Monday, 7 May 2012

Farewell to Austerity

Mr. Hollande is now the President of France. Voters on the other side of the Channel, have had enough with austerity. They elected a Socialist, promising to tax the rich, spend more, and get France growing again. The new President is even talking about lowering the retirement age. It is all great stuff.

The Bond Market might have different view. We will see soon enough. The markets open tomorrow, and it will prepare a suitable greeting for the new French President and his anti-austerity rhetoric.

Mr. Hollande will inevitably try to say something soothing for holders of French government debt. He will hint at a more pragmatic approach. Election promises from European politicians are not binding contracts. One needs to say all kinds of things to get elected. Much of it is not meant seriously. Once one is in office......

Mr. Hollande will probably carry the same message to Mme Merkel. "Don't worry old girl" he will say "France might talk a populist game, but it won't actually do anything stupid".

With the French having only a tenuous grip on reality, Mrs. Merkel is now the only grown up in the room. She knows that there is no alternative to a painful and prolonged period of fiscal downsizing. There is no route out of this crisis that involves higher government spending or lower retirement rates. Mrs Merkel will have to slap Mr. Hollande down and take control.

She has a few cards up her sleeve. The fiscal compact, which forms the basis of the European drive towards austerity, is a done deal. She won't agree to any renegotiation. Hollande's idea of allowing the ECB to borrow directly to governments is also dead in the water. Merkel will never agree to it.

Meanwhile, the European Commission has picked up on the fact that Mr. Hollande's election is a game changer, at least in terms of political sloganeering. Its commissioners have begun to de-emphasize the need for fiscal consolidation. They are talking up the need for growth and employment-friendly policies. Growth is a word that drops off easily from the lips of European politicians. None of them have the slightest clue how to achieve it.

The French weren't the only ones going to the polls. The Greeks also had an election. Like the French, they voted to put an end to austerity. Unfortunately, they couldn't decide which way to go. Some went to the extreme left; others jumped to the extreme right. Greek politics is now horribly fractured, with the traditional parties reduced to impotent rumps. The unity government comprising of the socialist Pasok and the conservative New Democracy is over. Forming a new government out of the the disparate collection of irreconcilable parties seems an impossible task. Although no one will say it, the Greek election result was the materialization of everyone's worst case scenario. The Greek thing is about to flare up again.

So where are we? We have a French President promising to implement an economic programme that will see French debt levels sky-rocket. It is a programme that will dismantle the unified Franco-German alliance on the need for austerity; the only thing that held the Eurozone together. The only hope is that he didn't mean what he said and that his electoral platform was a cynical ruse. Meanwhile, the Greeks have voted to have no government. Back in Brussels, the European Commission are talking about growth, without a single credible idea as to how to kick start the European economy. Taken together, this weekend's developments will scare the Bond Market witless.

The Euro has never looked more vulnerable.


electro-kevin said...

I wonder what the exodus of French people will do for the London housing market.

droog said...

I would not recommend any world leader to pay attention to day-to-day market swings.

Last French auction was 3 days ago and borrowing costs dropped. Does this mean the markets were looking forward to Hollande's vicotry? You would think rational market players had weighed in the risks of Hollande's likely victory, right? Maybe they did, maybe they didn't. Today there's news that markets are roiling after the predictions came true. Er, was this not foreseeable three days ago?

How can these guys be so erratic? Aren't sales of bonds and futures supposed to be precisely about that, looking a bit ahead? Bond markets love you one day and rue you the next. In theory this is based on rational risk evaluation but lately bond markets are suicidally erratic.

Looking more at policy matters I am very much against austerity but I wonder how France will fare on its search for growth whilst being tied to the single currency. I'm not an economist and I don't know exactly what should happen now.

As for Merkel, I think you give her too much credit. Of course Germany wants austerity. They made great wealth in the single currency area and they don't want it depreciated. A reunified Germany with a labour surplus and facing the challenge of domestic reconciliation found a purpose in exporting to Europe at rates that were comparatively cheaper than if the German mark tried to sport to the Italian lira. Today this model has caused large debt for the PIIGS and large wealth for Germany. No wonder they want to keep the wealth intact.

That isn't a sing of being a grown-up, just a sign of looking after your own interests. The Greeks can shoot themselves in public all they want; they're not her constituency.

droog said...

(Darn, sport =/= export.
My grammar and spelling have gone down quite a bit ever since I stopped trying to read the broken preview window)

Anonymous said...

As far as I can discern, no-one knows what the soundbite "growth" really means, it's just the current buzz word. The only idea anyone seems to have is to use public funds to directly invest in "productive enterprises" (perhaps construction etc?). Imagine the scope for corruption as public and private entities are handed out billions on a variety of hare-brained badly-costed ideas. No leader anywhere is willing to confront the debt/spending problem head on. All we keep trying to do is avoid going under the surgeon's knife by taking more paracetemol.

Kitz said...

Inflation is a cert . Get into debt , it's the only way they can't tax brains ( at least for a while ) .

Kitz said...

Let renter girl and her mindset bitch about their landlords ,when others with the will and determination to save buy their own homes . It's quite possible to buy a house two miles in any direction from the centre of Manchester for 45 k .
Play the game the way it is , not how it should be .

Anonymous said...

Re the house price ramping - try the south-east, where salaries outisde the City are around 25,000 and a modest terrace is between 200 and 250 if you're very lucky. Nice ratio that. And for most under 35's completely unachievable, even by those who "save to buy a house". If you actually expect that to be sustainable you need to come off the meds

Anonymous said...

@ Anon. Theres a reason for that. Its housing benefit. It distorts the pricing of houses, allows people to take lower wages to work inside London in entry level jobs, and permits businesses to remain inside the City which would have to move out to be able to afford essential services in its absence. It may even encourage unsustainably high immigration putting pressure on finite land. And it costs 25 billion a year.