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Wednesday, 12 October 2011

Slovakia: Leaving the Euro-zone?

(Picture by bennylin0724)
In Europe, the continuous struggle to keep Athens afloat is producing some dissenters. Slovakia has ratified the Euro bailout fund only after days of strenuous negotiations. The decision might cause a political shift at the next elections. Against the U.S. dollar, the euro could soon reach key resistance lines. A deeper decline of the European currency is still in the cards.

European leaders are working intensively for a temporary solution to the Greek’s problem. It would help better prepare all the parties involved for the inevitable default. There is no other possibility, at present. Greece has spent half of its modern history in a state of insolvency. It cannot keep up with E.U. requests, considering also the global economics’ contraction, and its population is fed up with the austerity measures. The month of March 2012, when Greece will met heavy re-financing commitments, could be the deadline. Some countries hope to postpone the decision even further. In 2013, the European Stability Mechanism (ESM) should provide the legal backing for the organized insolvency of a state. Can Europe wait one more year?

A default will have a strong impact on the European society. Some nations could face recession, while others might be tempted to leave the Euro-zone. Nonetheless, Europe has the capacity to overcome the crisis, if the rescue procedures will be finally working. The healing process will be the hardest task to accomplish, as well as the loss of credibility. So, it was with no surprise that on Tuesday the Slovak’s parliament voted against the new EFSF. Slovakia has then ratified the Euro bailout fund on Thursday, after days of strenuous negotiations. Nonetheless, the situation remains critical. The country is short of money. 

Slovakia: Out of Euro-zone?

The temptation to leave the Euro-zone might be strong at this point. Why? Slovakia is the second poorest country in Europe (the first is Estonia). It has made huge improvements to join the Euro-zone in 2009. The debt to GDP’s ratio declined from 50% in 2000 to 27% in 2008. During the same period, the Greeks debt rose to 111% from 103%. Slovakia is now required to provide Euro 7.7 billion, which represents 10% of its Gross Domestic Product, to the European Financial Stability Facility (EFSF).

How can the government justify this decision? At the next elections, the electorate could decide to reward the anti-European parties. In Slovakia, inflation is low, as well as unemployment. The Slovak koruna rose against the euro before the country joined the Euro-zone. What would be the consequence for Europe? It would create a precedent, which might become an example to follow over the medium-term. There is no light at the end of the tunnel yet. The euro will be again under pressure, once this period of transition ends. Against the U.S. dollar, the next technical levels to watch are 1.39/1.41, where various levels of resistance meet.  

Angelo Airaghi,

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