After such a faltering decade of mixed growth, and different prospects for the members, the Euro is having it first true test as a reserve currency.
After a recent vote the German parliament has passed (by 523 to 85) a vote to bolster the € 440bn eurozone rescue fund, the European financial stability facility (EFSF). As the FT says, the vote
“would strengthen the hand of the government, and revive confidence in Angela Merkel’s ruling centre-right coalition. They said it should alsosend a strong signal to eurozone partners that Germany was “ready to resume its responsibility” in the eurozone crisis….“Within the coalition, it is a very strong and comforting signal,” said a senior adviser. “But we are under no illusions that the next steps are just ahead, and they are going to be every bit as difficult.” “
The EFSF could easily become the most powerful tool available to the EU. It needs ratifying, and all decisions require unanimity. This is both a strength and a weakness: the market needs assurance that any action will be sufficient and responsive. Weeks of political negotiations will not be acceptable, the market will make its own decision.
Greece has to decide if, in addition to it’s fiscal retrenchment, that it wants private creditors to increase the haircut they have presently accepted, by taking a bigger writedown on the value of their bonds.
It is certain that even at € 440bn, the EFSF is not large enough to deal with a new bout of market speculation. By investing the facility with institutional powers, and giving it the power of leverage, this problem could be solved. Even with a small leverage ratio, the EFSF would remain a desirable investment. With the US recently losing it’s triple A status (and the world not ending), even if EFSF didn’t attract a triple A, it would still be cheap at the price to stop a run on Spanish or Italian debt.
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