What is the take-away from the French, German and Greek elections? Simply, austerity is no longer guaranteed. Those elected will attempt to stop the cuts to government spending, benefits and pensions. Instead they will try to retain or expand the European welfare state.

The problem with this move toward growth is that the markets may not allow it. These governments are already paying huge premiums (interest rates) over Germany and the United States. If the take-away from yesterday’s elections is “borrow more,” then these rates are going higher and will further stress European banks that are stuffed to the gills with European sovereign debt (see the chart below).

Are these “pro-growth” plans a realistic possibility? Unless the Germans agree to fund more spending, we do not believe so. The markets are likely to force interest rates on these countries much higher under such a scenario, making it prohibitive to borrow and expand the welfare state unless the Germans agree to fund it via a Euro bond market or some other such scheme. As stated above, however, the Germans appear to be pushing Merkel further away from this option and want an even harder line taken toward austerity.

Right now Europe is a stationary force (preserve the social welfare state) meeting an unmovable object (market’s ability to lend to European governments). The markets await a resolution to this stalemate.

Click to enlarge:

The Financial Times – Wolfgang Münchau: The only solution to the eurozone crisis
It is easy to solve the eurozone crisis on a piece of paper. I have done it many times. It is also easy to invent new institutions: a fiscal union, a treasury secretary, a common sovereign bond and a banking union. I would welcome most of these. But we must subject these discussions to a reality check. While these institutions will emerge from this crisis, none of them can solve it. That will have to be the job of the existing institutions.  This applies particularly to the idea of a common bank resolution fund. It is a great idea, but political resistance to it will be so big that it will not be implemented in full and in time. It will not solve the crisis.

Economist – Germany’s economy: Message to the Bundesbank 
If the euro zone is to survive, Germany must tolerate higher inflation
Asking a central banker to accept higher inflation may seem like asking a cardinal to accept more sin. All the more so in Germany, where the importance of price stability is etched on the collective psyche. Most of the time that German instinct is right. Tolerating higher inflation is risky. It can be hard to squeeze down again. Yet Germany will need to live with slightly frothier prices for the next few years. Both the arithmetic of euro-wide inflation and the mechanisms of rebalancing growth in the currency union demand it. If the Bundesbank resists, the single currency could come apart.

Dow Jones – Spain Signals U-Turn, May Pump Public Funds into Banks
Spain may pump public funds into its banking system to revive lending and its recessionary economy, Prime Minister Mariano Rajoy said Monday, signalling a policy U-turn. The government had pledged to not give money to the banking industry that is struggling in the wake of a collapsed, decade-long, housing boom. “If it was necessary to reactivate credit, to save the Spanish financial system, I wouldn’t rule out injecting public funds, like all European countries have done,” Rajoy said in interview with Onda Cero radio stations. The weakness of Spain’s banks is weighing on the economy that contracted 0.3% in the first and fourth quarters, meeting most economists’ definition of a recession. The unemployment rate is at an 18-year high 24.4%, data showed April 27. Banks have sharply reined in credit in the face of rapidly growing bad debt and problems getting finance on international markets. Government borrowing costs soared as investors fear the price tag of a banking-sector clean up could break already strained finances. Yields on Spanish debt, up five basis points at 5.78% Monday, have risen above 6% this year, a level seen as unsustainable in the long run. The government is cutting costs to lower its budget deficit to 5.3% of gross domestic product this year from 8.5% in 2011.

Source: Bianco Resarch

Category: Think Tank

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

6 Responses to “The Take-Away From The European Elections”

  1. VennData says:

    Well you can be sure of one thing, everybody knows this is a bad situation, we don’t want to get into it again, nobody’s going to get away with combining Supply Side tax cuts with deregulating bank leverage ratios again… oh wait a minute!

    P.S. For the clowns who blame Fannie and Freddie, Europe doesn’t have a Fannie and Freddie. For the clowns who blame Glass-Stegall, the whole rest of the world has bigger, universal banks. Think about that before you vote… yes, I suggesting you THINK before you vote. Radical? Just look at the facts and figures. Global Climate change, Planned Parenthood… think about them too. Education, Health insurance…. THINK… don’t fall for the GOP nonsense.

    Tax cuts for the rich, simply make the things rich people buy more expensive.

