Fisher Investments Editorial Staff
Geopolitics, Media Hype/Myths, Market Risks

Same Greek Dance, Different Italian Song

By, 02/10/2012

As we discussed yesterday, Greece’s latest round of negotiations went down to the wire. Talk was pension benefit reforms were the last sticking point—and a tough one at that. But by Thursday, Greek Prime Minister Lucas Papdemos announced officials from all three major Greek parties struck a deal for stricter austerity measures and a 70% voluntary private sector debt haircut—two key steps paving the way for Greece’s second bailout package. Pragmatism! Demonstrated.

Details of the plan are still forthcoming, and several approvals are necessary before Greece receives its bailout—the most important approval is eurozone finance ministers’ review to determine if it meets the troika’s mandate. Similarly, the Hellenic Parliament votes on the agreement Sunday. There may be additional amendments between now and then, but overall, Greek officials have again displayed the wherewithal to do what’s necessary to avoid a Greek default or disorderly exit from the euro. (With much political wrangling of course—a dance we’re all familiar with after three years of the same eurozone woes.)

Meanwhile, across the Mediterranean, Italian Prime Minister Mario Monti started singing a new song—announcing a new proposal to stoke growth across Europe and move beyond the region’s current focus on austerity and deficit reduction. Monti’s proposal seeks to tighten the eurozone’s fiscal union by opening member states’ national industries to encourage economic growth and competition. On the surface, a sensible move. However, his proposal also seeks to give the European Commission—the EU’s governing body—greater power to sanction member states for violations without going through the time-consuming European Court of Justice, as is currently required.

The idea of enabling the European Commission to swiftly dole out sanction for those countries not abiding by the tenets of the single-market eurozone seems fine enough … in theory. However, history is rife with examples of well-intentioned changes in regulation or regulatory structures that subsequently create unintended and unforeseen consequences. It’s not inconceivable that the commission begin enforcing rules potentially hindering competitiveness in the name of leveling the playing field across Europe. For example, the UK flatly (and sensibly) refused to sign the European Union’s recent fiscal treaty on the grounds language therein would require the UK levy a financial transactions tax on its large Financial sector—a poor idea, in our view. Similarly, should the commission receive this power boost, Ireland’s favorable corporate tax climate—one of the lowest in the developed world—could come under pressure. These measures would reduce the relative competitiveness of the UK and Ireland to that of their European peers, instead of enhancing the overall competitiveness of the continent to encourage growth—the plan’s stated goal.

Thus far, Monti’s “growth pact” is nothing more than a proposal. And similar to the fiscal pact passed late last month, any eurozone-wide growth pact is likely to involve significant political wrestling in the weeks and months (and potentially years) ahead. This much seems clear: We’ve seen planfully planned plan after plan—and proposals for yet more plans over the last three years. But above and beyond all else, what this shows is that despite politicking, there remains ample willingness on all sides to forestall a sudden and disorderly euro breakup.

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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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