Monday, 23 April 2012

Hollande. Europe's growth is slowing.

French presidential contender Francois Hollande of the Socialist Party came out with most votes in the first round of the French presidential elections. He will now face incumbent president Sarkozy in the second round in two week’s time. Opinion polls have persistently shown that Holland would win the second round hands down. Assuming that he wins, there will probably also be snap parliament elections.

Markets are now nervous that a new French government will challenge the German-imposed austerity programmes. Hollande has been clear that he wants to renegotiate the basis for the euro-zone “fiscal compact”. I have previously been quite convinced that faced with German determination, Hollande would back down quickly. But it seems that one of the austerity stalwarts, the Netherlands are also beginning to have second thoughts about the austerity programme

Growth has slowed markedly in the Netherlands in the first months of the year. It has now led to the Anti-Immigration party PVV to refuse supporting the EUR 16bn cutbacks, required for the country to meet the demands of the Fiscal Pact. Party Chairman Geert Wilders demand new parliamentary elections, in order “to allow the voters to decide” on the “Brussels diktat”. The open question is whether the other political parties can find an agreement to force through further savings as the economy is slowing.

Bank of Spain released its quarterly survey this morning and it is not uplifting. Economic growth in Q1 is falling, demand as well as supply is contracting. Employment is falling at a rate of 4% per year. BoE points out that private sector demand is weak and the decline in house prices has accelerated to a rate of more than 7% per year. So far, exports have been a growth driver. That has also stopped, but is more than balanced by a strong fall in imports. Add the significant budget cutbacks. Ugly!

This morning’s “Flash” PMI for the Eurozone and for Germany were not good news. Essentially, they point to a stronger rate of decline in Europe now at the start of the second quarter. I am certainly uncomfortable with this, as it demonstrates what has been visible in the Euro-zone monetary data, that bank lending is not reflecting a recovery.

I need some time to think this one over. My expectation has been that Germany would do nicely, and that the rest of Europe would be past the maximum downdraft forced by the austerity programmes. With Germany as the motor, I had expected Europe’s recession to end now. I may have been mistaken on two elements: Germany’s growth is still more driven by exports than by domestic demand – which means that the economic activity in the other European countries affect key export sectors. And the austerity programmes in Italy, France, UK, Spain and elsewhere may have more power in pulling down the economies than expected.

If this is the case, we will see Europe – including the UK - tanking under the weight of its own mistakes (the accelerated austerity programmes) while the US will do relatively fine because of the absence of austerity programmes for now.

If France and the Netherlands join Italy in a criticism of Germany regarding the austerity programmes, we are entering a phase of new political dynamics. The austerity programme may come under heavy fire, eagerly helped by the London-based financial press who will find it a brilliant opportunity to counter the increasing German influence on the continent. We may be looking at a renewed round of crisis meetings.

It will only confirm my opinion that the German zero-deficit ideology was destabilising for the economic growth. I will be happy if the rest of Europe comes to its senses and oppose Germany’s wrong designs. I am not sure I will be happy about the way it happens. It could be messy.

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