Whither Europe

Global markets today are feeling the effects of voters in France and Greece putting an end to the ‘Merkozy’ austerity drive in key regions of the embattled euro zone.

For the people, it was a backlash against harsh austerity measures that have exacerbated problems in the ailing economies. For investors, it is the dawn of new uncertainty in the long-running European debt crisis.

Many have argued that, amid soaring levels of unemployment and crippling recessions in some countries, European leaders need to focus more on growth and less on cutbacks that have led to widespread social unrest.

With the Socialist victory of François Hollande over Nicolas Sarkozy in the French presidential run-off vote Sunday, the ‘Merkozy’ era of ultraharsh cutbacks is now at an end.

That was the nickname given to Mr. Sarkozy’s partnership with Germany’s Angela Merkel. Together, the two drove Europe’s actions in the crisis.

Ms. Merkel said today she would welcome Mr. Hollande “with open arms,” and warned that a renewal of co-operation is “essential” for Europe.

That came after Mr. Hollande said that austerity is not “inevitable” and that he sees his mission as one of giving “European construction a growth dimension.” He hasn’t spelled that out, however.

Mr. Hollande will not kill the austerity push, but rather ease it, having to answer to both the people and the markets. The question is whether he will push to renegotiate Europe’s grand fiscal pact.

“All assume he will open the debate with Merkel about slowing the austerity drive, most assume his policy bite won’t be as bad as his electioneering bark,” said Sebastien Galy, senior currency strategist at Société Générale.

“Personally, I think we need to distinguish between the direction of policy and the macro impact of policy,” Mr. Galy said in a report today.

“What bothers many about French fiscal policy is the sheer size of the government in the economy overall. But the structural need to nurture the private sector and limit the power of the state isn’t at all the same as needing permanent austerity and economic misery. This is only important now because to argue for more austerity in Europe is just plain silly – the sort of siliness that could bring the whole thing crashing down.”

The political process still has to play out in France, in legislative elections in June.

“If the left wins it will control all branches of government,” noted Mark Chandler, chief of fixed income and currency research at RBC Dominion Securities.

“If the right retains its majorty, Hollande will be forced to appoint a PM representing the right (as the PM must have the confidence of Parliament). The key question now boils down to what a Hollande-Merkel relationship will look like within the context of his precedecessor’s ‘special relationship’ with the German Chancellor.”

In Greece, the poster child of Europe’s meltdown, everything old is new again, including where its bailouts stand and whether, as some believe, it will leave the 17-member monetary union amid a political deadlock today. Neither of the two major parties won a majority.

“Over all the breakdown in the political process may bring threats of a messy euro zone exit back into market focus,” said senior currency strategist Elsa Lignos of RBC in London.

“Popular support for [the euro] remains high and most parties identify themselves as pro-European (albeit anti-bailout) but the coming months look set to be a turbulent time for Greek politics, even by the standards of the last two years.”

As in France, it’s far from clear what happens next in Athens, meaning the uncertainty still has a way to go

“With both of the main parties searching to cement their would-be powers, the next steps is whether or not a ‘grand coallition’ could be created, but the willingness of other parties to go down that route looks low so Greece could actually be back at the polls next month – not the reduction to uncertainty required for sanguine markets,” said RBC’s Mr. Chandler.

Several European governments have toppled during the debt crisis, making the situation increasingly difficult for Germany and Ms. Merkel, and the ability to carry through on a common strategy. It becomes even more touchy now.

“I fail to see how any country is going to be able to ‘grow’ their way out of their deficits, barring [European Central Bank] debt monetization or via German acceptance of a common fiscal policy, which would then allow profligate sovereigns to ride off of Germany’s strong balance sheet,” said David Rosenberg, the chief economist at Gluskin Sheff + Associates.

“The problem is that the German economy is starting to soften, and along with that I expect polls to start showing lesser support for providing backstops to the periphery. And from a geopolitical standpoint, an ever-isolated Germany spells even more instability.”


Regime change in France signals wider shift in European outlook


PARIS— Globe and Mail Update
Published Sunday, May. 06, 2012 9:22PM EDT

Europe’s wall of conservative blue saw its first crimson fractures Sunday night as elections delivered a historic regime change to France, showed a newly resurgent left in Greece and Germany, and signalled the end of a continent-wide consensus around debt-cutting and austerity as the main response to the economic crisis.

Europe’s political centre of balance shifted decisively with the election of Socialist Party leader François Hollande to the French presidency, who defeated conservative incumbent Nicolas Sarkozy, 51.6 per cent to 48.4.

His presidency marks more than just the end of 17 years of right-wing French leadership.

The new politics could shift relationships with the United States and Canada, with Mr. Hollande promising to push Europe’s focus away from trans-Atlantic military and trade relationships toward a more insular emphasis on co-operation through the European Union. The withdrawal from Afghanistan is likely to become even more rapid, and the Canada-European Union free-trade agreement, championed by Mr. Sarkozy, could move to the back burner.

