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Europe – The Week Ahead: Greece And The Volcano

Courtesy of Tyler Durden

The latest from Goldman’s Erik Nielsen:

Happy Sunday,

This is not your usual weekly from Chiswick (where I understand the weather is awesome with not a cloud in the sky!) – instead you’ll find below a very short note from the road as I am making my way north (I just came through Mont Blanc) after having been stuck in beautiful Florence where I was on one of my hardship assignments when the wind changed and sent the volcano dust down over Europe bringing all air traffice to a hold.

From all the very funny emails I have received in recent days, my prize for the best one goes to Kevin Daly who suggested that when the British and Dutch called for “cash” for the IceSafe fiasco, Iceland simply misheard them, thinking they were asking for “ash”

More seriously, the two big stories in Europe are of course the planned start tomorrow, Monday, of negotiations in Athens on an IMF/EU program for Greece and the vulcano and its possible impact.

On Greece, I am not sure whether the negotiating teams from Washington and Brussels have made it to Athens, but if not things would presumably start via phone conferencing.  As I have discussed in recent weeks, the IMF is likely to ask for three components of conditionality: (1) contingency plans for the fiscal performance for this year; (2) concrete further fiscal measures for next year (and for 2012 if multi-year program); and (3) structural measures aimed at regaining competitiveness.  I continue to suspect that the Greek government will be reluctant particularly wrt (3).  But if PM Papandreou’s infamous gun is to get loaded then they’ll need agreement on all aspects, and the Europeans will have to get their political promises of EUR30bn converted into legal commitments.  The finance ministers updated each other on Friday in Madrid on their national strategies and progress.  After some early flirtation with various ideas of how to circumvent the national parliaments, I believe that most – if not all – now have concluded that they had better go through their parliaments (makes a lot of sense to me given the risks involved.)  I am not aware that anyone has received parliamentary approval yet.  Next weekend there’ll be more opportunities to talk coordination and policy stuff when they all meet in Washington DC for the IMF’s spring meetings.

And then the Volcano. Needless to say, at this early stage it is very difficult to say anything meaningful about the effect on the European economy, but here are my very preliminary thoughts (surely subject to possibly significant revisions):

First, if the disruption to air traffic is contained to a week or less, then I think the total effect will be minimal.  My guess would be that the effect on Q2 GDP would be within a rounding error (of 0.1pc) around our +0.8pc qoq forecast.

Off the top of my head, air transportation is no more than some 0.1 pc of European GDP, and one would assume that a lot of what’s been lost in the air will be made up in coming weeks.  Also, ground transportation is having a field day, as illustrated by the fact that all trains out of Florence was fully booked for the next 3 days and none of the car rental companies had cars available for the next 9 days.

In hospitality, I suspect that its also marginal so long as its contained to a week.  My hotel in Florence told me that so far their cancellations were being broadly compensated by people extending their stays (as I had to do), and restaurants and bars were busy as ever; I suspect we had seen what we wanted to see of the city so a wonderful atmosphere developed in several places with people buying drinks for each other while swapping stories of the hardship we all had to endure away from our families, friends and work! – making the bar tender very happy! 

BUT, if this things were to continue for a longer time, then it would surely start to have a significant effect.  (And, worrisome, last time it erupted it kept going for some two years!)

In other words, if disruptions run beyond a week or so, then I suspect that most people will have made their way to where they want to be by ground transportation, and a very large share of otherwise planned travels will be simply be cancelled.  As my driver just told me: “this is great for us, but if they don’t start flying again by mid-week then there will be no more tourists left in Florence and there’ll be no more work.” I suspect that hotels around Europe will feel the same pain.  The loss here will surely not be compensated by business people and tourists changing to ground transportation and video conferencing etc.

Also, production and distribution of goods usually transported by air – including “light weight, high value” stuff like many pharma products as well as fresh fruit etc – will suffer because it’ll either take substantial time to sort out their ground transportation, or it’ll be impossible all together.  (The latter probably applies more to fresh produce usually being flown into Europe from overseas.).

In the extreme scenario (at least I hope it’s extreme) in which we are still not flying by the end of the quarter I suspect that we would see a very serious knock to our Q2 GDP forecast before business conferences and vacations get rescheduled closer to home (with video links when necessary).  If so, we would see the biggest damage to GDP in Q2, followed by less severe – but still measurable – damage in following quarters until we return to normal.

Stay tuned.  I expect to be back on line from Paris tomorrow.

Erik


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