Euro Choosing Growth Over Austerity
In a long past due scenario, the euro zone members are weighing the German policy of austerity against GDP growth. The controversy jeopardizes the euro as a single currency and even the survival of the euro zone. The weekend did not produce the results that the IMF’s leader, Christine Lagarde, had hoped to accomplish in her fund raising initiative. Compounded with weekend activities in the region, the euro zone looks to be on tenuous footing.
Dutch Prime Minister, Mark Rutte, resigned as the Dutch Coalition submitted their collective resignations to Queen Beatrix. The resignations are the result of a split with the populist Freedom Party, which had supported the coalition until the recent austerity legislation. Queen Beatrix has requested that the coalition continue to serve until such time as new elections can be held. That may not be occluded until late Summer.
The Dutch crisis preceded the results of the first round of French presidential voting. The biggest winner in the surprising elections was not the winner, Socialist Francois Holland, or incumbent Nicolas Sarkozy, but Maine Le Pen, the far right activist who succeeded her father as head of the National Front. Le Pen capture a sunning 19 percent of the popular vote. Although the margin was not enough to qualify for the two-way runoff in the next round, it assured the Front Line of a significant voice in the upcoming second round.
It is projected that Sarkosy, the first incumbent to not win the first round of elections, would be the more significant benefactor of the Le Pen followers. However, Le Pen has repeatedly attacked Sarkosy for enabling the euro zone crisis to affect the country’s economic stability.
Both Le Pen and Holland have been critical of Sarkosy’s willingness to implement severe austerity cuts to meet the euro zone’s budget restrictions. LE Pen is well positioned to increase her coalition’s influence. Her platform stresses returning a national currency and terminating France’s subscription to the euro zone.
The magnitude of the Le Pen, Holland vote is emblematic of the anti-establishment posture that is sweeping across the euro zone. This sentiment clearly jeopardizes the investors in the Greece bailout. With Greek elections scheduled for May 6th, there is real concern that the new government will not comply with the terms of the bailout.
As other euro zone countries have discovered, the austerity cuts are too large and too quick. Most nations implementing these restraints will be unable to grow economically. Although not strictly a quantitative easing mechanism, the participation of the ECB comes about as close as possible to quantitative easing.
To further underscore the euro zone crisis, Spain has rejected further austerity cuts. Instead, the government has sided with its populace that is opposed to further constraints.
The news does not get any better. In addition to all the negativism about the euro zone austerity and lack of growth, Germany reported its lowest manufacturing data in three years. The euro zone paymaster looks to be a big loser if the Dutch, Greece, Spain and France reject austerity programs.
The biggest political loser could well be Germen Chancellor Angela Merkel, the driving force behind the euro zone negotiates to date. The Dutch are a favored trading partner with Germany. As one of the few euro zone members with a triple A credit rating, the economic differences ion the Netherlands could well result in a lowering of The country’s credit rating.
In early trading, the euro gave away some ground to the dollar, settling at $1.3129, down 7 percent over the weekend. ING projects that the euro will fall to $1.20 by the end of the second quarter. That marks some serious volatility.
To cut to the chase, the continuation of the euro zone is going to boil down to which nations are willing to comply with the budget cuts necessary to contain spending to 3 percent of GDP. It is growth versus austerity and while the politicians may talk the talk, the people have the power and they seem poised to act at the polls.