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The Flaw In Europe’s Austerity Plan: Elections

Getting Europe’s mainstream politicians and appointed technocrats to agree to bailouts and austerity was actually the easy part. The real challenge for these guys will be holding onto their jobs — and preserving the deals they’ve cut — in upcoming elections.

Voters, it seems, aren’t convinced that that a depression is the only solution to the euro’s design flaws. Faced with the immediate reality of poverty, they’re listening to formerly fringe voices calling for a better deal, either in the form of more help from Germany (via the European Central Bank) or a quick exit from the euro zone and a return to national monetary sovereignty. Greece, of course, is first in line:

Greece’s Fringe Parties Surge Amid Bailout Ire
ATHENS—Weeks after agreeing to an agonizing bailout deal with Europe, Greece is splintering politically ahead of national elections, raising the risk that it won’t be able to make the economic sacrifices still needed to keep it in the euro.

The election, not yet scheduled but expected in April or May, is shaping up as a public revolt against Greece’s political establishment, which has backed the austerity policies that are the price of financial life support from Europe and the International Monetary Fund. Mainstream politicians are increasingly painted as leading Greece into a debt trap, then impoverishing it in trying to escape.

Half the electorate plans to vote for radical opposition groups, ranging from Soviet-style Communists to anti-immigrant neo-Nazis, according to recent opinion polls. That could lead to growing political instability even if the established parties cling to power, undermining Greece’s ability to enact the drastic spending cuts and economic overhauls its creditors demanded.

“Most people here think the two big parties shouldn’t have power anymore,” said Costas Papaioannou, a 32-year-old teacher of German at a night school who used to be a loyal New Democracy voter but “not anymore.”

Mr. Papaioannou said his German classes have “never been so full, because many people who want to emigrate are studying the language.”

He said the state of the country depresses him. “We’re furious at what is happening. Everyone is scared, and without hope.”

Signs of economic collapse are more visible in Athens’s riot-scarred center, where growing numbers of homeless people huddle under blankets outside closed stores. Burnt-out buildings exude a whiff of charcoal from violent protests. “For rent” signs adorn broken marble facades on once-bustling boulevards, while long lines of taxis wait for fares.

The austerity measures “taken under pressure” from Germany “are exceptionally adverse for the Greek people,” said Giorgos Karatzaferis, head of the nationalist party Laos. Extra austerity measures due in June “are completely repulsive,” he said, vowing to fight them.

“The reality is that after the elections, Greece will be an absolute mess,” said Anthony Livanios, a political risk consultant. “With no clear majority in Parliament, a very high far-left representation and rising social unrest, this is a recipe for chaos,” he said.

The election will be Greeks’ first chance to choose their rulers since the debt crisis began in late 2009. Since last fall, Greece’s government has been led by an unelected, technocratic prime minister, Lucas Papademos, supported by the two established parties: the conservative New Democracy party and the center-left Socialists, known as Pasok.

Mr. Papademos’s mission was to secure a €138 billion ($183 billion) loan package from Europe and the IMF to keep Greece afloat. On Monday, a government spokesman said elections will be held on April 29, May 6 or May 13.

New Democracy, led by Antonis Samaras, is likely to be the largest party in the new Parliament. Many analysts expect it to form a bipartisan coalition with Pasok. But the two parties’ combined support is only 35% to 40%, according to several opinion polls. In Greece’s 2009 elections, they won around 75% of the total vote. The decline shows the price they are paying for supporting unpopular austerity policies, and for their past misrule.

To get the bailout, Mr. Samaras and Socialist leader Evangelos Venizelos both had to promise Europe in writing that they would continue the austerity measures. Among other promised steps, they pledged to pass legislation by June that will cut public spending by an additional 5.5% of gross domestic product. Economists say the cuts will further depress the Greek economy, which has contracted 14% in the past four years and is expected to shrink by a further 5% or more this year.

In spite of shaving more than €105 billion off its bond debt in this month’s default and restructuring, Greece’s total public debt is still around €330 billion, or more than 160% of GDP, a level most economists say it can’t repay. Greece’s budget deficit is stuck at around 10% of GDP, thanks to the shrinking economy.

Spain, meanwhile, might be next:

Spanish PM Mariano Rajoy’s election defeat fuels bail-out fears
Traders were alarmed by signs that Mariano Rajoy was losing popular support for his programme to reduce Spain’s burgeoning debts, without which the country may need a Greek-style bail-out.

The prime minister’s PP party won 50 seats in the crucial Andalusia elections but failed to win a majority as the opposition leftist PSOE party won 47 seats.

Alastair Newton, political analyst at Nomura, said: “Failure to win in Andalusia, whose regional deficit was more than double its 1.3pc of Spanish GDP target for 2011 and which voted against the central government’s 1.5pc target for this year, represents a potentially serious setback in efforts to rein in the total national deficit to 5.3pc.” He added: “The outcome in Andalusia may also make the challenges PP faces at the national level even more daunting.”

