Greek Voters Send Message

July 6, 2015

The “No” margin of victory, which exceeded 61% of the vote, far surpassed all expectations and has exposed the Achilles Heel of the common European currency experiment, namely its lack of adequate popular mandate ever since the project’s inception.  The Maastricht Treaty upon which EMU is based had to be ratified by all participating nations, but only three governments submitted the ratification to a popular vote.  Of those, Danish voters approved the treaty on a second try only after securing an opt-out clause that exempted Denmark from giving up its krone and own independent monetary policy.  Having done that, the whole question of whether the euro would happen or not came down to a referendum before French voters on September 20, 1992, and a mere majority of yes votes was all that was required to ratify the Treaty.  French President Mitterrand got the majority of that vote, but the verdict — a razor-thin margin of 51.04% in favor to 48.96% against– deprived the common currency project of any genuine legitimacy for such a huge shift in sovereignty. 

That lack of popular mandate in the eyes of Europe and of the world was underscored by yesterday’s landslide defeat by Greek voters.  Before and since the Greek vote, there’s been confusion about what the vote settled.  To the German-led coalition of hard-nosed creditors, it was a vote on whether Greek voters wanted to stay in the monetary union or not, and to the Tsipras government it was a vote about whether there would be negotiating room to find a solution to the Greek debt problem that has any chance of delivering its economy from the depression in which it has already dwelled for five years.  Judging by Germany’s reaction, the answer to that question is a resounding no.  Grexit seems likely, but the fatal flaws of EMU have been left raw, and the unraveling is unlikely to stop at Greece.

Greek Finance Minister Varoufakis has resigned.  German Chancellor Merkel and French President Hollande will meet in Paris today to coordinate a strategy of a united front against Greek negotiators.  This will extend to other members of EMU after Tuesday’s planned meeting of the group’s finance ministers.  In the meantime, Merkel and Holland assert that the ball is in Greece’s court for the government to offer a plan that meets demands for austerity and provides a basis for any further talks.  Given the landslide in the referendum, there’s no way that Greece’s leaders can accept further austerity.  Unless the creditors are willing to compromise, there will be little to discuss and a bridge too far to build.

The Greek vote may also mark the beginning of the end of the Truman Doctrine, which was passed March 12, 1947, to stem the spreading influence of Communist Russia specifically at that time into Turkey or Greece by gifting aid the the economies and militaries of those countries.  Russia is non-communist now but no less autocratic and will be waiting in the winds for a Greek government desperate for aid after being eschewed by the West.

All things considered, markets could have reacted worse, and this absence of extreme disorder will encourage the creditors to gamble on Grexit.  Ten-year sovereign debt yields are unchanged in Spain, 11 basis points higher in Portugal, ten bps higher in Italy, six bps lower in Germany, five bps lower in Japan and down 3 bps in France.  Greek markets and banks remain shut.  Treasury futures point to a 7-basis point decline in the 10-year yield at the open.

Share prices in Europe have fallen 2.3% in Italy, 1.4% in Spain, 0.8% in Germany, 0.9% in France, 0.4% in Switzerland and 0.3% in Britain.  In the Pacific Rim, stocks rose 2.9% in China but fell 2.4% in South Korea, 2.1% in Japan, 1.3% in Indonesia, 1.2% in New Zealand and 1.1% in Australia and Taiwan.

West Texas Intermediate oil dived 4.4% to $54.44 per barrel.  Comex gold slid 0.4%.

The dollar’s net advance overnight on net amounts to just 0.7% against the euro, 0.6% versus the Swiss franc, 0.5% relative to the Canadian and Australian dollars, 0.2% vis-a-vis sterling and 0.1% against the yen and yuan.  The kiwi is steady.

In other news since Friday, more purchasing manager survey findings were published.

  • Hong Kong’s private PMI index rebounded 1.6 points to 49.2 in June, a three month high but the fourth straight reading below 50, which implies a contraction of activity.
  • The eurozone retail PMI fell a whole point to a 2-month low of 50.4 in June.  The French reading of 48.9 was below 50 but at a 13-month high, signifying the slowest contraction over that span.  The German retail PMI fell from an 11-month high of 55.8 in May to 54.0, a 2-month low, in June, and Italy’s retail PMI dropped 1.6 points to a 3-month low of 46.7, exerting a significant drag.
  • Germany’s construction PMI edged down 0.1 to a 5-month low of 50.7 in June.  Such had crested in March at 53.3.
  • Egypt’s non-oil PMI rose to a 6-month high of 50.2 in June from 49.9 in May and 46.8 in February.
  • The non-oil U.A.E. PMI sank to a 22-month low of 54.7 in June from 56.4 in May, 59.3 last January and 61.2 last October.
  • Saudi Arabia’s June non-oil PMI reading of 56.1 was a record low for this data series stretching back to 2009.

Japan’s index of leading economic indicators edged down 0.2 points to 106.2 in May, but the index of coincident economic indicators stole the main headline, slumping 1.8 points to 109.2 in May and prompting government officials to downgrade the COI’s assessment to “weakening” from a label of “improving since December.  The previous most recent designation of “weakening” had been in August 2012.

German industrial orders dipped 0.2% in May, but April’s increase was revised upward by 0.8 percentage points to 2.2%.  As a result, orders in April-May averaged 2.5% higher than in 1Q15, more than reversing a 1Q-over-4Q14 slide of 1.4%.  In May, domestic orders slid 0.6%, but foreign orders firmed 0.2%.

Swiss CPI deflation lessened in June.  Consumer prices fell 1.0% versus June 2014 compared to on-year declines of 1.2% in May and 1.1% in April.

New car registrations in Britain, akin to sales, were 12.9% greater in June than a year earlier.

Spanish industrial production was 3.4% higher than a year earlier in May.

A measure of investor confidence toward Euroland, the Sentix, recovered from 17.1 in June to a 2-month high of 18.5 in July.   Readings in March, April and May had been at 18.6, 20.0, and 19.6.

Australian job ads rose 1.3% in June after edging up just 0.1% in May.  Expected inflation slowed in Australia last month.

In the U.S., the ISM will report the non-manufacturing PMI survey, and the Fed’s labor conditions index also arrives today.  So does the Canadian IVEY-PMI and the Bank of Canada’s Senior Loan Officer survey.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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