahead of German Chancellor Angela Merkel’s re-election bid in September -- has reinvigorated the Franco-German alliance and could spur further integration.

“With Merkel and Macron in power, we are likely to see institutional improvements in the euro area after the German elections,” Galenianos said. “These improvements may have no immediate impact but they will improve expectations about the future.”

The region also navigated two major bank bailouts in Italy and Spain. Rome liquidated two smaller lenders last month and in early July, EU officials approved a plan to salvage Banca Monte dei Paschi di Siena SpA, containing years of turmoil in the nation’s banking industry.

‘Systematic Threats’

Despite the positive momentum, the finance industry remains a source of concern for Sarah Fowler, an analyst at Oxford Analytica advisory firm. “We cannot call a definitive end to the euro-area debt crisis,” Fowler said. “The systematic threats to the European banking sector will persist.”

Euro-area banks are still saddled with more than 900 billion euros in non-performing loans, a legacy of the financial crisis that could stifle lending to the economy. The problems still facing Italian banks are exacerbated by political risks, with elections slated to take place by next spring. Polls show the anti-euro Five Star Movement in a three-way virtual tie with the ruling PD and a possible center-right coalition.

An emerging rift between Brussels and dissident leaders in the east -- including Poland, Hungary and Slovakia -- shows that, in the EU as a whole, unity is frail, even when it comes to the fundamentals of rule of law and the tackling of the migration crisis. Such divisions may be laid bare if protectionist policies in the U.S. as well as Brexit threaten to derail the bloc’s nascent economic recovery.

But Greece’s return from the brink shows that the euro area’s crisis management capabilities may have been underestimated. Earlier this month, the European Commission announced that it will recommend the removal of its so-called excessive deficit procedure for Athens, recognition that its budget shortfall appears to be finally under control. If the decision is endorsed by EU governments, only two euro-area countries would remain under the bloc’s so-called corrective arm -- France and Spain -- down from 24 countries in 2011.

For Greece, the successful market return is a first sign that the country could be able to stand on its own feet after its bailout ends in August next year -- a development that would mark the end of the crisis-spurred era of bailouts and collapsing output.

Compared to the existential nature of the debt crisis, the U.K.’s exit from the EU and U.S. President Donald Trump appear for the moment to be just a nuisance for Europe. “Brexit and Trump’s potentially protectionist policies will hurt growth, but the damage will be limited; it won’t be a systemic shock,” Galenianos said.

External risks could even help solidify support for stronger integration and tone down German criticism of government policies in Greece and Italy, according to Panos Tsakloglou, a professor at the Athens University of Economics and Business.

“Trump and Brexit will probably prove to be catalysts for deeper economic integration in the euro area, in which case, everyone will be keen to avoid having to deal with trouble children and negative headlines,” Tsakloglou said.

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