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Monday, May 7, 2012 – The Revolution in Greece and France


DOW – 29 = 13,008
SPX +.48 = 1369
NAS + 1 = 2957
10 YR YLD unch = 1.88%
OIL +.07 = 98.01
GOLD – 3.60 = 1639.50
SILV -.25 = 30.19
PLAT + 2.00 = 1535.00

The results pretty much followed expectations: An anti-austerity backlash by voters in Greece an France. First attempt at forming Greek coalition fails. Hollande seeks to augment fiscal pact with growth plan. Merkel tells French president-elect “no renegotiation”.

Greece, where Europe’s sovereign debt crisis began in 2009, was slightly discombobulated after the election boosted left and right-wing fringe parties, stripping the two mainstream parties that backed a the EU/IMF bailout of their parliamentary majority. Uncertainty over whether the country could avert bankruptcy and stay in the euro deepened on Monday when the leader of the conservative New Democracy party which won the biggest share of the vote, failed within hours to cobble together a government. The leaders of the New Democracy party had been given 3 days to form a government but this morning they said it was impossible.
Next in line to try to form a government will be Left Coalition leaders, whose party came second on a platform of rejecting the austerity conditions of Greece’s latest bailout program. So, that might be interesting. The Left Coalition is considered a splinter group of the communist party, and now they are in the spotlight because the socialists were too centrist. The far right Golden Dawn party, essentially neo-nazis, achieved a parliamentary breakthrough. In hard times, voters are receptive to extreme ideas. It is easier for a politician to blame immigrants rather than address the real problems. That is a troubling trend.
Greece had appeared to have averted a disorderly default and euro exit in December when a technocratic government led by former central banker Lucas Papademos, and supported by the two main parties, agreed on a second international bailout under which private bondholders accepted sharp write-downs on their holdings. Supporting the technocrats backfired. After four straight years of recession, wage and pension cuts and still rising mass unemployment drove angry Greeks further to the left and right.
Greece consistently missed targets under its first program, which led to the restructuring of its private-sector debt under the second package. Officials say any further backsliding now will not be tolerated, especially with the International Monetary Fund a reluctant partner in the second program. Harsh words. Voters had a louder voice this weekend. Greek finance ministry officials say the country might run out of cash by the end of June if it does not have a government in place to negotiate the next installment of EU/IMF aid and projected state revenues fall short.

Euro zone leaders have tried to avoid a Greek default and departure from the euro, which Merkel has said would be a catastrophe, mainly because it could set a precedent for other troubled south European countries. There is no public support for further bailouts among the lenders, and clearly the Greek voters find the terms onerous. Some European diplomats and economists have been predicting the possibility of Greece leaving the euro area for months.
In France, it was a clear victory for Socialist Francois Hollande, who wants to change Europe’s policy focus from austerity to restoring growth, Hollande clobbered conservative incumbent Nicolas Sarkozy. German Chancellor Angela Merkel, who had openly supported Sarkozy, her partner in euro zone crisis management, promised to welcome Hollande “with open arms” and work with him to maintain strong Franco-German cooperation at the heart of Europe but she also made clear there could be no renegotiation of a fiscal discipline treaty. Hollande has said France will not ratify it unless measures are added to promote economic growth.
Merkel sent her message through journalists, saying: “We in Germany are of the opinion, and so am I personally, that the fiscal pact is not negotiable. It has been negotiated and has been signed by 25 countries. We are in the middle of a debate to which France, of course, under its new president will bring its own emphasis. But we are talking about two sides of the same coin – progress is only achievable via solid finances plus growth. “
Jean-Claude Juncker, head of the Eurogroup of euro zone finance ministers, said he had told Hollande on that the European Union’s fiscal pact could not be renegotiated. Juncker said: “It will not be possible to change the substance of the fiscal pact, there will not be a formal new negotiation in that respect.” However, he added: “It is possible to add growth elements, not necessarily in the form of a treaty.”
Of course, the reality is that everything is negotiable. The next question is whether it is workable and whether there will be any cooperation, any real attempt to help growth or whether it will become an ideological battleground, where right and wrong lose ground to left and right. Hollande’s election gave leaders of southern European countries a new ally in their effort to temper the German drive for austerity that has exacerbated their problems. Italian Prime Minister Mario Monti promised to cooperate with Hollande on refocusing European policy towards growth.
However, International Monetary Fund Managing Director Christine Lagarde said that the world’s advanced economies still had to cut their debts or face even more pain. In a speech in Zurich she said: “The most important element is to lay out a credible medium-term plan to lower debt. Without such a plan, countries will be forced to make an even bigger adjustment soon.”
Lagarde also said “austerity versus growth” was a false debate as it was possible for countries to make policies that were both good for stability and growth. The rhetoric is already shifting.
European stocks slipped early in the day on the Greek news but most recovered later, except the Athens stock exchange, down 6.67 percent. French debt was spared from the selloff, in a sign that markets are more relaxed about the moderate Hollande. The yield on French 10-year bonds fell to its lowest in seven months.
The elections in Europe will be analyzed for some time. Maybe the results had more to do with deep seated resentment for Germany than anything else. It is fairly clear that the French and the Greeks revolted. The elections were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It’s far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity. So what are the alternatives? Break up the euro. Greece and Spain would have a quick way to restore cost-competitiveness and boost exports, by way of devaluation. German leaders claim their economy should be a model. What they don’t like to acknowledge is that the German recovery was driven by a huge trade surplus with other European countries, specifically the nations now in crisis; which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment; that is, if the rest of Europe, especially Germany, experienced a bit of an inflationary boom, it would drive demand to the periphery.
British Prime Minister David Cameron wrote today in an article in the conservative Daily Telegraph: “When people think about the economy they don’t see it through the dry numbers of the deficit figures, trade balances or inflation forecasts — but instead the things that make the difference between a life that’s worth living and a daily grind that drags them down.” This is the old question: What’s the economy for anyway? The daily grind seems to be dragging down most Brits, and even Cameron’s government. Britain’s conservatives have been taking a beating.