Mr Rajoy faces a tough week, with a general strike scheduled for Thursday followed by Spain’s budget on Friday.Concern over Spain’s ability to manage its debts has been mounting and is likely to be the focus of the eurozone finance meeting in Copenhagen on Friday.

Some thoughts
Can deep cuts in public spending coexist with regular elections? That’s the question that will decide the fate of the euro zone, and the answer right now looks like a big no. A fair number of voters are starting to think that leaving the euro zone would get the pain over with more quickly than suffering through a decade of shrinking GDP and evaporating jobs. Put another way, when things get sufficiently bad the typical person starts thinking “what have I got to lose?” and voting for change, any change.

The problem is that the European financial system is so interconnected that even one small country leaving might spark a bank run in the other likely candidates, which might push the whole continent into political and economic chaos. Given this choice, one has to wonder if future election results will just be ignored, with the people in charge simply declaring an emergency and going on with their plans.

From here on out every major election is an “event risk” that threatens the eurozone as a financially viable democracy.

27 thoughts on "The Flaw In Europe’s Austerity Plan: Elections"

  1. I think that it is time for the Greeks to totally default on their debt. Once free of this debt, they can go back to using a national currency. They will need to back this currency with land and tax receipts for a period of time, much like the Germans did in the early 1920s to end their hyperinflation. The Greeks need to also pass a constitutional amendment to prohibit governmental borrowing that is not paid back by the end of the current election term.

  2. HEY CHRIS. seems I can remember these words over and over again ringing in my head “YES WE CAN”

  3. It all boils down to the takers vs. the makers. When you combine the takers with the brainless, like the ones who voted for Obama, it can only end with a giant crater. Crater, here we come.

  4. “I think that ultimately the greatest danger will be when “the typical person starts thinking ‘what have I got to lose?’ and voting for change, any change.”

    Hmmm… seems to me that we saw this movie start in 2008. It is playing to dwindling audiences as I type this and it looks as if the ending will really suck.

  5. in the future ?? what ? they are already ignoring elections that is what a technocrat is…its a banking installed political leader.

  6. In a democracy the problem is not with the leaders but ultimately with the public. The Greek public, like the public in most countries, has a delusional view of the world in which somebody else is going to pay their bills. In countries that print their own currencies (like the US) the public can maintain this delusion for a long time by inflating the currency, thereby indirectly performing a wealth transfer from those who are holding cash and currency-denominated instruments (such as bonds) into the pockets of those who are on the government dole.

    Greece will ultimately vote itself out of the EU. It has already defaulted on much of its debt (regardless of whatever rosy language they’ve used to describe the process) and will eventually default on the rest. The Grecians will thereafter live in the Drachma-based world of their preference: one in which people foolish enough to hold Greek cash or Drachma-denominated instruments will be paying for their unaffordable goodies at least for awhile. When that strategy runs out of gas, Greece will once again sink, but next time they won’t be able to blame their affiliation with the EU (but certainly they’ll find someone or something to blame – perhaps Santa Claus for not showing up).

    “It is not, perhaps, unreasonable to conclude, that a pure and perfect democracy is a thing not attainable by man, constituted as he is of contending elements of vice and virtue, and ever mainly influenced by the predominant principle of self-interest. It may, indeed, be confidently asserted, that there never was that government called a republic, which was not ultimately ruled by a single will, and, therefore, however bold may seem the paradox, virtually and substantially a monarchy.” – Alexander Tytler

    1. Excellent Comment Mr. Ziffer. I agree that Greece will leave the Euro. What happens then will likely be a Serbian style inflation event. The Greeks will attempt the monetize the debts and the New Drachma will fall. The only other option is default, and while we may see some “haircuts” there will not be the political will to completely default.

  7. To loosely quote Stalin: “Who counts the votes is more important that who actually votes”

    Reading this prescient post by John makes me think that the coming Greek chaos will be resolved with a military takeover by the Greek army (or a Euro/UN force ?) If it’s the Greek army their position will be polarised into either a pro banker or anti banker according to influences within the army.

    One thing is for sure, any chaotic uprising will be put down by force and it is likely democracy will be crushed in it’s original birthplace. Orwellian doublespeak will apply when this is done for “the good of the people”.

    So far, TPTB have been able to create virtually unlimited funds to maintain the system. Unlimited funds won’t help when it comes to a democratic election, will they ……. ? This could get interesting !

  8. Yeah, I can see why the EU is hated. They seem to be caught in a sort of no-man’s-land between inflation and deflation. They should either roll up their sleeves and inflate away the problem, like Ben B. is trying to do, with gusto, or boot the PIIGS out of monetary union.

