This week political rows in France and the Netherlands also crowded in on the European single currency.
Hollande in France
In France the emergence of Francois Hollande as the front runner to be President will mean renegotiating the fiscal discipline treaty the 25 EU countries signed towards the end of 2011 if he wins. The French electorate showed some defiance to the Franco-German establishment’s approach to keeping the euro together with austerity packages.
Some voted on the right, warming to eurosceptic rhetoric; some voted on the left, endorsing anti-capitalist and anti-banker rhetoric. Sarkozy and Hollande now have to woo these voters to try to secure overall victory, which means each of them sharpening their criticisms of the current euro orthodoxy.
Meanwhile the Dutch government fell. One of the parties to the coalition pulled out, refusing to go along with further spending cuts and tax rises in the name of deficit reduction. It appears there will be a caretaker government under Mark Rutte, the Prime Minister who has had to call for new elections.
There could be a few months while they organise a ballot and then form a new coalition assuming the results do not produce a majority winner. The Netherlands has not yet ratified the fiscal treaty, nor enacted the ESM bail-out fund. This loss of governing authority in one of Germany’s closest allies and better managed economies may delay and complicate the new architecture for euro support which Germany has been battling to achieve.
The Dutch budget deficit is only 4.7% of GDP, low by current western standards. The austerity package was mild by comparison to Greece or Ireland. Nonetheless it was quite enough to bring down a government, and to leave questions hanging over the current support measures for the euro.
Change in Greece
Greece is going to the polls soon, and we await news on whether the new Greek government will be willing to carry on implementation of their tough deficit control measures under their second loan agreement.
The Germans are concerned about the amount of their surplus money they now have at risk through the European system of central banks. German money is being used by the ECB to lend on to more distressed banks and indirectly through those banks to weaker countries. They need have no major concerns all the time every state stays within the euro and all the time the ECB stands behind its liabilities. Were one or more country to leave, or were a country to default on state debt held by banks and the ECB, then Germany would have to take her share of the losses.
The system still looks far from happy.
Electorates are weary of austerity programmes long before they have succeeded in getting deficits down to safe levels. Governments are likely to lose their tenure if they back the EU austerity measures too enthusiastically, or are being driven to a more sceptical stance about the wisdom of the current scheme.
We still think it best for investors to avoid the euro area, as it remains unclear how big a sacrifice the various countries will and can make to keep it going, and who will have to pay all the bills.