Fisher Investments Editorial Staff
Media Hype/Myths

Wishing Upon Eurozone Stars

By, 10/22/2012

We’re not much a betting crowd, but here are a few things we’re willing to bet won’t happen in Europe before year’s end:

  • Greece won’t have made much, if any, progress toward further privatizing state-owned assets it intends to sell. (You can check their progress for yourself here—the page devoted to “completed” privatizations now numbers a whopping two—rather scant, to us.)
  • Peripheral European nations won’t have suddenly developed an overwhelming preference for free market capitalism, as opposed to the semi-socialism they’ve lived under for the last several decades.
  • The eurozone won’t have suddenly and in disorderly fashion dissolved, nor will any of the struggling nations (namely, Greece) have left.

This lack of epic, landmark progress may seem unsurprising to you. But late in the week, European officials added a couple more possibilities to the list.

As the European Council’s summit closes, many leaders are paying lip service to creation of a central banking regulator for the continent by year end. Which seems like a very aggressive goal to us. First and foremost, the likelihood legislation for an overarching European banking authority is written by year end seems a stretch. Now, the verbal agreement is interesting, but it’s just very far from being approved legislation, despite leaders’ stated goal to have it up and running over the course of 2013.

Some expressed disappointment at the timetable, having hoped the new regulator would actually be functioning at the beginning of 2013. But that seems even more unrealistic—a sentiment German Chancellor Angela Merkel implicitly corroborated in indicating this isn’t likely to be a one or two-month process.

And in our view, it’s probably a good thing European officials first of all, recognize that, and second of all, are willing to continue withstanding popular pressure to “do something” more immediate and take their time. As with any country, a slower, more deliberate process for any regulatory changes gives markets time to digest the proposals. Impacted parties have an opportunity to weigh in on potential outcomes, problems, risks and more. Ultimately, a slower pace is just far more likely to produce a better end product and less likely to create detrimental side effects than hastily implemented rules.

But from the summit emerged an even bigger development unlikely to happen by year-end: French President François Hollande likely doesn’t get his wish. Which wish is that? Well, prior to the summit, Hollande said “decisions taken at the last summit in June to find a ‘definitive’ solution to keep Greece in the single currency, to reduce borrowing costs for other debt-burdened countries and to forge a eurozone banking union … ‘rapidly applied.’” Oh, and he said this: “I want all these questions dealt with by the end of the year.”

Well—sounds grand! In fact, let’s also solve global hunger and world peace while we’re at it. By year end. Alright, maybe that’s not entirely fair—the eurozone’s solutions are eminently solve-able … eventually. And that’s the key—as frustrating as many (including Hollande, apparently) have undoubtedly found the slow-go approach, one benefit not in any way to be discounted is the room it’s given officials and markets to slowly test the waters. To put stop-gaps and measures in place, determine their efficacy and move forward accordingly—either along a similar trajectory or trying new tactics.

And overall, the situation over the last few months has seemingly improved a bit. Spain and Italy have seen their interest rates fall rather markedly. Ireland, relatively speaking, is doing quite well, and Portugal continues more or less muddling along, implementing much-needed if politically unpopular reforms. While some small members like Greece have seen sharp contraction, the overall eurozone economy hasn’t cratered, and a deep recession doesn’t seem very likely. What’s more, we haven’t seen a major, It’s a Wonderful Life-style banking crisis—and the amount of liquidity the European Central Bank has injected in markets would make that an incredibly low-probability event. 

And so on—in fact, you can take many of the worst-case European scenarios broadly and at various points feared by investors and markets alike, and not really a one has come to fruition. In our view, a majority of the credit for that goes to politicians’ continued political will to work toward lasting solutions combined with their inclination to move slowly and deliberately.

So there’s certainly a lengthy list of things unlikely to happen in the eurozone by year’s end—but that’s not necessarily a bad thing. And it’s certainly preferable to speeding the rate of change up and risking an implosion of one sort or another.

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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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