There is much to digest after elections in a number of European countries this past weekend. Much has been written about the potential impact of the French vote on the current European austerity programs, Germany’s predominance on the continent and the future of the euro. Over the next few weeks, we will discover whether this flurry of excitement and concern is justified.
At a recent AGI conference in Washington DC, the consensus amongst participants was that not much will change in the Franco-German relationship. There could be a shift in tone, but no real departure from current policies. Austerity and the fiscal compact are here to stay. The growth compact, which is currently being cooked up, will likely emerge at the end of June and will be largely symbolic. President Francois Hollande could make some minor mistakes early on, participants agreed, but he will learn quickly, especially if markets become nervous. Nobody should expect him to put the French vessel on a collision course with its powerful neighbor to the East, namely Germany. According to Nicolas Veron, a senior fellow at the Brussels-based Brueghel Institute, Hollande has no clear governing program, despite some bold announcements made during the campaign. That will give him enough maneuvering room to act pragmatically. Markets seem to share this analysis with Mr. Veron. On Monday, after it was announced that the German Chancellor Angela Merkel and Hollande are to meet in Berlin next week, European stock markets quickly recovered from early losses. Merkozy is dead, “vive Merkollande.”
Against this backdrop even the Greek disaster looses some of its disruptive potential. Voters in Greece punished austerity and Germany, but the majority decided that they did not want the country to abandon the euro. Unfortunately, there was no consensus on how to achieve this goal. If the parties fail to form a government of unity within the next few days, Greek voters will be called on to return to the polls in about a month. The international media focused on the far right party, “Golden Dawn”, which for the first time made it into the Greek parliament. While the relative success of the fascists is an interesting story, its relevance may well have been blown out of proportion by reporters and analysts.
As for the vote in the German state of Schleswig Holstein, I refer to the essay by AGI Executive Director Jackson Janes. The real test for Merkel is next weekend, when voters in the much more populous state of North Rhine-Westphalia go to the polls.
Last but not least, local elections in Italy confirmed that things are getting more complicated for Prime Minister Mario Monti. Its largest supporter in Parliament, the center right PDL (People of Liberty Party) of former Prime Minister Silvio Berlusconi, took a beating at the polls. With its controversial but charismatic leader out of sight, the political group is rapidly losing its grip on the conservative electorate. Many in Berlusconi’s party could soon reach the conclusion that there is very little for them to gain by continuing to support Monti’s experiment. The PDL’s alliance with the left and a smaller center right group in support of Monti’s government could fall apart sooner rather than later. At the very least, the PDL will do its best to slow down the pace of Monti’s reforms, which are perceived as too punishing for its traditional voters. Expect everything that comes out of the Italian Parliament as a watered down version of Monti’s original plans.
That, more than the latest installment in the never ending Greek tragedy, should give us pause. Italy and Spain remain at the core of current efforts to rescue the euro zone. If they stumble, they could drag the rest of the continent with them.