FYI | May 03 2012
By Greg Peel
“Be worried, be very worried,” suggests UBS.
Of course, Australia's parliament is so tenuous at present one feels we could be thrust into an election at any time, although next year still seems the schedule. Over in the US, the election race is yet to really hot up but expectations are for another Congressional stalemate as we head towards November with the Republicans intent on promoting seizure in the US economy in order to press home its cause in a race that might otherwise be lost. Another rating downgrade thus threatens – not that anyone much cares this time.
But the world's focal point of fear continues to be Europe and this weekend sees the run-off vote for the French presidency and the first round of general election voting in Greece.
The fate of the eurozone may hang in the balance.
In France the incumbent Nicholas Sarkozy trailed his socialist rival Francois Hollande in the first round, while voting for the National Front candidate Marine Le Pen was sufficient enough to ensure her supporters will be fundamental in now deciding between the remaining two. The National Front is right wing, which would lean them away from Hollande, however they remain bitter that Sarkozy “stole” National Front policies in his earlier successful bid for the presidency and then did not follow through.
It is thus unclear which way individual National Front supporters may swing, but it is accepted that Sarkozy cannot win without sufficient National Front support. The National Front is anti-immigration and also anti-euro – the latter suggesting Sarkozy is not their man. Sarkozy's solid, albeit often grudging, support of German chancellor Angela Merkel's fight to hold the eurozone together at whatever cost has been fundamental in preventing what by now would likely have been a devastating fracturing of the economic bloc.
It has meant support for a more homogenous fiscal union, and also for across-the-zone austerity measures. Resistance from the other AAA-rated members, who believe austerity is a slippery slope towards deep recession and that stimulus (a la Fed) is the sensible policy response, has now brought down the Dutch government, where elections will be held in June thus offering yet another potential crack in the framework.
French National Front supporters are nevertheless not being offered an anti-euro solution from Hollande, who's views are similar to that of the Dutch opposition. He is not trying to break up the eurozone but he does want to see the French economy stimulated, not hamstrung. This view puts him at odds with the incumbent German government, which is yet to face the polls.
Eurozone governments have been falling at a rapid pace since Greece started the whole mess back in 2010, but not always in general elections. With eurozone unemployment now running at near 11% and over 20% in the Mediterranean, it is not hard to guess how the masses are likely to use their voices. Perhaps the hardest hit is Greece, where youth unemployment is now running close to 50%.
The first round of the Greek general election will also be held on the weekend. It is this election that has UBS most concerned. The latest polls show support for the incumbent coalition has universally plunged but has also fragmented into non-majority support for a number of smaller parties. Policy preferences among these smaller contenders include renegotiating agreements with creditors (ie the bond rollover and haircut deal reached earlier this year), a rejection of strict austerity measures, and also an exit from the eurozone.
Greece's biggest problem is that which makes it unique in Europe. Unlike the other PIIGS, in which private sector banks gorged on cheap credit and a strong currency to promote rampant and unfettered lending, Greece exploited its eurozone membership to build the (democratic) world's biggest public service and to indulge in the national pastime of not paying any tax. If Greece did abandon the eurozone and return to the drachma, the government would have no source of funds to pay the many government employees.
For the average Greek, however, the feeling is probably one of “what's the difference?”
In the meantime, the response of the incumbent Greek coalition to its impending defeat has been to run on a policy of renegotiating its memorandum of understanding with the IMF – that which ensures ongoing periodic bail-out payments. It's all well and good, notes UBS, except that neither the IMF nor the European Council are likely to have any patience for further renegotiation. They are more likely to insist on the current requirements that Greece must cut E3bn of spending now and another E12bn over 2013-14. But as global doubts grow over the Greek government's capacity to implement such austerity measures, Greece's sovereign creditors become less committed by the day.
So something probably has to give, one way or the other.
“The restructuring of Greek debt earlier this year appeared to many people to mark the end of Greece’s ability to upset other European markets,” notes UBS. “Even a temporary suspension of official sector financing could therefore be very damaging to European markets – as they consider Greece’s alternatives in the event that official funding were cut off permanently”.
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