Elections in France and Greece Spell Trouble for Eurozone

by John M. Curtis
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Copyright May 8, 2012
All Rights Reserved.                                         

              French and Greek citizens exercised their Democratic rights May 6, tossing one-term flamboyant French President Nicolas Sarkozy out of office and failing to form a new parliament in Greece.  Both elections seem unrelated but they signal discontent in the Eurozone, primarily with Germany.  Germany houses the Frankfurt-based European Central Bank that has printed the common currency, euros, since 1999.  Cobbled together by the euro, the Eurozone—those European countries trading in euros—was promised unparalleled prosperity, especially in poorer, less export-based countries like Greece.  It didn’t take long for the big common currency experiment to fail in Greece, driving successive governments into red ink, begging the ECB and more prosperous countries for cash.  When Greece accepted its last 130 billion euro bailout Feb. 21, it came with a hangman’s noose.

             Because the ECB refused to finance the Greek bailout, the burden fell on Germany, by far the Eurozone’s most profitable country. Debate in the Bundestag or German Parliament rocked the very core of Chancellor Angela Merkel’s center-right Christian Democratic Union.  German lawmakers are tired of paying higher taxes to finance the rest of the Eurozone’s failing economies, including Greece, Italy, Spain, Portugal and Ireland.  Merkel watched her French counterpart Sarkozy go down in flames for austere economic conditions largely imposed by Germany.  Voting in socialist Francois Hollande Sunday sent a loud message to Berlin that France—and other Eurozone countries—won’t tolerate Germany imposing austerity on the Eurozone.  Greece’s Left Coalition Leader Alexis Tsipras rejected the German-based austerity provisions of prior bailout agreements.

            Sunday’s European elections sent a loud shot across Germany’s bow, telling Merkel no matter whatever the financial problems of Eurozone-members states, they won’t let Germany bully them into austerity. Greece’s election slapped Antonis Samaras’s conservative-leaning New Democracy Party, accepting all Germany’s austerity measures.  “We’re not going to let in through the window what Greek people kicked out the door,” said Left Coalition Leader Alexis Tsipras.  Bailouts “did not bring salvation but caused tragedy,” opening up a can of worms about whether or not Greece can survive inside the Eurozone.  Because the euro did not deliver to Greece the expected prosperity, Tsipras’s Left Coalition is no longer willing to compromise at the expense of Greek citizens.  Hollande’s election in France sends precisely the same message to Merkel in Berlin.

            U.S Financial markets sold off early Monday morning, then recovered, suggesting, if nothing else, that Wall Street knows how to play political developments to its advantage.  President Barack Obama continues to get buffeted by dicey economic news, hoping the last jobs report doesn’t signal a downturn.  Any downturn between now and the election could propel Barack’s Republican opponent former Massachusetts Gov. Mitt Romney into the White House.  Voters have shown little patience for more White House excuses about why the economy isn’t performing.  It’s ironic that the GOP hopes for bad economic news to get rid of Obama.  Barack, of course, benefits every time there’s positive economic news.  Wall Street doesn’t deal well with uncertainty on either side of the Atlantic.  Political changes in Paris or Athens shouldn’t have much effect in what happens in Washington.

            Whether in Greece or other Eurozone countries, the problem with the euro involves compromising the sovereignty of independent states.  Unlike the United States where there are regional or statewide differences in terms of culture or traditions, Europe has different languages, cultures and histories, making the Eurozone concept more complicated.  Without a common tax base, like the U.S. Internal Revenue Service, each separate Eurozone country handles its own taxation.  Frankfurt-based European Central bank doesn’t receive direct payments from Eurozone’s separate economies.  All Eurozone countries have their own debt obligations involving their health care, welfare and retirement or pension systems.  Less export-based economies, like Greece, Ireland, Portugal and Spain, even France, can’t compete with powerful, cash-rich exporting countries like Germany.

            Elections in France and Greece raise more doubts about the survival of the Eurozone.  While there’s nothing immediate, it raises questions of whether or not the common currency can survive.  “What is happening in Greece has reopened the wild card of euro zone stability . . . if it left the euro zone there would be contagion, pressure on the rest of Europe that is vulnerable,” said Sassan Ghahramani, CEO of New York-based hedge fund advisors SGH Macro, raising more doubts about the ultimate survival of the euro.  “Greeks don’t want to risk leaving Europe but they also want to send a message that following these policies monotonously cannot be tolerated,” said MRB Group Director Dimitris Mavros, confusing Europe with the Eurozone.  Greece’s decision to leave the Eurozone would not affect its participation in the European Union, just like 10 other EU countries.

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