Survey: UK to stay in EU, Greece to stay in eurozone near-term
The over-riding consensus amongst portfolio managers, analysts and finance specialists recently surveyed is that the UK will remain within the European Union (EU) in years to come.
Perhaps unsurprisingly respondents are less confident about whether Greece will remain within the eurozone. While 63% think Greece will still have the euro in three months time, only 35% think this will be the case in three years. This suggests a majority expect a deal between Greece and its creditors – a view reinforced by recent developments – but that this is only a short-term solution to a longer-term problem.
I tend to agree with this distribution of probabilities which I do not think are fully priced into the sterling and euro exchange rates. Moreover, I see a risk that the time lag between the US Fed and Bank of England hiking rates is shorter than the six months currently priced in. I therefore remain bullish GBP/EUR medium-term.
The survey consisted of two sets of questions and was open from 8th July (12:00) to 11th July (12:00). Respondents could chose to skip one or more questions. 72 respondents filled in the survey, of which 20% are portfolio managers, 18% analysts/strategists with the remainder being finance and industry specialists. Please see Appendix for complete survey data. Thank you to all who responded to this survey.
Question 1: Do you expect the United Kingdom to still be a member of the European Union (EU) in 18 months, 3 years and 5 years?
90% of total respondents (94% of respondents with a view) forecast the UK to still be in the EU in 18 months time (see Figure 1). The latter ratio drops slightly to 87% when the time horizon stretches to three years. Perhaps unsurprisingly, 18% of respondents do not have view on whether the UK will still be in the EU in five years time (i.e. the end of the current parliament). Of the 59 respondents who do have a view, 83% forecast the UK staying in the EU.
Figure 1: An overwhelming majority expect UK to remain in EU in near and long-term
Note: Number of respondents who do not have a view is 3, 4 and 13, respectively.
Prime Minister Cameron has promised a referendum on the UK’s membership to the EU before end-2017. My core scenario is that he will secure the “yes” vote which he has started campaigning for, although the ongoing Greek crisis is a reminder of how intra EU negotiations can be complex, emotional and acquire an unpredictable life of their own.
Cameron’s initial discussions with key trading partners to reform the EU and ultimately give the UK a greater degree of autonomy in decision-making, including on immigration, suggest there is some scope for negotiation. The UK economy has performed well and the government committed to further cutting the fiscal deficit. This is likely to resonate with the likes of German Chancellor Merkel at a time when the Greek debt crisis is threatening the very fabric of the eurozone. There is an argument to be made that Germany and France cannot afford to lose the UK.
Furthermore, with UK growth robust and the labour market further improving, a reasonably content electorate is less likely to look for people or institutions to blame outside of the UK’s frontiers. Prime Minister Cameron will be hoping that the UK economy is in full swing by the time of the referendum.
Finally, the recent “yes” vote in Scotland’s referendum on UK membership suggests we should not undermine the collective desire to be part of a union. Incidentally, this is probably why in the recent Greek referendum, the government asked the electorate whether it supported austerity measures (an overwhelming “no”) and not whether it wanted to remain within the euro (which based on polls would have likely yielded a “yes”).
Question 2: Do you expect Greece to still be a member of the European common currency area (eurozone) in 3 months, 12 months and 3 years?
61% of total respondents (63% of respondents with a view) forecast Greece to still be in the eurozone in three months time (see Figure 2). But the latter ratio drops sharply to 44% and 35%, respectively, when the time horizon stretches to 12 months and three years. The survey closed on Saturday, before Greece and its creditors announced on Monday morning that the outline of a new bailout package had been reached. One could therefore argue that the ratio of respondents expecting Greece to stay in the eurozone at least in the near-term would be a little higher today. However, the next few days remain fraught with risk.
The Troika and Prime Minister Tsipras have agreed that there is a basis for an agreement on a new bailout package, broadly in line with my core scenario (see Fifty Shades of Greece, 12 February 2015). The new three-year bailout package is reportedly worth €82-86bn and includes improved repayment terms on some of its debt but not outright debt forgiveness.
In exchange, the Syriza government has agreed to sweeping structural reform over and beyond the measures which it rejected in recent months and which the Greek electorate voted down at the 5th July referendum. These include i) automatic spending cuts if fiscal targets, including a primary surplus of 3.5% of GDP by 2018, are missed, ii) pensions cuts, iii) public-sector layoffs, iv) an increase in VAT, v) Sunday retail trading, and vi) perhaps most controversially placing €50bn of state assets (25% of GDP) into a privatisation fund based in Athens but administered by the European Commission and ECB. These assets are to be sold over time to repay debt and recapitalise banks.
Figure 2: Only a third of respondents expect Greece to be a eurozone member in three years
Note: Number of respondents who do not have a view is 2, 2 and 6, respectively.
Procedural and implementation risks
The breadth of demands which Tsipras agreed to raises the risk that the Greek parliament votes them down in tomorrow’s session, although this is not my expectation. Other EU countries, including Germany, also need to approve the package in parliamentary votes.
Time is of the essence as Greece has a €3.5bn ECB loan maturing on 20 July, €2bn in late payments to the IMF and a further €5bn in maturities in August. The government may be able to draw about €2-3bn from the profits the ECB made on Greek bonds – profits which are part of the €7.2bn which Tsipras has been negotiating to access for months. But that would still leave the Greek government short about €8bn and there is talk of Greece accessing the technically-defunct European Financial Stability Fund (EFSF) to plug the shortfall – which has run into opposition from the UK.
Even if parliamentary approval is given and these near-term financial hurdles are cleared, the risk of implementation slippage remains high particularly given the parlous state of the Greek economy. This would explain why only a third of survey respondents expect Greece to be part of the eurozone in three years time. The economic progress which the Greek government was making prior the January elections and the slow economic turnaround in Portugal, Spain and Ireland offer hope.
Question 1: Do you expect the United Kingdom to still be a member of the European Union (EU) in:
Question 2: Do you expect Greece to still be a member of the European common currency area (eurozone) in:
Olivier Desbarres currently works as an independent commentator on G10 and Emerging Markets. He has over 15 years’ experience with two of the world’s largest investment banks as an emerging markets economist, rates and currency strategist.