The big news this weekend was the poor showing in the first round of elections by center right French President Nicholas Sarkozy. Sarkozy actually took it on the chin from voters to his left and right as he was beaten by leftist Socialist candidate Francois Hollande and saw a non-insignificant portion of the vote go to far-right National Front leader Marine Le Pen.
Sarkozy is so badly damaged he had this to say about the National Front voters who turned out for Le Pen, “National Front voters must be respected.” This is widely seen as telegraphing Sarkozy’s only path to victory in the second round, courting the Le Pen voters in an attempt at some center right/ far right coalition.
What’s more interesting to me is that Sarkozy seems to be getting it from both sides as the Merkozy brand of Very Serious People of the Center™ seems to be turning stale across Europe. Hollande is basically campaigning as the anti-austerity candidate from the left and if elected would join other recent movements around Europe of people getting tired of current policy. For instance in The Netherlands this weekend:
Prime Minister Mark Rutte, whose centre-right coalition has been in power since October 2010, said on Saturday that crucial talks on budget cuts had collapsed and that new elections were inevitable.
In the short term, the government must seek support for budget cuts from the opposition parties.
But uncertainty over the makeup of a new government, and waning voter support for bailouts and austerity measures, raised questions over Dutch backing for a fiscal responsibility pact seen as crucial to helping Europe cope with its debt crisis.
The fact that Sarkozy may have to court voters from the right to combat these developments is also a little weird. Le Pen voters are protectionists that are also mad about current policy. Le Pen has gone on record advocating for less free trade and the nationalization of the banks. She also wants to put restrictions on the banks similar to the repealed Glass-Steagal law in the U.S. Like her dad she’s also got all the anti-immigrant stuff but she tries to keep that quiet.
Here’s a look at the stated policies of Hollande and Sarkozy. You’ll notice the biggest difference is in the plan from Hollande to try to jumpstart the economy with an increase in spending. Sarkozy plans on continued spending cuts. Both look like they want to tax the banks: (via BergenCapital)
Either way the French elections go, ending up with either a more left Hollande or a Sarkozy pulled more to the right, the end result is a more isolated Angela Merkel and Bundesbank in Germany.
In the near term there’s more uncertainty in markets as Merkel has made it clear that the current path of austerity is required to guarantee future and current bailouts. Hollande has run on re-negotiating these demands. But in the medium and long term, what happens? Will Merkel and the Germans be forced to soften their demands? Is that even politically possible for her within Germany? Remember, German unemployment is only in the fives, there’s not a lot of political will to suddenly be less tough on the rest of the Eurozone.
Both scenarios are tricky, if current policy holds, Merkel runs the risk of losing all her partners across Europe to elections, throwing the whole plan into doubt. If she tries to tack to the left (or far right, these things are confusing in Europe) and lessens her demands on austerity she runs the risk of being run out of town herself. The whole thing is one big NIMBY situation and just goes to show how fragile everything in Europe is under the current fiscal vs. monetary set-up.
All of this amidst the latest flash PMI out of Europe showing the slowdown creeping into the core countries. This could force Merkozy into even more action at the very least along the same lines they’ve been pursuing from the bailout standpoint: (via PragCap)
The Markit Eurozone PMI Composite Output Index fell to a five-month low in April, according to the preliminary ‘flash’ reading which is based on around 85% of usual monthly replies. The index fell
for the third month in a row to 47.4, down from 49.1 in March, to signal a faster rateof decline of private sector economic activity. Output has fallen seven times in the past eight months.
Output fell at the fastest rates for five months in both manufacturing and services, with the former
seeing the steeper rate of decline.
In a nutshell Sarkozy and Merkel are in trouble if the status quo continues. They’ll probably have to make some bold moves in the near-term. Ultimately, only changing how the European Union is set-up to deal with these questions of account imbalances across sovereign countries sharing the same currency will solve the crisis. In the meantime global markets will continue to be held hostage to the situation in Europe.
We’ll keep an eye on this and look for some plays in Europe over the next few days and weeks.