    Actually, they should probably put it to a vote in each country: do you want to revamp the EU into one federal state, with one central bank and one federal budget, or go it alone? In this scenario, small groups of 3 or 4 countries banding together might make more sense than a 17 nation dinosaur.

    Whatever the outcome, it doesn’t make much difference. The USA has the one federal budget, and we’re in just as deep as Greece. We just don’t know it yet. I wonder what will happen to China when they realize they have no foreign currency reserves.


  9. I hope one day soon more people will realize this paper currency system has been created to serve the intrests of banks and governements and that a paper currency system for the people and the entrepreneurs is what 6999000000 want.
    The one million top bankers and top politicians are in control and want to keep there system going. It’s time this parasitic system is overthrown bey we the 99%.

  10. The point is not that the people are directly moving towards “fringe” parties, but that they are moving towards parties that are Euro-sceptic or downright anti-EU. Increasingly people in European countries are getting totally fed-up with the EU, the Euro and everything that is connected with it. There is a very wide gap between how the people think about the European “project” and how the political elites, or actually the political mainstream, thinks about Europe. For years on end politicians have totally ignored their people on this issue, but now the chickens are coming home to roost. As a Dutchman I voted against the EU-constitution back in 2005, like the majority of the Dutch. What did we get? The EU-constitution. The politicians simply whiped their ass with the result of the referendum. It is precisely this arrogance, together with the (predicted) mess that the Eurozone has become, that pisses the people off big time. We’re headed for very unpleasant times, that’s for sure!

  11. I think that ultimately the greatest danger will be when “the typical person starts thinking ‘what have I got to lose?’ and voting for change, any change.” Rhetorical questions like that tend to yield existential answers. That is what ushers in oppressive regimes and dictators.

    In the meantime, however, the same theme is playing out all over the industrialized world: The financial oligarchs versus everybody else. Personally, I’m looking forward to seeing more countries following Iceland’s lead and calling the oligarchs’ bluffs by defaulting on their debts and methodically going after all the politicians and bankers responsible. Put the onus on them to deal with it. Remind the financial world that when you lend money you may not get it back. Interest rates are a compensation for risk, not a guaranteed return. Remind the political class that they have a lot more to lose than just an election.

    1. I mostly agree with you. However, the present oppressive regime in Europe, the EU, certainly has not been voted in by people who voted “for any change”. It has been voted in by no ordinary citizen. It has been put in place by the political elites of the member countries, who had their dream of one big, powerful Europe, that could compete with the US, China etc. And the European peoples have had no say in all of it. The EU-parliament is just a farce, like the Soviet-parlement was. And whose interest are the EU institutions serving? Not the interest of the people, but the interest of the banks, big business and their own political interests. The people however are getting more and more aware of this. A storm is brewing a few years down the line in the EU. Like Iceland, the troubled EU countries should have told the EU where to stick it long ago.

  12. As a helpless 63 year old American, I can only say we’re right behind you. Yes, we have the petrodollar and yes we can print money but the former will end and the latter will do us in. I say we take the quick death so our kids and grand kids can have a decent life. Greece should also. We both enjoyed the fake good times, let’s. Let’s not push the price onto our kids and grand kids. Got gold?

    1. Gold is not good for the diet. I got some extra food and water for you about 10 years supply. How much gold you got :).

      1. Neither is paper money.. All the anti gold folks don’t even realize you can’t live by eating paper money either.. gold has been sound money for over 2500 years.. paper money was invented so the now collapsing socialistic central planned state could be built.. but like all ‘perpetual motion machines’.. it ends..

        my gold buys a whole lot more food than your paper money..

  13. I don’t see the point of swapping a supranational debt-based fiat currency for a national debt-based fit currency. If you’re going to go through the pain of change, why not solve the real problem?

    Of course, it is entirely possible that they don’t realize what the real problems is yet…….

  14. ps I’d advise you to keep a close eye on the greek elections and dont beleive bloomberg with their 8.8 percent for the Independent Greeks, you can double that.

  15. Things are going to get nasty. I live on a small island in greece. Almost everone I know is voting for the far right nazi party, Golden Dawn. They are so pissed off with the old socialists that they want a dictatorship to come clean things up. The most viable candidate is Panos Kammenos of the Independent Greeks party. He was from the New Democrats and did not vote for the bailouts. If he and his party win, their objective is to keep the original 130B in debt and screw the rest of it. The markets will go bananas if he gets in, and he is doing quite well for a start up. Got u some gold????

    1. I hope that your party wins! To hell with the banks! That’s where all of your bailout money is going. The banks get to print money out of thin air while the rest of us have to work to earn a living. Fiat paper “money” is really about control, getting us to do the physical work that the banksters don’t want to do.

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