Late last week I said this:
Over the last few days I have attempted to be positive in support of the political messages coming out of Europe even though I have been well aware that the economics of the situation simply don’t add up. The renewed issues in Portugal, Ireland and Cyprus and Italy add to the rational argument. What is worrying me about what I am seeing is that it looks far more like a new attempt to “kick the can” by desperate politicians than it looks like a genuine plan for economic recovery.
We may see a resolution of the current EFSF later this month, but Germany has already admitted it can’t save Italy under the current arrangements and Ms Merkel’s attitude towards euro bonds shows there is no real appetite for further expansion. This is an assessment without even taking into account of the opinions of the more vocal opponents of supra-European instruments such as Austria, Finland, the Netherlands, Slovakia and Slovenia.
We are now starting to get a clearer picture of just how important those “vocal” nations are going to be. Firstly from Slovakia:
Last Wednesday Slovak teachers took to the street, more than 8,000 of them striding along the asphalt of Bratislava’s old city center. There they voiced anger about poor pay and dilapidated schools. “We’ve been tightening our belts for decades,” shouted one speaker, “and our trousers are still falling down.”
On Thursday the doctors’ union reported that 1,500 doctors out of a total 6,500 working in state-run hospitals want to resign in protest of unsatisfactory pay and poorly equipped facilities.
The government under the Prime Minister Iveta Radicova has turned the population against itself. Despite an impressive economic record, the country is still Europe’s second poorest and in some regions one in three people are unemployed. The government leader has adopted a tough cost-cutting plan and can hardly dare asking for more from her people. But that’s exactly what she must do: Slovakia is obligated to contribute some €7.7 billion ($10.9 billion) to the euro-rescue fund. It’s a hefty sum for the formerly communist country with a mere 5.4 million inhabitants. At the moment it is highly unlikely that Radicova can rally a parliamentary majority to support the plan.
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But there is more at stake in autumn 2011. If Slovak parliamentarians vote against the new EFSF then the plan to support highly indebted nations will collapse. That scenario could lead to the demise of the common currency and no one knows for sure which countries could be brought down along with Greece.
For this reason Radicova has spoken out in favor of the rescue package — but she is virtually alone in this. Leading the chorus of opposition to the EFSF fund is her coalition partner, Richard Sulik of the Freedom and Solidarity (SaS) party, whose votes she relies on. The rescue payments would lead the country “on a direct path towards socialism,” he has warned, “we have to let Greece go bankrupt.”
And last night in Slovenia:
Slovenia’s left-leaning government has been ousted in a parliamentary confidence vote, further complicating Europe’s debt crisis as the small eurozone nation becomes more politically unstable.
Prime Minister Borut Pahor’s government faced the motion overnight after months of disagreements between ruling coalition partners and several cabinet resignations.
The opposition has accused the government of corruption and mishandling the economy.
The vote in the 90-seat assembly was 51 against the government and 36 for, with other MPs abstaining or being absent.
Slovenian President Danilo Turk now can pick a new prime minister within seven days, who then has 30 days to form a new government. If this fails, early elections are called, probably in December.
The political deadlock may trigger a delay in the Slovenian parliamentary approval of the EU rescue fund for debt-strapped eurozone nations, known as the European Financial Stability Facility. The fund has to be ratified by all EU member states to be implemented.
So, at best, we won’t see the EFSF ratified until late December which means the ECB has a few more months of heavy lifting ahead of it. Overnight Greece sold 1.625 billion euros of 13-week Treasury bills today with a yield of 4.56 percent in order to roll-over some previous sales, which by all accounts is a success even if the yield was a little higher than the August auction. In the meantime the discussions with the ‘Troika’ drag on with various reports that they will now not be a resolution until the first day of October. Not that this is a surprise, their new list of demands is quite long and I can only assume they have added a couple more since this list was compiled:
On the weirder side of the news we had Fitch claiming that Greece will default but not leave the Euro and the IMF once again warning other nations against doing exactly what it has prescribed for the European periphery:
Britain should delay some of its austerity programme if growth falls short of expectations, the International Monetary Fund said on Tuesday in an important new intervention in the UK deficit debate.
The fund, which has steered a fine line between supporting the coalition’s tax increases and spending cuts while calling on the government to be “nimble”, has now become explicit about when it thinks the UK government should perform a U-turn on austerity.
Instead of saying the UK government should ease the deficit reduction plan “if it looks like the economy is headed for a prolonged period of weak growth and high unemployment”, as Christine Lagarde, IMF managing director did earlier this month, the fund says policy should change “if activity were to undershoot current expectations”.
Umm…..