Greece will leave the euro-zone this autumn?

The London-based Capital Economics, which offers advice to the world’s leading investors, believes that the Greek exit from the euro-zone is inevitable despite the agreements. Leading economist of Capital Economist, Julian Jessop said in the interview he gave to Fundblog: the exit will stabilize Greece, and the situation of both the euro-zone and the European Union.
The interviewee regards the slowdown of the Chinese economic and structural shift as a significant risk, while thinks Russia cannot be saved – and the reason is its government rather than the further decrease of oil prices.
For Central-Europe, a steady economic growth and appreciation of the area’s currencies are expected. However, he is not so positive about our country’s prospects. According to Julian Jessop, Hungary’s financial appreciation is not likely to change because foreign economic and political circles think that the Hungarian monetary and fiscal policies are unpredictable, not like in the neighbouring countries; hence new investments from foreign capital are not expected, and the rate of economic growth will also drop.

Péter Zentai: How do you see the agreement between Europe and Greece?
Julian Jessop:
We do not have too much faith in it. Greece is kept in the euro-zone by political intrigue, and ignoring rational economic considerations. We think that this agreement is based on a temporary solution.

Do you still speculate Greece to leave?
We do not speculate in any field. For the last months and weeks, politics has dominated economics because stalling was in every party’s – the major countries of the European Union, the IMF, and Greece – interest. However, the directly affected and the operators of other leading economies of the world do know that Greece cannot be kept in the euro-zone for too long. Sooner or later, its stay will cause more political problems than its exit. Market operators are preparing for this, and this is what we recommend our clients seeking our advice to do.

Germany is the only major player here. For them, easing the political risk is more important than the results of economic discretions…
The leaders of Germany are divided on this matter. It is known that Minister of Finance Schäuble wants Greece to leave the zone as soon as possible. However, Merkel wants to postpone this issue because she thinks the world needs more time to contemplate the Greek exit, which is now considered extremely risky. Everything in Europe closes down, everyone goes on a holiday, but in September and October – according to our prognosis – preparations for the Greek exit will begin.

So every effort to save Greece has been in vain?
Greece will be saved by its exit, and so will the euro-zone. The euro will be stronger and more stable if the country that joined solely for political and geopolitical reasons rather than economic and financial, can finally be released and leave. Greece is not and – due to the curtailments forced upon it – not likely that it will ever be ready to keep the euro as its official currency. Greece need its own currency which can be strongly devalued and the majority of its debts can only be cancelled if it exits the zone. However, as long as it remains, it cannot expect real debt reliefs, but only further curtailments. This is the real challenge against the European stability, not keeping Greece in the zone at all costs.
Everyone will be relieved by the end of fall, when Greece – as we presume – leaves the zone.

However, this could threaten the whole European Union too…
The reason this story is so long is that politics and the economy needed time to realize: a country leaving the zone is not a tragedy, but an economic necessity. Despite all of that, Greece can remain a stable and reliable member of the Union.

Are you worried about Russia attracting Greece after its exit? This could initiate the breaking-apart of the Union, and some East-Central or Southern European countries could follow the Greek example…
This is a risk that mostly Americans are concerned about. They are the most worried about Greece, and this is why they supported Tsipras, and agreed that Germany should not pressure curtailments so much. Americans saw it more clearly than Europeans that Greece had suffered more and for longer than the United States during the world economic crisis.
However, America starts realizing too: Russia in its current weak state could not guarantee a stable alternative and a financial-economic support to Greece. Russia is crippled, but not by not the falling raw material prices, but its inability to carry out reforms, and its terrible governance – turning the country into a less impactful world political and economic player.
All in all, we tell our institutional investors and political clients that Greece leaving the euro-zone will invigorate the Greek economy, so its people can feel relieved, while still remaining a member of the European Union. This relatively is the best option for the EU, the euro-zone and Greece too.

Besides the Greek issue, which other political, economic, or geopolitical challenges do you think are the most significant?
We think that globally the Greek problem is not as important as the Chinese. Market developments will be more significantly affected by the situation of the American monetary policy too.
As for China, the main issue is that fewer and fewer people think that it is a major problem! It is not obvious that its changing market would not create problems in the country and in the world: from a gigantic industrial producer power, it turns into a services-focused ‘empire’, so the significance of local consumption is skyrocketing, while industrial production is depreciated. This is an unprecedented experiment, however, its failure could be disastrous to the political leaders. The power of the communist party, which has always operated with predictable reforms, could become threatened and this might have uncertain consequences.

How much China’s internal developments affect raw material and energy carrier prices?
In this regard, the significance of China is absolute. It would be wrong to believe that the major factor of crude oil price on the world market is the agreement with Iran. Actually, the liberalisation of Iran’s oil export next year will not push prices down as much as, for example, Iraq, who can –  due to the slow recovery of its internal situation – supply the world economy with substantially more oil than Iran. The most influential factor is that China’s oil requirement will drop dramatically.
After numerous separate conditions have appeared at the same time, we can say that raw material prices are absolutely more likely to go down than rise.
However, the probable change in the American monetary policy (Fed increasing interest-rate) will have serious effect on the dollar; its further strengthening is inevitable.

How much attention do you pay to our region?
From both geopolitical and economic views, we think that the significance of the East-Central European region is increasing. Mainly because it is geographically tied to Western Europe and it also presents the greatest sustainable economic growth in Europe.
Of course, it is noteworthy that there will be significant differences between the productivity of the countries in the region.
Our prognosis says, Poland and Romania will be able to keep up an annual 3.5-4 percent economic growth. We think that the performance of the Czech Republic and Slovakia will not be so good, but at least it will be sustainable. However, we think that Hungary is weaker than those mentioned above. Namely in Hungary, GDP growth has exclusively been ensured by one-time revenues and EU funds. However, these funds will soon dry up, while politics, including both monetary and fiscal policies are unpredictable. Far fewer investments are expected in Hungary in comparison to the other countries in the region; foreign working capital is more reluctant in an uncertain political environment. This is the factor why we do not expect credit rating agencies to improve Hungary’s position. For the next year, we predict an economic slow-down in Hungary.
However, every currencies of the region including the forint – since East-Central Europe overall grows at a higher rate than Western Europe – will likely to be appreciated against the euro for the coming years. In case of the forint, we think that it is reasonable to calculate with 300 forints per euro from the beginning of the next year.

Original date of Hungarian publication: July 21, 2015