Slovakia has voted against expanding the European Financial Stability Facility (EFSF).
They were the last of the 17 countries in the eurozone waiting to ratify it. And they still haven’t.
Unanimous approval of new powers for the bail-out fund is needed. If not, then, as Lex in the FT puts it, “the fate of the euro is at stake”.
So is the euro about to collapse? No. This is one of those minor hitches where a spot of local democracy gets in the way of the grand European project. The EFSF will almost certainly be ratified later this week.
But it does suggest that anyone who thinks this is all going to be wrapped up and dealt with by the end of the month will be sorely disappointed…
Slovakia won’t sink the euro
The EFSF is Europe’s big bail-out fund. It currently has financial firepower of €440bn. The ultimate plan is to turn it into a mega-big bail-out fund, with closer to €2 trillion in ammunition. The idea then is that no one will have the temerity to bet against the eurozone surviving, because even the likes of Spain or Italy could be saved with that kind of money.
However, that €2 trillion is a while off yet. Europe’s leaders still haven’t figured out quite how to gear the EFSF up to those levels. And in the meantime, some changes have to be made to the EFSF. At the moment, the EFSF sells bonds. These bonds are guaranteed by eurozone member states. The money raised by those bonds is used to fund the various rescue packages.
The changes will enable the EFSF to buy the debt of various troubled countries and banks directly. That’s a crucial step between the format of the EFSF just now, and the powers it will need to have to become the mega-big bail-out fund mentioned above.
The Slovaks were the last in the eurozone to sign off on it. And rather than pass it with flying colours, they’ve voted it down. Why?
I’m no expert on Slovakian politics (I hope you’ll forgive me). But the Slovaks are keen to be ‘good’ Europeans. After all, they only just joined in 2009, and they worked hard to get to that stage. But they’re none too pleased about having to bail out Greece.
The ‘undeserving poor’ of the eurozone
There’s a general perception of Greece as being the ‘undeserving poor’ of the eurozone. While Portugal and Ireland were unlucky, the Greeks have only themselves to blame because they never pay tax and their state is ludicrously generous.
I don’t know how much truth there is in that view (although US writer Michael Lewis’s articles in Vanity Fair on the topic do seem to back it up). But you can sympathise with the Slovaks. They’re the second-poorest nation in the eurozone. The average wage is below that in Greece. Why should they be funding a bail-out?
However, for all that, it doesn’t look as though Slovakia will hold up the process for long. The real problem in this case is that prime minister Iveta Radicova tied the vote on the EFSF to a no-confidence vote in her government. So the opposition voted against it, largely to throw her out of the job.
Petr Just, a political scientist in Prague, told Bloomberg: “It’s clear that there’s a political will in Slovakia to approve the fund, however it was used as a power tool amid the coalition crisis and the whole of Europe was taken hostage”.
In other words, local politics got in the way of the ‘bigger picture’.
So what does this mean? Analysts are nonchalantly saying that the vote will pass sometime this week. And it probably will. But the same analysts expected the vote to pass yesterday.
The eurozone isn’t built for speed
And this is the crux of the matter. Remember the 2008 crisis? Remember all those melodramatic stories about Hank Paulson getting down on one knee and begging politicians to pass the US bail-out bill? All manner of weird concessions and tax breaks got added to that bill as bribes to get people to vote it through.
That was just one country.
Europe has to do the same thing, only with 17 different countries. And that’s just including the ones that are actually in the eurozone. On top of that you’ve got the banks, who have their own agendas. And of course, the voters, who may eventually get sick of being largely overlooked in this whole process.
I’m not saying the euro will collapse. It’s one possible outcome. Indeed, in the long run, it seems more likely than not, given historical precedent. But it might survive this particular crisis (for more on how this might happen, see my colleague Merryn Somerset Webb’s latest blog: The answer to the Eurozone crisis – theft). Certainly, a lot of people with a lot of power would rather see it intact than in splinters.
However, even if it does make it through, I suspect it will be a lot weaker by the end of that process than it is now. If you fancy spread betting, you can take a punt on the currency directly. The euro has been creeping higher against the US dollar over the last few days, so may be ripe for a fall – just watch out for the Federal Reserve minutes tonight, which could hint at more quantitative easing. Sign up for our free MoneyWeek Trader email to find out more about how to go about it.
As for the rest of your investments – with plenty of scares still to come in the eurozone, it’s still best to stay defensive. However, with European stocks getting steadily cheaper, we’ll be getting some experts in shortly for a chat about what looks good in the region – we’ll report back in MoneyWeek magazine in an upcoming issue. If you’re not already a subscriber, subscribe to MoneyWeek magazine.
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