Wednesday, 18 July 2018

Slovaks take rod of democracy to eurozone's back

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Anthony Peters, SwissInvest Strategist

We all saw the EFSF proposal go down in the Slovak parliament yesterday but we also all know that it was not the EFSF expansion itself that was voted on but the vote of confidence which sank with the EFSF bound to its mast. There will be a rerun in the next few days and it will duly be passed. However, the entire process brings with it some fundamental questions with respect to what parliamentary democracy is all about.

I think I have related in the past my memory of a drunken evening with my parents, Greek friends and a rag-tag bunch of foreigners in Athens (I was in my early teens but still well-oiled) where one of the Yanks slapped our Greek friend on the back and definitively declared “Us Americans and you Greeks – we know about democracy!” Nick the Greek looked at the American and asked him what democracy meant to him. The chap – I can’t really remember him – answered that democracy meant that you could do as you liked. Nick stopped him and put him in his place by replying: “No, democracy means respecting your neighbour’s opinions.”

By stipulating unanimity and that all 17 members have to individually ratify the EFSF expansion, the eurozone has made something of a rod for its own back. However, the attitude that a small number of swing MPs in one of the smallest and poorest members should not have the right to block the grand project smacks of considerable hypocrisy.

The EU does have a horrid habit of exerting duress on members’ voters who don’t toe the line as we saw in 1992 when the Danish people, in a referendum, refused to ratify the Maastricht Treaty and were sent back to polls in 1993 to try again. The same fate befell the Irish who sent the Lisbon Treaty packing in 2008 and were also told to go back and vote again in 2009 with the inference that they would be voting again and again until they got the result right. The ultimate abuse of the referendum on European matters can be found in the likes of Germany and the UK where the populous has simply been denied the right to deliver a result which the government cannot afford to see.

And… Down Under

Now we get into a politological swamp where we are faced with the question of whether the political class should lead or reflect public opinion? The answer is, to be brutally honest and somewhat disingenuous, dependent on whether we as individuals agree or disagree with the probable outcome. This brings on the next political nightmare which is in the process of befalling Australia where Prime Minister Julia Gillard has wooed the three independent MPs along with the Greens to vote with her Labour Party administration in order to pass the controversial Carbon Tax into law. Gillard is singularly unpopular and Australians are also keenly aware that the polluters who are to be heavily taxed at A$23.00 per tonne of emitted carbon are also the key providers of the nation’s wealth, so this legislation is clearly carried without broad popular support.

There are now a lot of very worried and very defensive people out there – expect liquidity to become even tighter as we move towards the end of the year

A propos, taxation – in many respects austerity measures have been carried about as far as they can be in many European countries. Further individual taxation also running up against the walls of popular acceptability and, as we know, taxing the rich more heavily looks good politically but has little effect fiscally and, it can be argued, is even somewhat counter-productive.

However, as the Occupy Wall Street movement has raised, it may be time to review the fiscal position of many of the larger corporate bodies. Such a move might not immediately affect top-line earnings but it would kick into the dividend stream, a matter which has as far as I can tell not yet been integrated in any of the stock pricing models… but that is a subject for another day.

Meanwhile, financial markets will be basking in the warm the inevitable passing of the EFSF increase – it feels out there as though there is a will to see the political efforts succeed as opposed to the way we were trading in August and September when likely failure was the key note. From here things could swing either way but it is too late to save the year for most houses.

There is no doubt that there will be significant retrenchment by the investment banks between now and Christmas with the big guillotine likely to be brought on to the trading floors during the last two weeks of October and the first two weeks of November. There are now a lot of very worried and very defensive people out there – expect liquidity to become even tighter as we move towards the end of the year.                                       

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