European investors are preparing for one of the most crucial weeks in the Eurozone΄s staggering recovery as the European Central Bank mulls taking its final and most decisive monetary policy step and Greek voters mull electing lawmakers who may opt to take an equally decisive step towards exiting the single currency.
According to MNI, Greece΄s voters will head to the polls Sunday January 25 – and for the third time in five years – after snap elections were called following the failure of Prime Minister Antonis Samaras to gain enough support in parliament for his favoured Presidential candidate.
At present, the leftist Syriza party is holding on to a slim lead in national opinion polls, and could take as much as 31% in next Sunday΄s vote, well ahead of Samaras΄ New Democracy Party. However, Syrzia needs 151 seats in Greece΄s 300-seat chamber to hold an absolute government majority.
Under Greek electoral law, the victorious party receives a 50-seat boost, but even that may not be enough to vault Syriza and its firebrand leader, Alexis Tsipras, over the 150 seat threshold and he΄ll be left seeking political partners to form a coalition government, weakening, to some degree, the positions he can take in negotiations with Greece΄s international creditors.
European leaders, meanwhile, have been careful not to interfere with Greece΄s domestic politics in the election run-up, even as they brief journalists of a certain “sanguine” attitude towards the country΄s exit from the currency union, if it were to occur.
That may be based on fact – mechanisms such as the ESM and the Banking Union make the Eurozone a much more resilient economy than in 2012 – or bravado – ΄Grexit΄ contagion is as unpredictable today as it was three years ago and sovereign bond yields have really one direction they can possibly go at this stage.
Another backstop in place today that makes the Eurozone more fortressed against a Grexit is the ECB΄s Outright Monetary Transactions Programme (OMT), the result of President Mario Draghi΄s “whatever it takes” pledge in July 2012.
However, that very programme will be at the centre of a critical legal decision later this week (Wednesday 0930 CET) at the European Court of Justice in Luxembourg. A case brought by German investors in 2013 challenged the legal basis of OMT and was eventually heard by the country΄s Constitutional Court, which referred the compliant to the ECJ. In essence, the investors argued the OMT amounts to state-level financing through the central bank – prohibited under European law – and demanded that the Bundesbank be excluded from participation.
The ECJ will give its opinion on the case and refer this back to the German Constitutional Court. Any hint of support for the legal challenge will, of course, create significant doubts over the future of the programme and, by extension, the legal basis for which quantitative easing can be justified under the ECB΄s mandate and charter.
This, of course, comes just eight days before the ECB΄s Governing Council meets in Frankfurt as speculation mounts that it΄s preparing to announce an expansion of its asset purchase programme to include government bonds. Many questions remain as to the size, timing and style such a QE programme may take, particularly given the political developments in Greece.
This questions will surely form a large part of the public comments of the various ECB speakers due to make speeches this week, including Bundesbank President Jens Weidmann, whose QE reservations are well-established, during his Thursday appearance in the Bavarian city of Ulm (18:30 CET).
Earlier that day (16:15 CET), Executive Board member Peter Praet will also likely address that topic – and the region΄s increasing chances of slipping into deflation – when the Bank΄s chief economist speaks in Vallendar, a small German city just east of Koblenz. Other speakers of note during the week include Governing Council member Ewald Nowotny (Innsbruck Wednesday at 16:30 CET).
There΄s also a decent slate of economic data to navigate next week, including key Eurozone industrial production figures for November (Wednesday at 11:00 CET) and final December inflation figures on Friday (11:00 CET).
The former will be of interest given the mixed set of data we΄re seeing from both France and Germany, where domestic confidence and demand appears to be improving even as manufacturing strength erodes. That said, input costs are expected to slump dramatically over the coming months as the collapse in global oil prices, which accelerated in the final weeks of November, kicks-in to full effect from December onwards.
Inflation figures will also be of interest given that the -0.2% flash estimate was the first negative assessment for Eurozone consumer prices since September of 2009. A confirmation of the flash estimate, alongside gradually slipping inflation expectations, could provide the final pretext for the Governing Council΄s January 22 decision.