Share prices fell in the run-up to Slovakia’s rejection of expansion of the EFSF, but the aftermath shows a remarkably unconcerned market.
On Tuesday evening, after a day of falling European share prices, the Slovak Parliament rejected expansion of the EFSF – the only eurozone member to do so.
The lead up to the vote saw the Stoxx Europe 600 fall by around 1%, revealing fears in the markets that the vote would fail. But in the aftermath of the rejection, markets have seemed somewhat unconcerned by the decision. Performance in Europe has been surprisingly robust, with the Stoxx 600 up by around 1%, and the euro at a three-week high.
The strong performance seems to stem from a feeling in the markets that Slovak assent to EFSF expansion will be given soon. Political support in Slovakia is strong: Smer, the main opposition party which rejected the proposal, has indicated that it supports the measure – with its ‘no’ vote yesterday being a move to unseat the present government.
“Slovakia must approve the EFSF, as it's clear that, without this mechanism, the situation can get worse," said Smer leader Robert Fico after the vote.
There is some sentiment that Slovak assent to the expansion is not just probable but inevitable, and that pressure may be put on the state by the EU if a second rejection looks likely.
“Slovakia is more or less irrelevant to the process,” says Julian Pendock, partner at Senhouse Capital. “This just follows a clear pattern of the smaller states in the EU being bulldozed – Slovakian politicians will be concerned that if they do not approve the expansion, then aid money and support for infrastructure may be cut off.”
“What we can see here is one country holding the EU process to ransom,” says David Buik, partner at BGC partners. “I don’t think people understand how great a danger a delay could pose, both to the UK and the EU as a whole.”
There is a feeling from some quarters that the Slovak rejection of the EFSF is not unreasonable, as the country is significantly poorer than those it is being asked to contribute to.
“Slovakia is the second poorest country in the EU, and is being asked to contribute around 13% of its GDP to the EFSF – the highest per capita contribution of any eurozone country,” says Pendock. “Given that Greek pensions are three times larger than Slovak pensions, the reluctance is understandable.”