Today is EFSF day in Germany

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The German parliament today votes on whether to increase the size of the European Financial Stability Fund (EFSF) as was agreed at the EU summit back in July.  The vote’s significance lies in its reflection of the political strains that Merkel’s coalition government is being put under in being asked to back more loans to Greece.  If Germany says “enough is enough”, then serious doubts will be raised regarding the ability of the eurozone to hold together in its current form, although all indications suggest that the vote will be successful for Merkel.

Furthermore, in talks with coalition partners yesterday, Merkel conceded that she could “not exclude” the possibility of a Greek default.  Regardless of which way the vote goes, it also serves to illustrate the inadequacy of the political process in the eurozone, because the debate has firmly moved on from the increasing of the bailout fund to how this increased firepower could be leveraged to cope with the potential scenarios that it may face.

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Commentary

The futility of a financial transactions tax.  The notion of a financial transactions tax (or Tobin tax as it is sometimes referred as) has cropped up on a number of occasions since the start of the financial crisis, and on each occasion it’s barely got out of the starting blocks. The UK PM in 2009 (Gordon Brown) took a proposal for a global financial transactions tax to the G20 which he hosted in Scotland and where it failed to get universal support. That was one of his primary stipulations, that it be all or nothing. The French President, Nicholas Sarkozy, pushed for a Tobin-style tax earlier this year and this has become an increasingly common occurrence at his meetings with Merkel. This became the bargaining tool for securing his agreement to Germany’s demands. Brown’s proposal (late 2009) came at a time when polls were showing voters’ dissatisfaction with him near the all-time highs. The same was true for Sarkozy, with his poll ratings hitting an all-time low earlier this year, ahead of his push in April for such a tax. Politically, it’s seen as a double whammy; raise some money and hit the most unpopular industry at the same time. Whilst electorates may be amenable to the taxing of financial transactions (under the mid-guided perception that although it is ‘bad’, it’s better than taxing income), it could well backfire if it’s viewed as the EU’s back-door way of introducing a common tax policy. In sum, there’s no free lunch taxing financial transactions and by the time the EU gets there in 2014 (as is proposed), the plate could be looking very empty. More to the point, it’s not going to win any favours with financial markets which are currently more concerned with the fragility of banks in the face of a likely Greek debt write-down.

Dollar strength and the first week of October. September has been the best month for the greenback for quite a while. In dollar index terms, the 4.6% rise so far this month is the largest since the huge short-covering rally witnessed in November last year. In recent days, however, the dollar has given back some of this month’s advance, in large part due to month and quarter-end portfolio rebalancing.  Once October kicks off, dollar strength is likely to re-emerge, especially if Europe continues to prevaricate regarding a proper and lasting solution to its sovereign debt and banking crisis. In addition, the dollar has definitely displayed a tendency for early-month gains over the past six months against the euro, the pound and the Aussie. Based on this (admittedly) short history, it would be surprising if this recent phenomenon of dollar strength against these other major currencies was not repeated in the first few days of October.

Merkel struggles to convince coalition on bailout plan.  After weeks of painful dialogue and posturing, Germany’s ruling coalition members finally get to cast their vote today on the expansion of Europe’s bailout fund mooted back in July. For her part, Chancellor Merkel is still struggling to convince some of the members of her own Christian Democrat/Christian Social Union. In a preliminary vote taken Tuesday, 11 members of her alliance voted against the proposal, with two abstentions. The CDU’s coalition partner, the FDP, also had a discussion on the issue, with at least two of its members having serious reservations.  Currently, Merkel’s coalition has a majority of just 19 seats, although the Chancellor will likely obtain some support for the bailout from the Social Democrats. Even so, failure to get her coalition to back the plan might compromise support for any future initiatives, and risks fracturing the coalition, which is slipping behind the SPD in the polls. Some coalition members are suspicious that the Chancellor has other major measures in the pipeline that she is not yet sharing with her coalition partners lest they trigger further trepidation about the expansion of the bailout fund. On balance, it looks as though Merkel will get a coalition majority, but if not then we could expect a negative response from the single currency.

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