While our base case is Greece remains in the euro, restructuring risk should stay on the radar. With Greece needing to finance € 10bn in official payments by September, some form of debt rescheduling looks likely, even if Greece does leave the euro.
- Avoiding the pitfalls of a ‘Grexit’ needs reform & restructuring, & risks further ripple-effects on activity. To test whether the macro strains are still spreading from periphery to core, we update our ‘Misery Indices’ (MIs), which adjust for defl ation.
- It’s not surprising to again see as the ‘most miserable’ those members having to run austerity to cut defi cits & debt. But, their positions are improving, & this should be sustained in 2016.
- Most revealing is what our MIs say about convergence. Economic hardship is still higher than before the euro, as converging on low inflation Germany came at the expense of lost growth & jobs.
- Yet, the divergence since 2008 is starting to correct, offering a counter-weight to the instability from Greece. In this way, though far from fi xed, the zone’s worst macro strains may be over...