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Eurozone Splinter?
Research for Online Investors

5/7/12

We tracked the election results out of France and Greece Sunday afternoon and evening.  Our interpretation, the gloves are off.  Francois Hollande beat Nicolas Sarkozy in Sunday’s French Presidential election.  He told supporters “Austerity is not inevitable” as he pledged to fight the eurozone (Germany) to pay for French growth.

Hollande proposed a 75% tax rate on incomes over $1.3 million dollars per year, higher taxes on large businesses and special levy’s on banks and oil companies.  He also promised to lower the retirement age from 62 to 60 for anyone that started work at eighteen.

Francois Hollande Celebrates Victory

Hollande proposes to collect an additional $38 billion dollars in taxes over the next five years and increase spending $26.3 billion.  French attention now turns to parliamentary elections that will be held on June 10 and 17.  French Socialist National Assembly leader Jean-Marc Ayrault said, “We need a majority in parliament.”  The former Prime Minister, Jean-Pierre Raffarin said, “What’s very important now is to put together a great opposition force.”  The lines are drawn and redrawn.

Hollande has called for re-negotiating the eurozone deficit rules agreed to in December.  Bloomberg reports, a German government spokesman said contacts had been made with the candidate’s camp recently, while the German Finance Minister indicated Germany would allow some “flexibility” for Hollande.

Wolfgang Schaeuble said, “I’ve said that everybody who gets freshly elected into office must be able to save face.  So we will discuss this with Hollande in a very friendly way.  But we won’t change our principles.”

The Syriza party in Greece came in second with sixteen percent of the popular vote on Sunday.  Alex Tsipras is the Syriza party’s leader.  Syrize means “Coalition of the Radical Left.”  After the election Tsipras was on state-run NET_TV saying, “European leaders, and especially Ms. Merkel, should realize that her policies have undergone a crushing defeat.  The people of Europe can no longer be reconciled with the bailouts of barbarism.”

Tsipras wants to play the hand of calling the eurozone, and Germany’s, bluff.  He believes other governments will not enforce austerity on Greece if it means Greece would chose to leave the eurozone because it will destroy the monetary union.  Greece is dependent on the European Stability Mechanism (ESM) for additional funding as soon as this summer.

Under terms of the $170 billion dollar bailout completed along with debt restructuring this year, the Greek government must make additional cuts in future budgets.  They must inform the European Commission what austerity measures will be enacted to cut $15 billion additional dollars for budget years 2013 and 2014 to receive more funds.  The Guardian states ‘European Officials have been very clear, any breach of Greece’s second austerity and reform plan would lead to a halting of rescue funds.’

Early results out of Greece show the New Democracy and Pasok party are going to be one vote short of forming a government.

Angela Merkel’s Christian Democrats (CDU) party only garnered 30.6% of the vote in local elections on Sunday.  Elections were held in the state of Schleswig-Holstein.  The CDU had partnered with the Free Democrats (FDP).  The FDP only garnered 8.3% of the vote, so Schleswig-Holstein is thrown into limbo as parties negotiate to form a new coalition government.

U.S market futures were down sharply overnight but began to close the gap as we approached open this morning.  We are not certain this will pass without more pain but it appears the “shock” of the election results has become more muted.  Dominic Rushe explains American markets are minimizing the actual impact Greece can cause to world markets.  In the Guardian he says ‘everyone’s favorite fact about Greece is that its economy is the same size as the Dallas-Ft. Worth.  Big, but not big enough to matter to the U.S. economy.’

We appreciate the comparison, but not sure the repercussions of a Greek default or leaving the eurozone (and a default) will pass as easily as some might believe.

Watching the jubilant crowds in France and Greece as they celebrate what they believe is their victory over hard work and austerity reminds me of an old quote attributed to Stalin, “Give them what they want…Good and hard.”

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