Fisher Investments Editorial Staff
Geopolitics, Market Risks, Developed Markets

Vaguely Inconclusive

By, 02/08/2011

Story Highlights:

  • The EU held an economic summit meeting last week to discuss France and Germany's "competitiveness pact."
  • Given their different situations, EU countries were opposed to the pact's "one-size-fits-all" approach.
  • More summits are scheduled for March, but results could be as inconclusive as last week's due to similar disagreements—and subsequent uncertainty may add some volatility to this year's stock markets.

 

Last week, the EU conducted an economic summit meeting. And well they should. It appears there could be more PIIGS bailouts on the way, and the eurozone still has no permanent resolution for dealing with fiscally weaker members. One might have expected the chief topic at the summit to have been how to expand the size and scope of the European Financial Stability Facility (EFSF—a €440 billion special purpose vehicle created in May 2010 to back weaker eurozone economies). Instead, in return for expanding the EFSF, Germany and France put forth a "competitiveness pact."

The "competitiveness pact" attempts to further unify economic policies within the eurozone and possibly the greater EU and includes proposals to de-index wages, harmonize corporate and other taxes across EU countries, establish national bank resolution systems and national debt brakes, and raise retirement ages. Germany and France, the eurozone's anchor economies, aren't thrilled to keep fiscally backing peripheral nations in perpetuity without some commitment that the beneficiaries get their houses in order. (Who can blame them?) But given different economic and social situations, many European nations were understandably opposed to the "one-size-fits-all" approach of the pact. Even France and Germany still dissent over details of a pact they purportedly support—specifically on proposals regarding ongoing EFSF bond repurchases. (France wants nations with high debt to be able to buy their own bonds back at a discount. Germany rejects the buyback proposal.)

What was most head-scratching about the whole affair was the focus on broad, ground-breaking reform that could set the region in a wholly new direction (i.e., to federalize the EU or no?) when the eurozone (and EU) have other, rather more pressing issues to resolve—including final agreements on nitpicky details of the temporary bailout, then finalizing a permanent framework for when the original bailout provisions expire in two and a half years. The Europeans can run their affairs as they choose, of course, but they could jeopardize agreements over the current bailout by taking on more sweeping reforms.

Meanwhile, two more summits are scheduled for March, though results could be just as inconclusive if the focus remains so broad. It's no doubt difficult to devise sweeping policies that please all 17 current eurozone members (or, heck, 27 EU nations), and it could take years to gain some consensus, not to mention implementation of any agreed upon plan. And naturally, tack on another few years if the full EU decides to comply (with a plan fully in flux at the moment). With a massive bailout already in place and eurozone members already proven willing to help maintain the Union (at least in the near term), the threat of a true default in the next few years is nil. However, if the March meetings aren't more focused and fail to produce more concrete results, PIIGS fears could certainly resurface, potentially providing a source of volatility to markets this year.

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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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