Back in early February I wrote a post about 2 key things that I was watching out for in Europe that I thought the economic world was underestimating the impact of. I called these things “black cygnets”. One was Spain, the other was elections.
My concerns about Spain came to pass and now it seems elections are doing the same. As I have mentioned a few times in my European coverage, one of my greatest concerns about the failings of Europe’s economic policy response to the crisis was a dangerous political fallout. As I stated previously:
Obviously this is an economic disaster and I have been at the front of the queue screaming about misguided economic ideologies in Europe that have led, and continue to lead, to this situation. However, it doesn’t take much of an imagination to realise that this has the potential to become something much more sinister than just ugly looking charts and that is my real concern.
It was obvious from round one result of the French presidential campaign that the Right was gaining strength in Europe. Marine Le Pen played a critical role in ousting Sarkozy, and given the failing of Sarkozy to re-claim the presidency she is now expected to extend her base into the national parliament in June elections:
An implosion of French President Nicolas Sarkozy’s ruling UMP party has sunk his chances of re-election, far-right leader Marine Le Pen said, calling on disenchanted conservatives to join her National Front in a new grouping to run for parliament.
In an interview with Reuters, Le Pen said centrist UMP stalwarts had wrecked Sarkozy’s strategy of moving sharply to the right in the hope of winning over National Front voters for Sunday’s presidential run-off.
“The UMP is digging Sarkozy’s grave. They prevented him from even having the hope to win,” said Le Pen, who won six million votes in the first round of the election last month and now wants her party to return to parliament.
As I explained last week, although the major theme around President elect Francios Hollande is that his policies will be disruptive to the Franco-German alliance, my own opinion is that he is actually calling for tighter European integration. Whether or not the Germans will be receptive to his opinions given he is calling for additional government spending in the short term is yet to be seen. Initial comments aren’t particularly encouraging:
“I’ve said that everybody who gets freshly elected into office must be able to save face,” Schaeuble said. “So we will discuss this with Hollande in a very friendly way. But we won’t change our principles.”
But it is early days. France won’t accept the same treatment as a small periphery economy and certainly isn’t alone in calling for a re-think of the fiscal compact. I note Christine Lagarde, president of the IMF and former French finance minister, renewing her calls for slower austerity overnight. This is very much a positive move in my opinion, supra-European austerity has been an utter failure, but it is yet to be seen exactly what the outcome of the end of ‘Merkozy’ brings.
Germany, however, may not be President Hollande’s biggest issue in the short term. That may well be his own parliament:
French leftist parties will stop short of garnering an absolute majority in the legislative elections next month, according to several polls conducted Sunday after Francois Hollande’s victory in the presidential elections.
A BVA survey showed the left would garner 46% of the vote, a score that adds up the Socialist Party’s 35% and the 11% attributed to the Leftist Front, led by Jean-Luc Melenchon. Mainstream conservatives would garner 33%, while 17% of those interviewed would cast their ballot for the far-right National Front, led by Marine Le Pen.
The two-round legislative elections will renew the National Assembly, the pivotal law-making branch of parliament, and will decide how strong a backing the president-elect can bank on to push through his agenda.
While other pollsters, including CSA and Ifop, forecast similar showings for the country’s main political forces, the numbers are of limited significance, because the 577 members sitting in the National Assembly are elected by a single-member constituency through a two-round system, and not on a proportional basis.
If no candidate obtains an absolute majority in an electoral district, those garnering the support of at least 12.5% of those enrolled in the electoral lists pass to the second round. The system is supposed to encourage alliances between small parties and favors mainstream parties who have an even presence throughout the nation.
Still, the strong showing of the National Front and the Leftist Front may propel the two extremist parties to the center stage of national policy.
If the Right continues to gain power then that balance will shift further.
France, however, at least has some short term stability, this is not something you can say about Greece.
Below is the break-up of the seats from the Greek parliament after Sunday’s election. Greece’s two long-term ruling parties, PASOK and New Democracy have been smashed and have less than the required votes to build a ruling coalition. New Democracy finished with 19 per cent of the votes and 108 seats , PASOK received 13.3 per cent and 41 seats. These parties have basically been running the country since 1974 and have together previously garnered close to 80% of the vote. In Sunday’s election together they couldn’t even manage 35%:
Obviously this is a massive anti-austerity message from the Greeks, but most concerning is the bottom of the chart. Greece lost 10 per cent of its population to the Nazi’s in World War two, yet a neo-nazi party has managed to gain 21 seats in parliament with approximately 7% of the vote.
Given there are no 2 parties with a viable coalition then the a third part will need to be found. Antonis Samaras, leader of New Democracy, had 3 days to attempted to create an agreement with a third party, but after just 6 hours of talks he has thrown in the towel:
I tried to form a coalition government with two goals: that the country remain in the euro and bailout policies change to include growth measures. I did what I could to get a result but it was not possible. As such, I have informed the president of the republic and handed back the mandate.
The gauntlet has now been handed to Alexis Tsipras, the head of Syriza, who has vowed to form a coalition of the Leftist parties and rewind the bailout agreements with Europe. But, as you can see from the numbers, this is a big ask and his own attempts to form a coalition are likely to fail. If Mr Tsipras is unable to form a coalition then the head of PASOK has three days. After that the President takes over and after one last attempt to build a government will call for a new election some time after June 10.
The problem is that while the parliament is in limbo Greece’s debt payment schedules begins to slip. A payment of €430 million on the yet to be negotiated international law bonds from the PSI is due on May 15, and by June 30 the Greek parliament is supposed to approve and additional €11.5 billion of further cuts in order to secure on-going funding from the Troika.
Given the parliamentary limbo, it is likely that the May 15 payment will be made by the caretaker government, but if a working parliament that agrees to the bailout conditions cannot be formed in the coming days then it is likely that the Troika will delay the next tranche of €31 billion in 2012 payments. If no political resolution can found overall it is likely that the programme will be stopped altogether. If that occurs then Greece will have little choice but to leave the Eurozone and default on much of its outstanding €220 billion in debt.
In other words, Greece is back …. but not in a good way!