NOMURA: 6 Crucial Things To Watch During Europe's 'Summer Of Discontent'

Richard III, painting

Photo: Wikimedia Commons

This week marks the second anniversary of the establishment of the EFSF, which was proclaimed to be the solution to the Greek/eurozone crisis at the time but uncertainty over the future of the monetary union is far from finished.In his latest report, Nomura’s Alastair Newton says while there has been some real progress in recent month there has also been an increase in “bail-out fatigue” in core Europe and austerity fatigue in general.

Following on the widely reported French and Greek elections, and the less covered Italian and German elections last weekend, Newton considers the impact of these elections on some key policy decision across Europe.

With presidential elections done, all eyes will be on France's legislature elections

  • Francois Hollande will be sworn in as president on May 15, and the new Socialist government will be sworn in right after.
  • Right after, the government priorities will include passing 'pre-election pleasers' ahead of the French legislature elections on June 10 and 17. These pleasers include the right to retire at 60, rolling back some of outgoing president Sarkozy's pension reforms, a 25 per cent increase in benefits to families at the start of the academic year, a 30 per cent pay cut for the president and ministers etc. Opinion polls point to a Socialist majority at the legislature elections.
  • There will be a leadership struggle in outgoing President Sarkozy's Union pour un Mouvement Populaire (UMP). A contested UMP leadership could further hurt its chances of retaining a majority in the legislature elections.

Source: Nomura

The impact of Hollande's win on Franco-German relations and the fiscal/growth compacts

  • Right after a the new French government is sworn in on May 15, Hollande will go to Berlin for a working dinner with German chancellor Angela Merkel. This will be their first meeting and while in part the leaders will just get to know one another, they will also work towards finding common ground for the May 23 informal European Council dinner.
  • This will involve the process of beginning the 'second pillar' i.e. the growth compact, to compliment the fiscal compact (the first pillar). The second pillar is likely to be finalised at the June 28-29 European Council meeting.
  • In dealing with Berlin Newton says Hollande has two options a) 'He can follow through his pre-election rhetoric as the pro-growth/anti- austerity 'white knight' in support of the peripherals and risk undoing 55 years of French EEC/EU policy by creating a permanent 'rupture' of the Paris/Berlin axis' or b) Accept the growth compact compromise. Newton expects Hollande to accept the second and says there is a 'predisposition in Berlin to work constructively with Mr. Hollande'.

Source: Nomura

Regional elections in Germany could act as an indicator for next year's general elections

  • For now Merkel will be looking to drive growth in the eurozone still Germany's major export market.
  • With her current coalition partner Free Democratic Party (FDP) struggling in opinion polls, it is likely that Merkel will look for a 'grand coalition' with her CDU's main opposition, Social Democratic Party (SPD). But the SPD is likely to want a partnership with the Green Party. Latest polls however show that a grand coalition might be more likely, unless the SPD and Green Party can successfully form a minority government.
  • The May 13 regional election in North Rhine-Westphalia (NRW) - Germany's biggest region with 13 million voters where Merkel's CDU lost power 11 days after she agreed to the establishment of the EFSF - could act as an indicator of the CDU's prospects in next year's general election.
  • The ratification of the fiscal compact might be postponed as the SPD and Green Party demand pro-growth measures with it. But ratification of the enforcement mechanism which has a June 30 deadline could be dealt with quickly.

Source: Nomura

Greece is in the 'last chance saloon'

  • Talks of the possibility of a Greek exit from the eurozone are rising, if Athens fails to abide by the terms of the second-bailout agreement. There is growing consensus in Germany that Greece's current attempts to form a coalition government, or the aftermath of its possible re-rerun election on June 17, is 'the last chance saloon' (i.e. a situation beyond which hope will decrease) for the Greeks.
  • Greece is in a different and more dangerous position than other peripherals according to Newton: 'The real question may soon be: can Greece be let go and the related contagion threat contained?'
  • Newton says that while it is likely that there might be some minor adjustments to the terms of the second bailout, the broad-based changes that some leading Greek politicians want are highly unlikely and a June election will not be able to resolve the matter.

Source: Nomura

Monti could have a hard time pushing through more structural reforms

  • The first round of regional elections in Italy held on May 6-7 saw Italian voters follow the European anti-incumbency trend by punishing former prime minister Silvio Berlusconi's (PdL) party. The big winner was the populist Movimento 5 Stelle, the anti-establishment alternative for up to 20 per cent of those who voted.
  • The outcome of these elections does not however threaten Monti's technocrat administration according to Newton. With a general election in about 11 months though, Monti will have a hard time pushing through more structural reforms and fiscal consolidation measures.

Source: Nomura

Ireland will be a test to the fiscal compact, but perhaps not as crucial as some think

Here's what else you should be worried about...

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