France
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
Netherlands
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.
Spain
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!
PMI
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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