Mr. Hollande’s victory also may signal an end to an awkward compromise among the leaders of Germany, France and other European states around debt-cutting, rather than growth promotion, as the solution to the euro-zone crisis.

“Europe is watching us,” Mr. Hollande declared in a victory speech. “In many European countries there is now relief. … Austerity is no longer the only option.”

As if to drive home that shift, Greeks delivered a crushing blow Sunday night to the coalition of pro-austerity conservative and centre-left parties, with the strongest returns going to far-left parties.

The shifting tide could also be felt in Germany, when a symbolically important election in the northern state of Schleswig-Holstein delivered a humiliating blow to the conservative-liberal coalition government of Chancellor Angela Merkel at the hands of parties of the centre-left. It could mean that Ms. Merkel will be forced by her opposition parties to co-operate with Mr. Hollande’s demand for a growth-promoting bailout pact – and that European politics will feel very different after Monday morning.



FRANCE: Socialist challenger François Hollande defeats incumbent Nicolas Sarkozy for the presidency by capitalizing on anger over austerity measures. As president, Mr. Hollande is expected to push for a more stimulus-minded approach to the financial crisis in France and the rest of Europe.

GREECE: Greeks punish the two main parties in parliamentary elections, with official projections showing both hemorrhaging support and no party gaining enough votes to form a government. The results could affect the country’s course as it grapples with a debt crisis that has shaken world markets.

SERBIA: The nation of 7.1 million people in southeast Europe holds presidential, parliamentary and municipal elections. The outcomes could affect Serbia’s relations with the European Union as well as Kosovo, a one-time province whose declaration of independence Serbia has refused to accept.

GERMANY: Exit polls show voters in Germany’s northernmost state have likely ousted a governing centre-right government made up of the same parties as the federal coalition, a blow to Chancellor Angela Merkel. About 2.24 million people are eligible to vote in Schleswig-Holstein state.

ITALY: It’s the nation’s first election since Premier Mario Monti was tapped to save Italy from its debt crisis. The vote could gauge public anger against parties supporting his austerity measures. Some 9.5 million Italians were eligible to vote Sunday and Monday for 942 city councils and mayorships.

ARMENIA: Some 2.5 million Armenians are eligible to vote for a new parliament in an election the nation’s president hopes will give him a legislative majority. President Serge Sarkisian’s Republican Party is expected to win, but it wants the majority in the 131-seat parliament to avoid having to form a coalition.

Associated Press


SPAIN: A burst real estate bubble also deflates faith in a Socialist government, which is nonetheless reluctant to admit Spain has problems. The Socialists of Jose Luis Rodriguez Zapatero are wiped off the map in November 2011 elections; Mariano Rajoy’s conservatives take over.

ITALY: Silvio Berlusconi, the long-serving leader accused of everything from bedding escorts to serial corruption, finally bites the dust in November 2011. Mario Monti, a former European Commissioner, is named to replace him and lead a technical government until elections in 2013.

BRITAIN: Gordon Brown leads the Labour Party to defeat in the May 2010 election; Conservative Party leader David Cameron becomes leader of a coalition government. Mr. Brown had boasted endlessly of ending the cycle of boom and bust – but as prime minister he presided mostly over bust.

IRELAND: Brian Cowen, promoted to prime minister in 2008 after being finance minister, doesn’t even get to run. He resigns as leader of the Fianna Fail Party weeks before the February, 2011 election. It doesn’t help his party, which suffers its worst ever defeat.

GREECE: Greek Socialist leader George Papandreou swept to power in October 2009 over conservative opponents, pledging to spend his way out of a deteriorating economic situation. Two years later, at the height of Greece’s worst financial crisis since World War II, Papandreou’s his own deputies force him out.

PORTUGAL: A month after Portugal requests a €78 billion-euro bailout, the centre-left Socialist government of Jose Socrates is voted out of power in June, 2011.

DENMARK: A centre-right government in Denmark loses power in September in part due to discontent over austerity measures introduced amid the debt crisis. It is replaced by a centre-left coalition.

FINLAND: Finland’s government is reconfigured after June elections following a sharp surge in support for nationalists who oppose bailouts for debt-stricken euro-zone countries. A conservative-led coalition spanning left and right is formed to keep the nationalist True Finns out of power.

But in some countries, voters bucked the trend:

ROMANIA: Romanian President Traian Basescu wins re-election in 2009, the year Romania’s economy shrinks by 7 per cent and Romania takes a €20 billion-euro bailout loan from the International Monetary Fund, the World Bank and the European Union. Mr. Basescu, a former ship captain, prevails because he is seen as a strong leader in a time of crisis.

POLAND: It’s the only European Union country that did not to slip into recession during the global crisis of 2008-2009. Last fall the centre-right party of Prime Minister Donald Tusk wins a second straight term in parliamentary elections, making history by becoming the first government since the fall of communism in Poland in 1989 to be re-elected.

ALSO: Sweden’s prime minister is re-elected in 2010 and the prime ministers of Latvia and Estonia are re-elected in 2011.

Associated Press

Source: Globe and Mail


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