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
François Hollande is a man who means what he says and his rise to the French presidency comes at a moment when there are exceptionally few restraints on how far the French Socialist Party may now push its agenda.
The party already controls many of the branches of French government. There are few institutional checks not already in the hands of his allies. In the hands of a resolute politician, the powers of the French presidency are almost breathtaking in their latitude. Most fundamentally, he has earned a mandate to do much of what France's unreconstructed left he longed to do for years.
In view of his promise to tax millionaires at 75%, the wealthy of France are already making plans to relocate, as French income taxes stop at the border (unlike American income taxes -- we are the exception among major nations). Thanks to the EU, French plutocrats can live anywhere in the union, with no visa.
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.
Official results showed conservative New Democracy came first with 18.85 percent and 108 of Parliament's 300 seats. Party leader Antonis Samaras, who backs Greece's bailout commitments for austerity but has called for some changes to the bailout plan, will launch coalition-forming talks later in the day.
"I understand the rage of the people, but our party will not leave Greece ungoverned," Samaras said after Sunday's vote.
After receiving the mandate to start negotiations from President Karolos Papoulias, Samaras will have three days to strike a coalition deal. But that could prove impossible because even with the support of the only other clearly pro-bailout party elected, Socialist PASOK, New Democracy would fall two seats short of a governing majority.
If the deadlock does not ease, Greece faces new elections under a caretaker government in mid-June, about the time it has to detail new drastic austerity measures worth €14.5 billion ($19 billion) for 2013-14.
In June, Athens is also due to receive a €30 billion ($39.4 billion) installment of its rescue loans from the other countries in the 17-strong eurozone and the International Monetary Fund.
Analyst Vangelis Agapitos said protracted instability would threaten the country's eurozone membership. Greece's debt inspectors - the eurozone, IMF and European Central Bank, collectively known as the troika - could turn the screws by halting release of the bailout funds until Athens moves forward with its pledged reforms.
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.
The Socialist Party of late strongman Slobodan Milosevic held the key to power in Serbia on Monday after tied elections in which voters angry about the country's economic woes roundly punished the ruling Democratic Party.
The Democrats, part of a reformist bloc that turned Serbia westwards with Milosevic's ouster in 2000, saw their support crumble to 23 percent from 38 percent in 2008, hurt by an economic downturn that has left a quarter of the Serbian workforce jobless.
After years of teetering between pro-Western reformers and pro-Russian nationalists, Sunday's elections for president and parliament were marked by an unprecedented consensus between the major political blocs on Serbia's bid to join the European Union.
The right-wing Serbian Progressive Party, led by former ultranationalists who say they now share the goal of EU accession, claimed the narrowest of victories in the more-important parliamentary vote with around 24.7 percent, but was seen struggling for coalition allies.
The Democrats and the Progressives will fight it out for control of the presidency, too, when Democrat incumbent Boris Tadic and opposition leader Tomislav Nikolic go head-to-head in a run-off on May 20.
The Socialists, led by Milosevic's former spokesman Ivica Dacic, doubled their vote to some 16 percent and emerged as kingmakers.
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?