There is neither deflation nor inflation

christoph-weilGermany waives a part of the Greek debts, and extends the deadlines of a large proportion of the remaining debts. This is what Christoph Weil, senior economist of Commerzbank, tells us and adds: it would be a political suicide for the German governing elite if they let Greece leave the euro-zone; however, he believes, it is very unlikely scenario anyway.

He understands the unsettling decision of the Swiss central bank, because this way, decision makers in Bern evaded a more serious financial and economic turmoil – just in time.  The Swiss decision made it clear how uncertain the situation of the euro is, since it has weakened not only against the frank and the dollar, but also against every other relevant currency. The expected new quantitative easing programme of ECB is unreasonable, according to the senior economist of Commerzbank, and he also sees no risk of deflation in the euro-zone.

Péter Zentai: Do you share the opinion of your German and other foreign economist and banker colleagues that it was an irresponsible act from the management of the Swiss National Bank when they decided to cut the three-year-long bond between the Swiss franc and the euro?

Christoph Weil: I would rather assume that the management of the Swiss central bank anticipated the economic and foreign exchange market storms for the next period, or even for this week. It launched developments that would have happened later anyway, but in an accumulated, more severe manner. I think, decision makers believed they pull out a ‘venomous fang’ – just in time.

Are you implying that the euro would have weakened this week anyway, because the announcement by ECB, expected on Thursday, on the stimulation of the government bond buying programme is surrounded by uncertainties?
I am, and also I refer to the consequences of the Greek elections next Sunday, the strengthening of the fear of deflation.

After the Swiss decision, it has become clear: markets have unveiled how vulnerable the euro is, because it has weakened not only against the franc and the dollar, but also against every other relevant currency, it has declined significantly even against the Brazilian currency.

Compared to the euro-zone, Switzerland is in a better financial and economic situation, so pegging the franc to the risk-exposed euro has become untenable sooner, than we expected in the last 2-3 years. Probably, the managers of the Swiss central bank thought ‘the sooner we get over the drama, the better. If we deal with the losses now, they can be compensated; later they would become unmanageable.’ So, the later the Swiss had acted, the greater the losses of Switzerland and the foreign exchange, stock, and bond markets would have been. And, indirectly, other national economies as well would have suffered losses.

What can we expect from launch of ECB’s great bond purchase programme, possibly announced this week?
It opposes contracts relevant to ECB. The sole tangible aim of ECB was nothing but to weaken the euro. It has happened and the Swiss central bank has contributed a lot to it. I do not see why Europe has to follow the QE of the American central bank.

With this, Fed has largely contributed to the boosting of American economy…
The economy of the United States launched earlier. Prior to the QE, numerous macrodata supported the strengthening of GDP dynamics, the growing number of jobs, increasing house sales, and rising real estate prices. However, the QE (quantitative easing, flooding the economy with cheap money, printed in large quantity) significantly weakened the dollar for a while. This favoured the American export.

And the European QE will favour european exporters.
German corporations will definitely profit; better than other euro-zone economies, because their exports are directed within the euro-zone. However, Germany has a much more significant presence in the American, Chinese, Japanese, Latin American , and eastern European markets. This is the reason behind the launching of DAX (german stock market index). The prospects of the conjunctural situation, regarding the whole euro-zone – independently from the weakening of the euro – are not favourable. We think that this year the average of GDP growth will not exceed 0.8%. Here, in Germany, we predict it to be a bit more dynamic. However, we warn everyone not to link this solely to the weakening of the euro. The situation of Germany is better for other reasons, for example, we did not let a real estate bubble develop. We do not have an overheated real estate market; the price rises have been manageable for years. Neither the buyers and investors nor the banks got involved in inextricable lending complications, which caused drama in other places, particularly in Spain.

As for the unemployment, it is not decreasing significantly in most of the euro-zone countries.

In our opinion, that the numerous artificial and political debate triggering interventions which are aimed to boost the conjunctural situation, will not make wonders. We, at Commerzbank, warn people that it comes with many potential risks if the euro-zone countries are planning to set up an artificially weakened euro in the long term.

Despite the weakening euro, the economic recovery and its dynamics seem to be moderate. Its ripening should be handled with patience. And it takes time.

If this forced ECB intervention does not take place, Europe will definitely fall into deflation…
I do not agree with Mr. Draghi, president of the ECB or with anyone who thinks Europe is in danger of deflation.

There is simply no inflation, because energy prices are low and they are still decreasing. However, consumers welcome it, because they will have more money left to spend on other goods. Low prices or negative inflation will not hinder economic growth. During the 90s there was a deflation in Japan; however, GDP per capita growth rate was not lower than the American. The euro zone is light-years away from a spiral-like state of deflation – when consumers postpone their purchases and fund-holders postpone their investments, because they expect further decrease of prices.

The uncertainty surrounding the euro is likely to be interwoven with the Greek situation. What are you expecting at Commerzbank? Would Germany allow Greece to leave the zone? The german Minister of Finance did imply that…
It is almost impossible for Greece to leave. It would also be a distinct issue for Germany, because the Chancellor could not explain why she let hundreds of billions euros they have been lending to Greece be lost. By Greece leaving, or simply by announcing it is incapable of paying, German taxpayers would have to give up on a significant amount of money. It would count as a political suicide for the German elite if they agreed to everything, because forces supporting the disassembly of the European Union would gain power to be reckoned with.

Otherwise, the Greek party which is likely to win the elections, Syriza, and the majority of the Greek people have no intention of leaving the euro-zone.

Do you, at Commerzbank, believe it is probably that the German lenders and the new Greek government will come to a compromise?
Greece has compiled many debts; however this problem can be handled practically. In the next decade, Athens will not have to pay interest on the 150 billion-euro European financial rescue package. These are 30 years old loans!

Furthermore, Greece’s budget and its balance of payments have been positive; and the euro-zone’s presidents of finance agreed on that if Athens can stabilise a general government surplus, a portion of debts can be waived. There is no doubt that the Syriza government will play this card.

Therefore, we say that there will be a compromise with Greece which will include a certain level of waive of debts; furthermore the loan maturity date of the European financial rescue package will likely to be extended from 30 years – maybe to 50 years.