Article / 09 September 2016 at 5:00 GMT

3 Numbers: Possible crack developing within the EU

Blogger / MoreLiver's Daily
  • Representatives of nations hit hard by the euro crisis will meet in Athens
  • Greece may be is trying to form an anti-austerity alliance among EU nations
  • EU finance ministers and central bankers discuss Greece, Brexit and budgets
  • Two Fed speakers return the focus to September's rate-setting meeting

By Juhani Huopainen

The European Central Bank’s press conference yesterday did not announce any new policy measures and left its forward guidance unchanged. So eyes are once again turning to the upcoming central bank meetings – the Bank of England next week and then the Bank of Japan and the Federal Reserve the following week.

 A house divided ... Greek PM Alexis Tsipras will today meet with the leaders of six southern EU countries badly hurt by the euro crisis, with a view to forming an alliance. Photo: iStock 

European debtor country meeting (1215 GMT). Greece Prime Minister Alexis Tsipras hosts a conference in Athens on “challenges facing the European Union at an economic, political and institutional level”. Invited countries are Italy, Spain, France, Portugal, Cyprus and Malta – all countries that have been badly hit by the euro crisis and that are politically on the left side.

Politico wrote earlier that Athens is trying to form an alliance of like-minded against the austerity-minded northern members of the EU. The obvious goal is to build support for debt restructuring and less strict limits of national deficits. The migration crisis also plays a large part – Greece is the migrants’ gateway to the rest of the EU, and the EU has been pressuring Greece to “do more” to stop the influx. 

The EU’s deal with Turkey on stopping the flow of migrants faces an uncertain future. Athens is afraid that should the arrivals increase rapidly, the EU might decide to close its border with Greece.

At the moment it seems implausible that the countries would be united enough to present plausible demands to the northern members – especially with elections in Germany getting closer. No one wants to sound soft on southern members, because it implies losses for the northern countries. 

On the other hand, sounding too hard backfires just as easily, because everyone has a vote, and pushing countries too close to the edge just alienates them in an union that still offers each member a vote at the common table. The long-term result of the southern alliance and similar events is that the deficit rules will be enforced even less in the future. 

Eurogroup meeting (1230 GMT). If the central bank is not going to do anything, it is up to the EU and national leaders to get something going on. Which they will not. Just as the G20 summit seemed to identify what needs to be done – and what must be cherished – the leaders are unlikely to do it, as Mohamed El-Erian wrote.

Slowly but surely there is a consensus forming around the need to allow more fiscal spending. Monetary policy is close to its limits, and just as the Fed had to taper when its share of the market became too big, so will the ECB.

Struggling from the migration crisis, approaching elections and Britain’s vote to leave the European Union, means the Eurogroup's hands will be full. The most important decision will be whether to give the green light to Greece's next bailout tranche. 

Of medium-term importance will be what to do with those countries in blatant violation of the budget deficit limits and trying to form some tentative tactics to soften the blow from Britain’s vote. It won’t be easy, but investors will be eager to hear hints that fiscal policy is about to become easier.
US Federal Reserve speakers. With the ECB out of the way, eyes are back on the Federal Reserve. After the mediocre jobs data and the terrible August ISM surveys, market-implied odds of a rate hike in September plummeted. The probabilities will probably begin to again move higher from here, as decision-makers will repeat that the rate hike is not yet definitely off the table.

The Fed is keen to keep its options open. Unless it provides a picture that it could consider a rate hike after a string of bad monthly data, it is never going to be able to prepare the investors for the eventual rate hike. The hike will come, but probably not in September. September will be “free easing” from the Fed.

By threatening to hike and then not doing it, the Fed will sound tough on inflation but benevolent toward the economy. At least in its own mind. Everyone else is likely to see it flip-flopping because of a downtick in monthly data.

The Fed’s Eric Rosengren is the keynote speaker at the South Shore Chamber of Commerce’s breakfast meeting (1145 GMT).

Fed’s Rob Kaplan participates in a moderated Q&A at the Mission Capital Conference (1330 GMT).

– Edited by Gayle Bryant

Juhani Huopainen is a blogger and a macro analyst at MoreLiver’s Daily. Follow Juhani or post your comment below to engage with Saxo Bank's social trading platform.


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