A Busy Weekend in Europe
By Fed Copper
June 19, 2012
The headline story is the election in Greece. The pro-bailout New Democracy party has unofficially won a clear victory (with the vast majority of votes now counted), taking 29.7% of the vote, earning it 129 seats in the 300 seat Parliament. The opposition Syriza party, which threatened to tear up the bailout agreement, basically daring the European Union (EU) to throw them out of the monetary union, won 26.9% of the vote, which translates into 71 seats. The disconnect between vote percentage and parliamentary representation is due to a 50 seat bonus that is awarded to the first place finisher to help facilitate the achievement of a majority/coalition. When combined with the 33 seats won by the similarly pro-bailout party PASOK (33 seats), and the 6.2% from the Democratic Left (17 seats), there is sufficient votes to form a comfortable majority, potentially allowing Greece to form a government.
The initial market reaction to the vote result was positive, with the Euro and Asian markets up strongly. However, in a replay of last week’s market action post the Spanish bank bailout, the euphoria has waned, with S&P futures down modestly, and European markets essentially flat. Apparently, the market is realizing that though a disorderly Greek exit scenario has been taken off the table, at least temporarily, by the majority given to pro-bailout parties, we are really just back to where we were before, between the rock of an economy in free-fall and the hard place of an unsupportable and expanding mountain of debt.
A coalition still needs to be formalized, among parties that historically have not played well together, and some type of an agreement will need to be reached between the prospective new government from which all parties had campaigned on a platform of re-negotiating the terms of the bailout agreement, and the EU, who thus far has been adamant that all aspects of the agreement must be honored, though they have shown some willingness to relax the timing of the austerity targets. Ultimately, the vote outcome affords markets a very fragile, and potentially short-lived peace.
The story that has gotten much less coverage but which could be far more consequential to the future of the Euro Area, was that the Socialist party of newly elected French president Francois Hollande and its close allies won an absolute majority of seats in the National Assembly, the lower house of French Parliament. While superficially good news, as it provides Hollande with the political support to enact real change, it also raises some serious questions as his stated agenda is in many ways directly contradictory to the policies espoused by German Chancellor Angela Merkel.
The alliance between Merkel and prior French president Nicholas Sarkozy was seen as a vast bastion of strength and resolve in holding together the fraying bonds of the European Monetary Union. A rift between between the two largest economies in Europe arising from differences over how best to return the Euro Area to some type of a growth trajectory, could prove to be massively destabilizing, effectively isolating Germany in its calls for strict adherence to policies of austerity and fiscal unification.
Hollande has proposed many measures of budgetary largesse, such as the highly controversial rollback of the French retirement age for certain industries from 62 to 60 (in the face of Germany’s recent increase of the retirement age to 67), which are likely to keep relations between the two key players on edge. Given France’s size and influence in the area, a fallout between France and Germany probably represents the greatest existential threat to the future of the Euro Area. A lot will depend on how President Hollande chooses to use his newly ratified mandate for change, and his willingness, post election campaigning, to meld his policies to those of Germany.
Lastly, and garnering the least attention, was the first free presidential election in Egypt post the deposition of former president Hosni Mubarak. The front-runners in the hotly contested election were Mohamed Mursi, the candidate from the Muslim Brotherhood, and Ahmed Shafik, a former Air Force general who served as premier under Mubarak. The Muslim Brotherhood has declared victory, taking 52% of the vote in the two-man runoff which ended yesterday, although the count is still preliminary and unofficial.
The election was thrown into some disarray as two hours after the closing of polls, the army council that has been overseeing Egypt through the power transition, made a power grab of its own, by issuing a decree curtailing presidential powers, authorizing the ruling generals to appoint the committee that will write the new constitution, and keep the military budget off limits to civilian oversight. The hopes for a free election and democratic society post the violent uprising that toppled Mubarak’s regime are definitely being tested thus far.
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