Europe’s economy faces a number of risks, but there are signs the Greek crisis is now nearing a crunch point. Already low economic growth could be adversely effected, something that could endanger Europe’s car market recovery, says Dave Leggett
The game of brinkmanship involving Greece’s government and its major creditors continues. It’s been a familiar pattern. Greece talks tough and then makes a repayment to creditors who say that the hard work is ahead, more talks are scheduled. The short-term fixes mean Europe’s single currency area stays intact. EU Finance Ministers breathe a sigh of relief, European money markets stay calm and it’s business as usual for Europe’s major companies – like those in the auto industry – who are grateful for stability and any sort of economic growth across a region that is only slowly recovering from recession (much more slowly than the US).
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Except that last week a scheduled debt servicing repayment was missed by Greece. That sounded serious – and it is – but it’s not quite as serious as it at first sounds because Greece has been allowed by its bailout creditors to roll some repayments together into a bigger repayment at the end of the month. We could now be getting to the crunch point. Are Greece’s anti-austerity government and its creditors still far apart on a comprehensive deal that would involve an economic reform package as well as a sustainable looking repayments schedule in return for loans and ample liquidity for the Greek government for the next few years? Yes, but neither side actually wants the potentially disruptive scenario of Greece leaving the euro currency.
A deal that somehow retains the status quo is still preferable – on all sides – to the uncertainties that would follow a so-called ‘Grexit’ from the eurozone. Expect more hard negotiating over the next few weeks, but with the growing realisation that the gap really cannot be bridged with a fudge, this time. Someone has got to, effectively, ‘give in’. It doesn’t look like it will be the creditors and some of the vibes coming out of Frankfurt and Berlin suggest that if Greece cannot stomach bailout conditions and leaves, then that is a situation that can be ‘managed’. The Greek government may be forced to go to its electorate with the stark choice: In or out, austerity or less austerity, you decide. A higher probability of that kind of scenario did cause jitters in Europe’s stock markets last week. If Greece does leave the euro currency it would certainly generate considerable uncertainties in money markets beyond Greece’s borders and could upset Europe’s fragile economic recovery.
Europe’s car industry is watching. For now, the gradual European car market recovery appears to be on track. May’s numbers look poor, but there were fewer selling days. The figures for recent months taken together point to recovery continuing this year. Nevertheless, competitive conditions remain very tough and the German car market is being kept up by manufacturer actions to push volume. Anything that could further upset the overall economic picture or cause confidence to ebb would put the recovery back. And that would not be good news for the volume OEMs with major European operations who are hoping for the market ‘tide’ to rise over the next few years.
Europe’s car market, remember, remains well below the last peak in 2007. Across the continent, many car owners have stubbornly stayed out of the car market for a long time now. Some national markets may never get back to where they were, such is the extent of the economic shock and restructuring over the past five years. There’s more to come and it’s not just Greece that faces prolonged economic belt-tightening. In the auto industry uncomfortable questions inevitably remain over the need for possible further restructuring or industrial consolidation. For example, could European operations’ breakeven be put back (a question for both GM and Ford)? Are there further opportunities to collaborate with others and cut costs (perhaps a question for Carlos Tavares at PSA)?
The questions become more pressing if we see Europe’s economy entering a new period of turbulence that would reverse some of the recent better news and genuine signs of improvement. The possibility of prolonged price deflation and a Japan-style economic stagnation that so worries the ECB becomes more likely. Greece is staring into a hole. Leaving the euro might mean its economy could properly adjust in the long-term but there would be unavoidable short-term pain. Europe’s economy remains in a vulnerable place (Ukraine and Russia is also an on-going headache). Brinkmanship is a dangerous game.
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Is there more auto industry consolidation ahead? OEMs and suppliers? Yes.
