March 26, 2012
To listen to many eurozone policymakers, one would imagine all is now well with their two-year long struggle with the sovereign debt crisis.
Progress on plans for a beefed-up “firewall” to bail out distressed countries, which now have Germany’s backing, are cited in support.
Not so fast, say the markets. Sure, everyone is agreed that things feel better than they did at the end of last year. But many investors also say that little has changed fundamentally.
A good example of that is the apparent willingness of Germany and Finland to allow the temporary eurozone rescue vehicle, known as the European financial stability facility, to run alongside the soon-to-be-launched permanent one, the European stability mechanism. But a headline lending figure of €940bn for the two soon fizzles out as at least €200bn is already committed and the EFSF’s €440bn is likely to end next year.
“I don’t see the eurozone crisis fading in the next few years even when the ESM is operating,” says Neil Williams, chief economist of Hermes. Like many, he believes that even in enlarged form the rescue funds would be unable to deal with either Spain or Italy, the two Mediterranean countries whose fiscal and economic health is still viewed as critical to whether the crisis takes off again or not.
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