A Pink Slip for Austerity
04/24/2012 10:22 am EST
The first round of France’s presidential election was won by voters demanding fundamental change, writes MoneyShow.com senior editor Igor Greenwald.
The bad news for Europe is that its economic policies aren’t working. The good news is that the authors of those policies might soon not be working either.
French President Nicolas Sarkozy has already been given two weeks’ notice, his second-place finish in the preliminary vote Sunday foreshadowing a probable re-election loss on May 6. And though Socialist Francois Hollande came in first, the real shocker was the strong third-place showing by far-right National Front leader Marine Le Pen, whose 18% of the vote nearly doubled her father’s tally five years ago.
Le Pen drained support from Sarkozy by attacking Europe as a “country-killing grinding machine, a machine that has killed our prosperity and our democracy.” Her prescriptions include the abrogation of Europe’s new fiscal treaty, “the horrible stability pact [that] condemns us to pay endlessly for the countries that are victim of the euro.”
Actually, the victims of the euro, France included, are paying to shield French banks from the consequences of their Italian and Spanish loans. But Le Pen is right to worry about the damage austerity has caused, just as others are right to fear the rise of populist, nationalist parties like the National Front. They’ve risen in part because their opposition to austerity is increasingly seen as sensible, while the supposed moderates are stuck with arguing for tax hikes and cuts in services to please the Germans and the Eurocrats.
Dutch Prime Minister Mark Rutte, perhaps Germany’s truest ally in forcing austerity on the continent, has just resigned because he couldn’t convince his far-right coalition partner to commit to the required cuts at home. As a result, the Dutch AAA rating is at risk, and the spread between the Dutch and German bond yields is as wide as it’s been in three years.
Austerity as it’s being practiced in Europe, without simultaneous devaluation, is plunging the continent into a deepening recession and robbing its most ardent supporters of the votes they will need to stay the course.
The next German federal election is still 18 months or so away, and that’s a lot of time for a German economy that’s rapidly losing momentum. A new purchasing managers survey Monday suggested the country’s recently booming manufacturing sector is now shrinking at the fastest pace in nearly three years.
The German stock market fared even worse than Spain’s on Monday, shedding 3.4%, and the remaining 10% lead it’s amassed this year now appears to be in serious jeopardy.
In another 18 months, will Germany have any creditworthy allies left? The example of Sarkozy and Rutte will not encourage others to toe the line.
Meanwhile, elections in Greece and Italy are coming too, and French election results will only embolden critics of austerity in those countries. Italian consumer confidence is at a record low as budget cuts take their toll. Spain’s bond yields are back above 6%.
Yet the European Central Bank, which was taking victory laps after lending lots of cheap money to the banks less than two months ago, has just rejected foreign entreaties to get creative again. Without further forbearance from the ECB, Europe’s decision to wear shoes two sizes too small will saddle it with bloody feet, but probably not smaller budget deficits.
Bond traders and the politicians who want to win elections get it. Others may soon find themselves unemployed.