Europe-Greece accord confirms fading primacy of austerity

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Mikio Kumada (pictured), global strategist at LGT Capital Partners comments on the implications of the recent agreement between Greece and the Troika. 

Europe has agreed to continue to provide heavily indebted Greece with cheap loans, primarily to service existing obligations and to safeguard the financial standing of its banks. At the same time, Greece’s new left-right coalition was also granted a modest relaxation of the associated fiscal austerity on social grounds, as well as a conditional say in reforming its own country.

At the margin, the agreement is growth-friendly for Europe, and in line with our expectations. The international media has extensively covered the tense talks between the Eurozone’s institutions and the newly-elected Greek government’s representatives from a rather colorful and excited angle.

Nevertheless, investors should take the sensationalist headlines and the widespread instant insights about the presumed winners and losers of the negotiations with a pinch of salt – or risk missing the forest for the trees. Given the extraordinarily urgent and unusual political circumstances, the Athenian and European leaderships have not only behaved pretty much as we expected, but they were able to agree on the next steps rather quickly, and efficiently.

That is a positive development for the financial markets. Softening of austerity dogma has been effectively reaffirmed In addition, the agreement reaffirms that the hitherto predominant austerity dogma in European economic policy-making continues to gradually fade in favor of an increasing focus on growth and reform.

For the creditor nations, Friday’s accord means that the core of the existing (and nearly-completed) Greek bailout will remain unchanged, and that reforms that have been already undertaken cannot be rolled back unilaterally. Greece has also won a say in devising and implementing the program – i.e. it will be forwarding proposals for review and acceptance. Finally, under these conditions, Athens was allowed to relax the stringent fiscal targets. Greece’s involvement in the reform process represents an opportunity

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