The Election’s Over, but Europe’s <br>Difficulties are Not
The Greek election yesterday brought a brief reprieve as a nation and the common European currency stepped back from the brink.
But, from the view this morning, little has changed.
Yes, the Eurozone has survived its latest test, yet there is little indication where it will go from here. Considerable continental support for the common currency remains, and EU officials will soon introduce initiatives to consolidate banking and financial policy in the European Union.
Still, the problems keep mounting, and there is very little resolve here.
At this point, there are a lot of actions (or lack of actions) that could still upset the entire apple cart.
Greece must now form a government, gain widespread acceptance of tough austerity measures, and wrestle with widening unemployment, pension shortfalls, and reduced government services. Anger will not subside, especially with more than 50% of the nation’s youth without a job. With prospects still looking bleak, the streets will not be any calmer.
The pro-bailout New Democracy party and its leader, Antonis Samaras, now need to form a majority coalition. Samaras must start his day today with the No. 2 vote winner, Alexis Tsipras and the far left “let-the-rest-of-Europe-go-to-hell” Syriza party.
Tradition requires that the primary vote earners discuss forming a government first. Tsipras may relent on using his newfound political strength in the interests of national unity, but I wouldn’t count on it. The former communist student organizer has another agenda in mind.
Samaras and his conservatives will probably end up forming a government with the socialists. That is, itself, a clear statement on how disjointed European politics has become.
This morning, New York trading will take some profits from the run up last week and Europe will shrug off an election that has decided nothing to focus on the next sick patient – Spain.
Actually, what is happening there has been on the radar for some time.
With 10-year Spanish bonds yields in excess of 7% as I write this, and the Spanish stock exchange down triple digits, the bailout provided only one week ago now seems utterly insufficient.
It is becoming evident that the EU financial markets and a weakening banking sector will not be able to stem this rising tide.
Something more needs to be done.
The Myth of American Isolation in the Global Markets
Make no mistake.
All of the rhetoric floating around about how insulated the U.S. markets are becoming to the affairs of Europe means very little. Yes, America is better situated and possesses a remarkable engine for generating return. However, if Europe starts to slide, the U.S. will be moving in tandem with it.
Global markets need a European fix, but any genuine solution is likely to take some time.
Still, there are some matters beyond dispute.
For one, despite the problems, European prospects (and thereby wide areas of investment elsewhere) are much worse off without the euro. Greeks may widely disagree as to what policy comes next, but polls consistently indicate that 80% of them want to remain in the Eurozone.
For another, looking at the widening interest rates and declining stock markets one country at time fundamentally misses the point. The EU has reduced the meaning of national borders, especially when it comes to finance.
That means this is not a Greek crisis. Nor is it a Spanish, Italian, Irish, or Portuguese crisis.
This is a European-wide crisis.
And when a continental-wide currency exists, the fever will show up there. Unfortunately, the centralized apparatus to attend it is insufficient.
The focus now, therefore, is on the relationship between two very different institutions. The first is the European Central Bank, and the second is the European Council.
The ECB will need to inject additional liquidity into the Eurozone – and rather quickly at that. We may debate the overall propriety of stimulus projects, but without another dose now, Europe (and American) investment prospects are in for tough sledding.
The bank knows that, but it will resist for one simple reason that brings us back to my point earlier. Without resolve and a concerted plan of action stimulus programs merely move money from one place to another, ultimately contributing to little more than a rise in inflation.
ECB head Mario Draghi has already warned the EU that it should not expect his bank simply to cut checks (sorry, this is Europe; that should be “cheques”). He has moved the ball into another court.
He has framed it (quite rightly) as a European Council matter. That body comprises the heads of state from EU members, and they are set to meet again at the end of this month.
The EU has reached a crossroads. It survives (along with its common currency) only by further integration. Retaining the quaint nationalistic customs of European postage stamps is endearing, but whether they are standing in a crowd before the Parliament in Athens or in a Madrid unemployment line, the average citizen is exhausted.
And getting angry.
There is a reason that Tsipras catapulted to political prominence in Greece or François Hollande’s Socialist Party followed up his presidential victory in France with a solid parliamentary majority in the other European election held yesterday.
The heads of state must act, and decisively. If they continue to debate how to most effectively throw one or another under the bus, we are in for a long and agonizing journey to a fractured Europe.
That development will hardly play well in Berlin, Paris, or Rome.
Or Peoria, for that matter.
That being said, if you’re looking to make a move in these conditions, sit tight. First and foremost, we need to be patient until greater stability emerges in the markets.