Two elections were held in Europe overnight. One was the status quo result; the other a change in the politics of austerity, one that is possibly the only chance for Europe to break the grim impasse that has given the continent its second depression in 80 years.
The most important vote was in the second round of the French parliamentary elections. They confirmed that the Socialist Party of President Francois Hollande will have a majority. In fact, the Socialists and their closest allies were assured of an outright majority, with more than 300 seats in the 577-strong National Assembly. The long years of dominance by conservatives, up to Nicolas Sarkozy’s election in 2007 and a UMP majority, now look in the distant past.
The Financial Times pointed out this morning that “the overall result means that Hollande will neither have to make compromises with Sarkozy’s centre-right UMP party, which has criticised his growth and spending plans, nor with the Communist-backed Left Front, which has bitterly opposed austerity measures to combat the eurozone’s sovereign debt problems. He will not even require the support of the Greens, who are already part of the government.” (Julia Gillard and Wayne Swan, eat your hearts out!)
With a pro-growth, anti-austerity credo, the Socialists win confirms that the policies of Hollande have widespread support in France. France is now on a collision course with the axis of austerity of which it was once a paid-up member, if without the ideological obsession for the hairshirt that marks the Germans. This fixation with fiscal and monetary discipline, the botched implementation of the euro (the Greeks should never had been let near it) and the simple inability of the eurozone leadership to determine an effective path out of the last financial crisis has inflicted a depression on much of Europe and left the UK stagnating — a reality recognised last week recognised with $A120 billion of new spending from the Bank of England.
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The Greek result is of less importance. It remains likely Greece will leave the euro and default; the question is how and when. The immediate answer is that the economic illiterates of Syriza (with their fantasy of being endlessly propped up by Europe) won’t plunge the country into a firestorm of collapse and immediate exit from the euro, despite lifting their vote by 10%. Instead, New Democracy (which is responsible for many of the problems that brought Greece to the brink of collapse) is the leading party, Pasok (the Socialists, who contributed their share of mismanagement to the country’s predicament when it was in power in the early years of past decade) finished third and together should have the capacity to put together a viable coalition, especially as New Democracy gets 50 bonus seats for finishing top of the poll. And they will be seeking to renegotiate the terms of the European/IMF bailout, which are crushing a Greek economy already heavily damaged by the Greeks themselves.
The election of Hollande and the socialists should be helpful in that regard. Growth is now a positive message for parts of Europe under pressure. The strong support for the Socialists in France (with their at times illogical winding back some of the cuts and changes already introduced), means those who resist austerity have a significant friend inside the eurozone and the wider EU. Forget for the moment that much of what France and Hollande say from now on will be rhetoric because France had a high debt and budget deficits and is in a weakened position financially compared with Germany. Germany is more isolated (which could be a bad thing, seeing only it can afford to help the rest of the zone, including France). Its message and continued resistance to growth policies before budget solidarity pacts and other policies will be an increasingly solo act in Europe.
But in the end, any renegotiation for Greece is unlikely to work. The economy is damaged, perhaps fatally. Economic growth this year is estimated at a negative 4.7% rate. In the final quarter of 2011, the economy shrank by 7.5%. Unemployment is 22.6%, second after Spain. Youth unemployment is close to 50%. The country faces a decade of stagnation, and no responsible democracy can allow itself to lose a generation like that. Moreover, European leaders know, and the markets know, that Greece doesn’t matter, and can be allowed to go its own way. The markets, in effect, have already assumed a Greek default.
From that point of view, in a way a Syriza victory might have been preferable, in order to deliver the moment of crisis and catharsis that might remove the dead weight of Greek uncertainty from the eurozone and jolt policymakers in Berlin and Frankfurt (and other capitals) out of their ideological complacency.
But that moment may still be imminent: unless Greece receives money in the next five weeks, it will be broke. We have heard these claims before (around May 6, for example) and the trio of bailout groups (the so-called troika) stumped up with enough money to keep Greece going. But last month’s payment was cut by a billion euros, as the troika decided to wait and see what the election result would be. The Greek finance ministry was telling the media last week that unless that delayed one billion euros was paid quickly, funds to pay pensions and public sector wages would be exhausted by July 20.
The country’s biggest government-owned business, the electricity utility, is close to running out of money because people are not paying their bills. The situation has been made worse by a controversial new property tax, which was added to power bills to get people to pay. Since late last year, consumers were allowed to put off paying those bills and have stopped paying. The utility got a loan of more than a billion euros at the start of the year, but now an estimated 500,000 households haven’t paid their electricity bills for more than three months. The power company needs to pay $US657.2 million, which it doesn’t have, to its banks by June 22 (this Thursday). Banks have to recapitalised, there’s money to do that, but will there be time?
Foreign companies also continue to abandon the country. The world’s second-biggest retailer, Carrefour, of France, sold its Greek supermarkets late last week to a local company for the sum of just one euro (plus the assumption of debt). French bank Credit Agricole has been reported as letting its Greek subsidiary bank fail and walking away from it. Last month UK retail giant Marks & Spencer took a £44.9 million ($A69 million) write-off on its Greek business. It shouldn’t surprise anyone that Greece’s main stock index has lost 90% of the 10-year high it reached in 2007.
In Athens, the parties now face a 48-hour deadline from the EU to form a government and recommit to the second bailout, despite the claimed desire to change its terms. But Greece also needs a host of extensions of deadlines for spending cuts, wage cuts, tax revenue increases and privatisations that simply haven’t happened and don’t look like happening. In short, the markets might stage relief rallies, and the axis of austerity will welcome the result and declare its faith in democracy, and the G20 will issue the usual pious words, but little has changed: the uncertainty remains.
Outside Greece, the bigger issue remains the battle between the axis of austerity and pro-growth forces. On that front, at least, the latter have won a minor victory over the weekend.