U.S. stocks stumbled out of the gate and major European bourses suffered heavy losses Monday after another weekend of negative headlines in the eurozone.
First, Angela Merkel’s Christian Democratic Union party suffered big losses in a local election for the second straight week. In North Rhine-Westphalia, Germany’s largest state, the CDU received just 26% of the vote while a coalition of left-leaning Social Democrats and Green party candidates received over 50%.
The election results raise the risk that Merkel’s government will be ousted in the general election next year and embolden newly elected French President Francois Hollande to push harder for pro-growth measures in the EU vs. the austerity favoured by Merkel.
Second, Greek party leaders failed to form a coalition government, raising the possibility of another national election in Europe’s most-troubled economy. The political crisis comes amid rising market expectations that Greece will exit the eurozone sooner rather than later.
Notably, NY Times columnist Paul Krugman mused this weekend that Greece could abandon the euro as soon as “next month,” which he speculates could be the beginning of the “end game” for the euro itself. “And we’re talking about months, not years, for this to play out,” he writes.
In the accompanying video, Henry and I discuss these latest euro-developments with Ian Bremmer, president of Eurasia Group and author of Every Nation for Itself: Winner & Losers in a G-Zero World.
Generally speaking, Bremmer believes most observers have “gotten over their skis” about the meaning of recent elections in Germany and Greece.
“If you take a look at Europe with a fresh eye…overwhelmingly the dominant meme in Europe is austerity, that’s where we are,” he says.
“Is Germany now going to start writing big checks, domestically or internationally? Absolutely not.”
As for Greece, Bremmer believes they’re “playing chicken” with the Germans and the EU is “still firmly in ‘kick the can’ territory” when it comes to Greece.
“These two sovereign cars are travelling pell-mell at each other on a little road and they’re all saying ‘we’re not going to move’,” Bremmer says of the Greeks and the Germans. “But I don’t know why the only people who could possibly blink and end up in the ditch are the Greeks. At this point, there’s still some road. And I think there’s more road than most people think.”
Furthermore, Bremmer “would not presume you’re going to get a worse outcome” in the next round of Greek voting, noting polls show 70% of Greeks support staying in the eurozone. Voter turnout was low in the elections two weeks ago that threw the nation into political chaos.
As for the specifics of Kruman’s latest forecast, Bremmer could barely restrain his criticism, calling the famed economist and columnist “disingenuous.”
“Krugman is a very smart guy and he knows better than to manipulate people ideologically,” Bremmer says. “The notion the eurozone is going to suddenly implode? No CEO with real money on the table today in the U.S. investing in Europe actually believes that. It’s not actually credible.”
To be fair, Krugman isn’t the only observer speculating about the “end game” for Europe, although his timetable is quite aggressive. And in the essence of fairness and equal time, The Daily Ticker is extending an invitation for Krugman to respond. Stay tuned!