What a difference a day makes.
Today, Europe woke up to a new and potentially destabilizing political reality, as Nicholas Sarkozy – Angela Merkel’s co-pilot in European austerity – went down in defeat, just as the two major parties in the Greek Parliament suffered the worst thrashings in more than 30 years, giving rise to extremist parties on both the left and right.
Change that clarifies national economic policies to constructively solve the continent’s sovereign debt crisis would have been a good thing. But yesterdays’s results, seem only to make any cooperative solution more remote, highlighting the renewed danger of an uncontrolled economic contagion amid political paralysis.
In Greece – cradle of democracy and the epicenter of the sovereign debt crisis – the election results punished the parties that spent their way into Greece’s debt crisis, and subsequently agreed to the severe EU austerity program of budget cuts and tax increases to get a handle on the nation’s debt.
The center-right New Democracy party came in first with 19 percent of the vote, a sharp drop from the 33 percent it won in the last national election in 2009. Worse for the establishment parties, the ruling Socialists or PASOK party, who had won 44 percent of the vote in 2009 came in third with 13 percent.
From a ruling coalition of 77 percent, the two major parties now barely make up 32 percent of the new Parliament.
Alarmingly, the socialists lost second place to a more radical leftist party – the Coalition of the Radical Left or Syriza, which won 17 percent of the vote. Syriza is made up of parties including the Coalition of Left Movement and Ecology and a revolutionary Marxist group called the Internationalist Workers’ Left.
Adding to leftist discontent, the Greek communist party – the KKE – made a better that expected finish with about eight percent of the vote.
On the right, the Golden Dawn party won seven percent and its first seats in the Greek Parliament.
During the many battles over the Greek bailout, Angela Merkel was often portrayed in cartoons as a Nazi wearing a swastika. Now, in Golden Dawn, the Greeks have voted neo-Nazis into their Parliament.
Syriza leader Alexis Tsipras seemed to be speaking for all voters who delivered a stunning rebuke to the government establishment when he said that his party would put an end to Greek sacrifices that serve only “oligarchs, the plutocrats and big capital.’ Tsipras has already called for the annulment of the “memorandum of bankruptcy, and has called the EU bailout “barbaric.”
This matters.
While New Democracy – a strong supporter of the EU bailout – will get first crack at forming a coalition, more than 70 percent of Greek voters voted for parties that are to differing degrees against the bailout. To assemble a governing majority, it would appear that Greece will seek to modify the terms of the last bailout that was so painstakingly negotiated.
Worse, the results of the election directly threaten the next step in the Greek bailout package. In June Greece is supposed to approve an additional $14 billion of budget cuts for this year, and $18 billion for 2013-14. Those cuts are the predicate for the next $39 billion installment of the EU bailout.
No cuts? No bailout money, which would plunge Greece into even more chaos and certainly pressure European sovereign debt markets and roil global capital markets.
That economic nightmare is played out against the fallout from this election. Failure to of any of the three major parties to form a working majority coalition will mean a caretaker government and new elections in September.
At a moment of supreme risk, Greece will not have an effective government.
In France, Socialist Francois Hollande beat President Nicholas Sarkozy based on an economic program that calls for renegotiating the European austerity treaty, raising the top French tax rate to 75%, lower the retirement age to 60 and increasing government spending on teachers and other workers in an attempt to spur economic growth.
But Hollande’s plan runs headlong into French economic reality.
France has a debt to GDP of 90 percent in an economy which already has one of the highest tax rates in Europe. As in the US, trillions in unfunded pension and health care guarantees loom in the near future. Hollande’s plan is attractive, but unrealistic. Indeed, his plan for government spending to create economic growth looks horrifyingly similar to President Obama’s Stimulus package, which flushed nearly a trillion taxpayer dollars as unemployment crept up near 10 percent.
Hollande will need to be mindful that his program does not occur in a bubble. Moves to loosen strict deficit targets and increase government spending will have an impact on national deficits and debt, which in turn, will have an effect on the sovereign debt market. France, like Germany, enjoys low rates right now. Implementing Hollande’s economic program will put pressure on French bond rates, making it more expensive for France to finance its debt, adding to the Euro contagion.
And into this volatile mix comes Germany.
Conventional wisdom after the Greek and French results seemed united around the idea that Germany would have to yield on its “austerity for euros” policy as the only way out of the crisis. But that is not actually the only path for the Germans to follow.
Less reported amid the votes in France and Greece, Germany held regional elections over the weekend in Schleswig-Holstein. Angela Merkel’s Christian Democrats took the worst drubbing in 50 years, and likely lost power to the opposition Social Democrats. It is the fourth straight state election that the Christian Democrats have lost since the sovereign debt crisis have overtaken Europe, and may presage growing disenchantment among the German electorate as the nation gears up for national elections in 2013.
But the German view could hardly be more different from those who sought Sunday to vote against German engineered austerity and greater fiscal freedom. For Germans, who have sacrificed and saved, made hard but necessary changes to their social welfare programs, as well as improving the efficiency of their labor, manufacturing and capital markets to better compete in the global economy, the pleas for more massive EU (read German) help for struggling economies with massive debt is falling on increasingly frustrated ears. From a German point of view, the Germans have made the hard changes necessary to be successful, and it is now up to the individual countries in trouble to make the same changes.
The new reality of EU states rebelling against Teutonic financial discipline now has the potential to shatter Angela Merkel’s own Party, where a strong plurality are against any additional bailouts or greater German exposure to bad sovereign debt, until other countries get their economic houses in order.
Until now, Merkel has been walking a tightrope, ensuring Germany’s preeminent role in guiding the EU through the debt crisis through Germany’s financial influence, while also assuring her political base that Germany would not over-commit its own resources to countries that refuse to help themselves. And with the Greek bailout signed and sealed, generous ECB lending artificially keeping a lid on “at risk” sovereign debt rates, and an EU wide austerity pact nearing victory, it seemed that Merkel’s risk had paid off; at least in terms of setting a path for German-inspired European recovery.
After Sunday, all bets are off.
Instead of the EU coming together in common purpose, Sunday’s elections presage a continent moving in different political directions, but tied together in an economic economic quandary, with trillions of debt at stake.
Why should any American care?
The EU has a larger GDP than the United States. If it stalls or falls apart, there is no wall that will stop the ripple effects from washing up on US shores.
As Vice President Cheney once said, “Big Time.”