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May 7, 2012
Europe's Morning After
The smoke has nearly cleared after elections in 6 European countries on Sunday and Monday revealed an angry, fearful electorate who have tired of the pain brought by austerity measures. In France, Greece, Germany, Serbia, Italy, and Armenia, voters sent a clear message to their leaders; let's try something different.
The consensus seems to be in favor of heading straight for the fiscal cliff, pedal to the metal. Today, financial markets are taking the measure of the implications, and it is not pretty. Tokyo, the first major market to open closed down almost 3%. The US stock market opened lower and oil dropped below $100 bbl - the result of fears that Europe is not serious about reducing its crushing debt. The democracies apparently lack the will to honestly face the realities of spending at levels that cannot be sustained by the taxpaying capacities of the populace.
France, the most prominent example of the rejection of austerity, elected a socialist who has promised drastic change, and he has the intent and the ability carry out such a program. Richard Waghorne of the Daily Mail
Hollande also plans on reducing unemployment the old fashioned way -- drastically increasing the number of government workers, thus expanding the welfare state even beyond the generous cradle to grave cocoon in which the French state lovingly wraps its citizens. He has made vague promises that he won't add to the debt to realize his economic goals, but it is very difficult to see how he can avoid it.
Perhaps the most dangerous change in France will be its relations with Germany. "Merkozy" - the name given to the close partnership of German Chancellor Angela Merkel and former French President Nicholas Sarkozy - is no more. The duo worked closely together to bring the euro zone through several ticklish crises, and guide the EU to establish a stronger central bank and agree to a fiscal compact. Hollande is not likely to see eye to eye with the German Chancellor who believes that austerity is the only way to re-establish confidence by investors that european nations will pay back what they owe.
And after closely watched local elections in Germany where Merkel's center right party was ousted from power, the Chancellor herself has very little room to maneuver. As the Wall Street Journal points out, "Ms. Merkel's options for ruling beyond 2013 are narrowing." Merkel has pledged to continue to push austerity measures on over-indebted nations like Spain and Italy, but if she is seen as something of a lame duck, her influence will be lessened.
That influence will be needed in Greece. The Greeks not only marched over the fiscal cliff by rejecting the bail out coalition that negotiated the EU/IMF deal to reduce its sovereign debt, they decided to set the country on fire before they jumped.
If Greece fails to receive the next segment of bail out money, they will be in default and will almost certainly have to leave the euro zone. Some politicians on the far left and right bet that the EU was bluffing and would give them the cash even if they reneged on the bail out deal's strict austerity measures. That's the kind of wishful thinking Greek voters heeded when they went to the polls yesterday.
The local voting in Italy on Monday is showing a public tired of austerity. Allies of Prime Minister Monti, who has been sidling away from the austerity camp in recent weeks and begun to sound more pro-growth in his public statements, are expected to lose ground in elections affecting about 900 towns in Italy. Pre-election polls showed a large number of undecideds but lowered support for two of his major coalition partners.
Monti, a centrist technocrat, was chosen to run the country last year and save Italy from a Greek-like default. With no popular mandate, he has gleaned the straw in the wind and is gradually edging away from making the kind of structural changes that will save Italy from disaster. He will survive, but the local elections will hardly strengthen his hand going forward.
In Serbia, the socialists find themselves in the cat bird seat. They hold the key to any coalition government that is formed and they are likely to side with those who want to do away with austerity.
In tiny Armenia, President Serzh Sarksyan's Republican Party won a parliamentary election that turned on which side was more pro-development. Armenia, as an emerging democracy, hasn't suffered as much from the financial crisis as other nations who have been brought low by their crushing debt. Sarksyan will seek a coalition government with his main rival - the Prosperous Armenia Party.
With the exception of Armenia, the elections booted or greatly damaged incumbent parties who had been pushing austerity as the way out of Europe's financial mess. Because markets are looking at the future, many of the consequences of this widespread rejection of reality will play out before the American election. It is a wild card for Obama. If Europe goes into crisis because its voters embraced programs like Obama's, what will American voters conclude? How does Obama spin that?
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