Fisher Investments Editorial Staff
Geopolitics

Easing On Down the Eurozone Road

By, 09/30/2011

Thursday, Germany’s lower house of parliament easily approved the EFSF expansion proposed in July. Finland, too, fell in line with the proposed expansion just the day before, backing it without (as many had feared) explicitly demanding collateral from borrowing countries—although they left the door open to further consideration.

Many had presumed the German vote would be tight, with Chancellor Merkel’s CDU/CSU coalition potentially fracturing and forcing her to rely on opposition parties to see the proposal through. But the proposal managed to clear with a razor-thin absolute majority in her own coalition with 315 votes, while the overall vote was overwhelmingly in favor of the plan (523 for, 85 against and 3 abstaining)—a comfortable margin of victory in the Bundestag. The bill now goes to the upper house (Bundesrat) Friday for a non-binding vote. However, it would be unlikely for the Bundesrat to vote asunder from coalition lines in the Bundestag. Thus, Germany makes 12 of 17 eurozone members necessary to effectuate the expanded EFSF, which enlarges the facility’s total size from €440 billion to €780 billion (and increases Germany’s total commitment to €211 billion from €123 billion). Likewise, it grants the EFSF the power to buy bonds in the secondary market, support bank recapitalizations and provide short-term liquidity to financial institutions in need. While five more countries (Slovakia, Malta, the Netherlands, Austria and Estonia) still need to approve the expansion, most are scheduled to vote within the next week. 

The German and Finnish approvals represent an incremental positive for the eurozone, which has in recent weeks experienced greater rancor amid heightened tensions over Greek austerity measures. Likewise, their approvals reflect what we’ve long held: European politicians, more than ever, are willing to do what it takes to maintain the union—at least for the near to mid-term.

Officials in the PIIGS countries (though, they’re not all in the same boat) have also been doing their part this week. Greek officials stood by fresh austerity measures in the face of renewed protests in Athens as inspectors from the troika (European Commission, IMF and ECB) arrived to resume talks to approve Greece’s next tranche of aid.  In Italy, officials announced plans to initiate new austerity measures and make strides toward a more business-friendly nation. For example, Italy’s finance minster is reported to have met with bankers and developers Thursday to review the possibility of privatizing various public assets or extracting more value from them. Documents published by the Finance Ministry reported the country could raise as much as €40 billion in the short term by selling state-owned real estate and carbon permits. The report also revealed the average yield on state-owned real estate has been just 0.1% annually, whereas similar assets in private hands net nearly 6%. Likewise, interest rates on concessions (think radio frequencies, etc.) net the government merely 0.5% currently, whereas similar privately controlled concessions net up to 6.3%. Spain announced its federal budget deficit fell year-over-year in 2011 through August. (Of course, there are still four months remaining and the matter of regional government deficits due to Spain’s decentralized government—but the improvement is notable.)

There’s still much work to be done to right the PIIGS and eurozone. But steps taken this week by eurozone officials in expanding the EFSF, increasing privatization and standing by austerity measures are solid moves towards backstopping the euro and reforming economies where needed.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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