  2. DrSandman says:

    In a financial crisis caused by too much debt from spending too much, cutting spending would work. Perhaps the world governments should try it sometime. Show me a government — ANY NATIONAL GOVERNMENT — which has reduced spending below 2008 levels?

    The socialists, statists, Marxists, Peronists, progressives, collectivists, and other advocates of failed socioeconomic systems demand massive tax increases to go along with cutting spending, which of course doesn’t work. Then they say, “Aha! Austerity [cutting spending and raising taxes... note the definition change...] doesn’t work! The solution, mon pere, is to increase taxes!” Then they proceed to increase taxes to punishing levels because leftists hate people who become successful without paying the vig.

    This is simply the typical leftist ploy of changing the definition to create a straw man which is easily knocked down.

    All us rationalists ask is to 1) hold taxes steady (or at least keep the system revenue neutral and simpler by lowering the overall tax rate WHILE eliminating deductions), and 2) get government spending under control. So simple that even a caveman can understand it. But apparently, this is not nuanced enough for a leftist to understand.


    BR: You are conflating two different issues, a crisis caused by bad lending, versus a crisis caused by deficit spending. You seem to misunderstand the difference — “Its all credit”

  3. KJ29 says:

    Hi James

    That is quite a chart you have given us so thanks! On the subject of Spanish banks there has been more news as highlighted below.

    “Step Forward Bankia

    The bank identified as being most in trouble by the IMF was Bankia. In case you are unfamiliar with it then it is an example of merging cajas together where the largest Caja Madrid subsumed 6 others. It got some 4.5 billion Euros of state support and the worst bad debts were spun off into the parent. I also note that it received what many organistaions with a bad track record get, a change of name. Just like the UK nuclear reprocessing plant Windscale which metamorphosed into Sellafield for the same purpose some years ago.

    Apart from the name change the process above is oddly familiar to what happened to the Franco/Belgian bank Dexia last October and we know what happened next there. At the moment Spain’s government is claiming that it may have to inject only an extra 7 billion Euros of capital into Bankia and that it may do so in a way that reminds me of point six of my timeline for a bank collapse.

    6. The relevant government(s) tell us that the bank needs taxpayer support but through clever use of special purpose vehicles there will be no cost and indeed a profit is virtually certain.

    In case you are wondering it is contingent capital securities which are the new supposed super hero. It will not be long before the super hero develops feet of clay.

    So Spain has a problem as everyone with any sense will realise that Bankia needs more that the 7 to 10 billion Euros of extra capital being mooted. even worse it will focus attention on the other Spanish banks which need capital.”

    So the gap between Spanish and US bank performance may be about to widen further..

  4. Frilton Miedman says:

    By James Bianco – May 8th, 2012, 8:30AM

    “What is the take-away from the French, German and Greek elections? Simply, austerity is no longer guaranteed. Those elected will attempt to stop the cuts to government spending, benefits and pensions. Instead they will try to retain or expand the European welfare state.”


    The other side – citizens across the globe are voting to stop global CORPORATE welfare, where entire countries compete for the lowest revenues to lure corporate store fronts that do not generate the ROI in job creation.

    Ireland has the lowest corporate tax in the world – Dublin is crammed with global multinational corporate headquarters, yet unemployment there is dismal, among the worst in the world right now..

    It’s corporate & upper class welfare that leads to fewer jobs er capita of tax revenue lost, in turn generating “welfare states” that are cornered into subsidizing the jobless and lowered wage workers using debt to do it.

  5. Jojo says:

    @FM – I am all for stopping global corporate welfare. But we have to remember that corporations just pass through everything thrown at them. We can make them pay more but they will just add that cost to the product price.

    Is that good or bad? Depends on your POV and your place in the economy.

  6. Frilton Miedman says:

    Jojo, though that’s true, those goods are ultimately useless at any cost without the jobs/wages to buy them.

    The boom since 1980 for stock prices almost identically matches the incline in consumer/government debt.

    Also, on the pass-through for costs, in light of what I just stated, a majority (not all) of the benefits of the lowered price is passed onto executive wages & corporate cash coffers.

    I’m a FIRM believer in the Free market, but once a given market is dominated by a small number of corporations, coupled with the control they wield in D.C., they no longer compete, but instead undermine smaller competitors and manipulate law to their benefit.