The choice isn’t simply between budget-cutting austerity, on the one hand, and growth and jobs on the other. It’s a question of timing. If government cuts spending too early, when unemployment is high and growth is slowing, it makes the debt situation far worse. GDP slows faster than debt, and the ratio is skewed. The proper sequence is for government to keep spending until jobs and growth are restored, and only then to take out the budget axe. The problem is that the budget axe is never a welcome sight because it might just be your neck on the block. If Hollande’s new government pushes Merkel in this direction, he might end up saving the euro and, ironically, the jobs of many conservative leaders throughout Europe.And we’ll be watching in the United States. If it plays in Brussels, it’ll play in Washington. America has a long-term budget deficit that’s scary. So does Europe. There is a chance the voters in Athens will influence the voters in Athens Georgia, and the voters in Paris might have something to say to voters in Paris Texas.
Ron Paul is still a candidate for the Republican nomination for President. He won’t win, but he is a candidate. He is also still a congressman, and as such he will preside over hearings that take aim at the institution Paul has criticized throughout his political career: the Federal Reserve. On Tuesday, the House subcommittee on domestic monetary policy and technology, which Paul chairs, will consider various proposals to overhaul the Fed. Paul argues that the Federal Reserve is the root of many economic evils and should be eliminated. His ideas, which for most of his career have been considered to be on the fringe, have moved into the mainstream.
One proposal is being introduced by Indiana Republican Mike Pence, would limit the Fed’s responsibilities to controlling inflation. Another Republican proposal, the Sound Dollar Act, would shift control of some aspects of monetary policy to the regional Federal Reserve banks and out of Washington.

And to confirm the old saying that politics makes strange bedfellows, Democrats and liberal groups have also attacked Federal Reserve Chairman Ben Bernanke’s policies. They’ll have their day at Paul’s hearing, too. The Occupy movement claims that the Fed is held captive by the interests of major banks. Massachusetts Representative Barney Frank has a bill that would centralize even more control in Washington, moving it away from the regional banks. Representative Marcy Kaptur (D-Ohio) would curtail the influence of industry by cutting the 14-year terms of Fed governors in half and doubling the amount of time a retiring member of the Fed must wait before taking a job at a bank. Dennis Kucinich (D-Ohio) would take even more power from the Fed: He’d make it part of the Treasury Department.
Now if only we could get Kucinich and Paul to run together on the same ticket. I’d vote for that, if only for the entertainment value.
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