Glib pronouncements about the likelihood of Greece leaving the euro have returned to inboxes and television screens, and Merkollande is deemed a poor substitute for Merkozy, both as a name, and in terms of the implications for markets from its policies.
Protest voting
What we have seen across Europe (including here in the UK) is a protest vote. This is not surprising given high unemployment, low growth or recession and a general sense that natural justice has not been served in the way the world has dealt with the aftermath of the Great Recession.
In the UK, the Tories got beaten up in the local elections. Labour won 38% of the vote to the Conservative’s 31%.
The UK economy looks relatively OK but even here we are technically in recession. The general sense of lack of natural justice is also a powerful factor here in my view. Net result was a resounding defeat for the government.
But we know UK local elections are a protest vote that do not necessarily equate to the electorate’s true political leanings. Remember that when you look at the elections across Europe.
Local elections in Italy involving around 20% of the electorate also saw big wins for protest candidates including a professional comedian who won 20% of the vote in Parma.
In France, the two stage Presidential election allowed a protest vote in round one and a more rational vote in round two. So the big winner in round one was right-wing populist Marine Le Pen who got 18% of the vote. Sarkozy was the big loser, becoming the first Fifth Republic incumbent President to get fewer votes than his major challenger in the first round.
The second round of the election produced a closer result than the first round would have suggested. Sarkozy got a respectable 48.4% of the vote. So, protest vote in the first election, a more considered vote in the second round.
Hollande’s team
The next hurdle in France is the Legislative elections on 10 and 17 June. Hollande will appoint a Prime Minister before then (likely to be Jean-Marc Ayrault, the President of the Socialists in the Assembly) but it won’t be until Parliament reconvenes on 26 June that we will know the extent of the new government’s support. Hollande has suggested that between 3 July and 2 August he wants to push a reform package through Parliament involving such things as eliminating the 1.6% VAT hike due in October and his finance and tax reform initiatives.
So the summer will be full of French politics. The key will be whether it destabilises the relationship between France and Germany. One suspects Merkollande will try very hard to stay together for the sake of the children. But let’s see.
Greece will likely have another election on 17 June. In my view, this is a good thing. The weekend election produced an enormous protest vote with parties opposed to the agreement for the Greek bailout winning just 32% of the vote and 149 of the 300 Parliamentary seats.
The conservative New Democracy Party has already failed in its attempt to form a government. The second placed Left Coalition Party is now trying but it too will fail. This makes a second election almost inevitable.
That second election will only be contested by the seven parties that won enough votes in the first election to gain Parliamentary representation. Those seven parties won 81% of the vote between them.
Given that the second election will likely become effectively a referendum on staying or threatening to leave the euro, the stakes will be high. This should, hopefully, concentrate the minds of the electorate.
Greek euro future
There is a lot of commentary around how Greece ‘should’ leave the euro. This commentary may turn out to be an accurate prediction of what will eventually happen. But we should hope (unless we are 100% short anything other than gold and tin openers) that this does not happen.
Any Greek exit would lead to the new Greek currency being devalued a minimum of 50% and likely more. It has to import commodities and would not have a currency that could be used for doing so. There would therefore be shortages of energy and food. Combine this with the wealth destruction within Greece caused by the devaluation and you have social chaos.
This is a country that was run by the Army as recently as 1975 and which has a party that got 7% of the vote and 21 Parliamentary seats on a platform that included mining the border with Turkey.
Contagion would become a serious issue with Portugal, Ireland, Spain and at least Italy likely seeing a big widening in bond yield spreads over bunds. Banks across the euro area would be threatened by deposit runs as that contagion fear led individuals and corporations to remove their assets from the euro area. There is, I’m afraid, no such thing as ring-fencing a member of a common currency area. Nothing good comes of a Greek exit of the euro.
The run-up to any second election will doubtless produce many lurid headlines. And the situation in Greece is indeed fragile. But we should not assume that the first election is a reliable guide to the second one.
