Greece, Spain or UK: Which Holds Greatest Risk for the EU?

Hi, Jose. 

Jose Garcia Zarate: Hello. 

Cook: So, January, as I said, is going to be a really important month. We've got the Greek election on the 25th of January, but before that we've actually got an announcement from the ECB. So, what are we expecting come January the 22nd when the ECB comes to market? 

Zarate: I think it's pretty much assumed that the ECB is going to announce some sort of QE programme. So, what we are waiting for at the moment is to see the amount and that's basically it. 

Cook: We've heard rumours of sort of EUR 500 billion or even EUR 1 trillion being released by the ECB. When they do come to make that announcement about Europe QE, almost irrelevant of the amount what would be the potential impact on stock markets? 

Zarate: It very much depends as to whether the market thinks that it is going to be enough. I mean, the objective of the ECB is to increase the balance sheet to about EUR 1 trillion. So, whether the market – if they come up and say, okay, we're going to do EUR 500 billion on Europe QE, the market might take the view that that's not going to be enough. But that could be a knee-jerk reaction. Markets tend to react initially sometimes negatively and then think about it and see the positive side of things – it is premature. But at least the positive in all this situation is that Europe QE is coming. 

Cook: So, just a few days after that of course we've got the Greek election and now headlines are filled with ideas of whether there is going to be a Greek exit or ‘Grexit’, as it's called, from the euro. What do you think we should be looking for come the 25th of January? 

Zarate: Well, this is a very interesting situation because I don't think that the Greeks have the same kind of leverage as they did two years ago, in terms of negotiating with the European partners. The eurozone is not in the best of states by any stretch of the imagine, but there has been quite a few improvements in the governance, particularly on the side of the monetary policy, and this is very important. 

Now, we've got a central bank that is fully determined to protect the currency. That was not the case two, three years ago and that's why the Greek situation, two, three years ago was seen as a systemic risk. Now, the Greek situation is more of a national risk, if you want to put it that way because, as I said, the central bank, the European Central Bank, is in a much more powerful position. So, we'll have to wait and see because, as I said, the Greek government – if as everybody is assuming the left-wing party is going to become the winner of the election – I don't think they are going to have enough bargaining power this time around. 

Cook: So, it may feel like déjà vu in terms of some of the headlines that we are seeing in the press are the same as they were two, three years ago, but the situation is actually different. 

Zarate: I think the situation has changed. I mean, it's very nuanced but those nuances are very, very important and at the end of the day, it depends on whether the Greeks feel that they've got the power to bring the whole eurozone project to collapse. And I don't think that's the case this time around; it was two or three years ago. I don't think it is now. 

Cook: Well, there are some reasons for optimism then. But we're talking about some very short-term events, I mean, these are coming in just a few weeks' time. Longer term what other kind of focal points are there for the eurozone? 

Zarate: Well, obviously, one is going to be whether QE is going to help reflate the eurozone economy, not necessarily in terms of prices because we know that oil prices are coming down and obviously that's a tough call in terms of the inflationary dynamics at the moment. But the expectation long-term, we would need to see the eurozone recovery actually becoming a sustained recovery. That's one thing. 

And then there is a political risk much bigger than Greece, I think, in the long term which is actually Spain. Spain is due to hold a general election at the end of the year and very similarly to the situation in Greece there is a sort of radical new left-wing party making very substantial inroads and we will see what happens there. But I mean, the outcome of the Greek situation in the coming months may determine whether Spain lurches to the left or decides to retain the status quo. 

Cook: And of course, mixed with that, I mean the UK isn't part of the eurozone but we've got our own election in May, so it's going to be a very politics-heavy year for everyone involved. 

Zarate: I think the UK election is extremely exciting. I mean, it's not a question of whether you're going to have a coalition government. I think that's pretty much a given, or that's assumed actually, it’s whether it's going to be Conservative-led government or a Labour-led government. The Scottish situation is tremendously complex because the SNP might actually end up eating up Labour in Scotland. So, it's all up in the air and I don't think – it is exciting in terms of bets, but I don't think that the general public in the UK are terribly excited by any of the politicians to put it mildly, quite frankly. 

Cook: Of course, the one thing we know that markets hate kind of almost more than anything is uncertainty. So, it is going to be, I guess, a situation very much of wait-and-see as these various chapters unfold throughout the year. 

Zarate: I would only say that from my point of view as a non-UK citizen living in the UK, probably if you end up with a Conservative-led government then the outside risk of ‘Brexit’, i.e., the UK leaving the European Union would increase. If you end up with a Labour-led coalition, perhaps that outside risk would diminish and that's perhaps from the point of view of a pragmatic investor what they might be focusing on really. 

Cook: Well, Jose, thanks very much for explaining that in such detail for us. 

Zarate: Thank you. 

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.