Angst over imminent elections in France, Greece, and even Germany have aggravated investor concerns about stability in Europe.
While French president-elect Francois Hollande and increasingly important alternative parties in Greece offer an alternative to the German-led program of austerity that has aggravated the economic downturn across Europe, an increase in intra-euro antagonism and disagreement makes the union more vulnerable to unexpected political disaster.
But how worried should we really be about the prospect of a Greek government railing against more austerity and a French president less likely to be steamrolled by strict German ideology?
A team of researchers at the Eurasia Group say not so much:
Despite all of this attention, we remain of the view that the political outcomes from May 6 are unlikely to represent a negative turning point in the Eurozone’s debt crisis. Firstly, in Greece, the two mainstream pro-troika memorandum parties, New Democracy (ND) and PASOK, are likely to gather enough votes to command an overall majority in the parliament, allowing them to progress with the bailout’s conditionalities. In France, Hollande’s probably victory is unlikely to have big implications for crisis management: it will be fairly easy for Merkel to sign up to Hollande’s EU growth agenda without conceding, in any material sense, any large part of her fiscal agenda. Meanwhile, despite the gains of the opposition social democrats in Germany, Merkel will end up conceding little on substance, and the opposition’s success will remain confined to symbolic, not substantive, gains, something which the ratification debate in Germany on the fiscal compact clearly demonstrates. In conclusion, while the June European Council will end in a flurry of announcements and initiatives, none will have a serious impact on short or medium term growth prospects. Furthermore, the areas that could make a big difference to growth will remain hamstrung by political impediments, not least in France, despite Hollande’s rhetoric to the contrary.
In essence, they write, we’ll just see more of the same. That means more stability for investors, but does it really mean the euro area should breathe a sigh of relief?
I would argue that it is quite the opposite. While the possibility of political disaster increases with more dissident voices, the fact is that Europe has not responded adequately enough to the crisis in order to dispel the feeling that its problems were about to get much, much worse. Further, the German-led austerity project has focused too heavily on punishment and not enough on growth, producing little material progress in fixing the eurozone’s ills.
Thus the rise of alternative voices in the euro area may actually have a net positive effect for markets in the near- or medium-term, particularly if candidates actually make good on their promises. Sure, it’s possible something wildly unexpected and disastrous could happen—but that just isn’t likely: even Greece still wants to stay in the euro.
The options for ending the crisis without provoking a financial meltdown may be unpalatable to the North, but they are already on the table: eurobonds, more power for the ECB, or a massive bailout fund that leaves nothing to chance. The current leadership continues to write off such measures, and so new voices at the table are the best—if unlikely—hope that they will at least get some attention.
Even so, it is unlikely that such measures will garner support, just as they have failed to garner support in the fast. Suffice it to say: don’t get your hopes up.