Spluttering Europe inches away from the edge

Sharemarkets are rising as Spain and Greece inch towards solutions but the greater eurozone is still spluttering with new car sales down and Germany's growth outlook falling.

The strong rise in share prices in most eurozone countries overnight masks ongoing difficulties and a still problematic outlook for economic growth in the region. Shares got a boost from news that Spain will have access to a line of credit that will help it qualify and then request bailout assistance funds, but the economic performance of the eurozone in general, and Germany in particular, remains clouded.

While ECB president Mario Draghi has said he will do "whatever it takes” to hold the eurozone together, the size of that undertaking looks to be getting bigger given the still significant economic and policy problems confronting the region.

The strongest and most dominant member of the eurozone, Germany, is struggling to sustain economic traction. The German government cut its 2013 GDP growth projection to just 1.0 per cent (down from 1.6 per cent) which follows growth of a paltry 0.8 per cent in 2012. Germany accounts for more than 20 per cent of eurozone output and has a vastly superior fiscal setting to most other member countries, which means it is the dominant force when policies relating to the bailout conditions are negotiated.

The eurozone needs a strong Germany which makes the growth downgrade from the government unwelcome.

Consistent with that soggy outlook for the German economy, the ZEW index of investor and analyst expectations, which aims to predict economic developments in Germany six months in advance, was less negative in October, rising to minus 11.5 from minus 18.2 in September. While less bad, the index is still weak, having reached 23 early in 2012 after it had been hovering around 50 during through most of 2010, before the sovereign debt fully crisis erupted in Greece, Spain and Italy. The index is still weak.

Another crack in the eurozone recovery scenario came with weak data for car sales. New car sales fell by 11 per cent in September to register a full year where every month had recorded a fall. Business and consumers are not in the mood or don’t have the capacity to buy cars at the moment, which is a further concern for the growth momentum into the end of 2012.

In this environment, there must be other factors driving the positive sentiment on European sharemarkets.

The market optimism, for now at least, seems to have been sparked by progress towards Spain getting approval for bailout funds and confirmation that the Greek government will deliver a second phase of privatisations. These asset sales will make large inroads into the level of Greek government debt.

In terms of developments in Spain, it appears that progress is being made in planning for it to access funds that will allow it to rollover its debt financing obligations. The previous tough talk from the Germans appears to have softened with the Wall Street Journal reporting that "a precautionary line of credit” for Spain was acceptable to the German policy makers. This line of credit is seen as an important stepping stone to the full bailout as it buys time for Spain to implement and deliver the fiscal measures needed to meet the full conditions of the bailout funds.

While details of the line of credit are scarce, the news was enough to drive Spanish bank stocks higher by between 4 and 7 per cent.

The basket-case Greek economy also had some relatively favourable news. The Samaras government has outlined plans for additional privatisations, a move that will have a sizable impact on Greece’s public debt level which is estimated to reach 179 per cent of GDP in 2013.

The main asset sales include oil refiner Hellenic Petroleum and the ports of Piraeus and Thessaloniki. Also on the list of asset sales are Thessaloniki Water which supplies water to the domestic economy and Larco, a nickel producing company. The government is also looking to privatise Athens Airport and a series of roads and freeways.

A large scale privatisation program is one of the conditions for Greece to qualify for financial assistance from the Troika. In the context of Greek government debt heading to around €500 billion, the revenue from the privatisations is estimated to raise €19 billion by the end of 2015 (around 6 per cent of GDP) and a total of €50 billion (just under 20 per cent of current GDP) by 2020.

All of this is the background to the European Summit which starts tomorrow. All 27 European Union leaders are expected to discuss the still problematic move for a Europe-wide banking union as well the credit line for Spain. It is inevitable that Spain will require some financial assistance as it has over €200 billion of maturing government bonds to refinance in the next years.

With the eurozone growth outlook still sluggish, it is to be hoped that the summit delivers a market friendly outcome and that the next steps towards fixing the eurozone's ills are made.

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