Monday, 7 May 2012

European Elections - Entitlements and Austerity

The European elections yesterday have highlighted that there are a lot of angry voters.  Francois Hollande came out of nowhere in France  to defeat Nicolas Sarkozy to form the first socialist government in France since 1981.  This follows the fall of the Dutch government, defeat in Italy, Spain and Portugal.   In Greece the situation is even more volatile.  Some believe that Greece in no longer governable. 

In France, Hollande received 52%, while Sarkozy somewhat turned the election around and still received 48%.  It points to a very divided country when it comes to handling the European economic crisis. 

In Greece the situation is even more volatile.  The New Democracy and socialist Posak parties fell short of an absolute majority, with a vote share of 32.1% compared to their pre-election shares of 74.2%.  Both parties are committed to applying the EU loan agreement, which calls into question what kind of government can be formed, if any at all.  The parties opposed to the deal received 151 seats in the 300 seat parliament from the electorate. Greece has been hit hard by austerity measures.  A country with a myriad of entitlements and generous pension plans has been asked to take a bitter pill.  Naturally the voters are upset. 

The Lord Giveth and the Lord Taketh. This is an old cliche, but surely it applies in Europe.  After 30 years of entitlements the chickens have come home to roost.  Mounting debt and obligations based on promises made by politicians seeking re-election have brought European economies to their knees.  Once you give an entitlement it is hard to take it back, resulting in the type of pushback you see in Europe. 

This should be shot across the bow for US politicians that seek re-election by making promises, while the national debt increases.  Sooner or later those promises have to be paid for, something that is hard to do when the trough runs empty.  Maybe a little austerity and restraint now can avoid the same disaster in the U.S. and Canada.

While Hollande has told French voters that he will push to renegotiate the austerity measures and push for stimulus to effect growth, German Chancellor Angela Merkel has rejected any move towards renegotiating an agreement between 27 EU countries. 

She said on Monday that she would welcome French president-elect Francois Hollande "with open arms" and said the two leaders would work together closely.  Hollande is expected to make his first official visit Berlin.

"We will work together well and intensively and we will meet quite soon after he enters office," said Merkel.

Regardless of Merkel's remarks, German politicians are worried.  The German electorate is unsympathetic to the bailouts and Merkel's party has already paid for it in regional elections.  So the more moderate approach of Hollande is worrisome.  German leaders are unsure how much of a partner they have in Hollande.

Conservative governments, including Canada's and the UK's conservative governments are feeling the heat.  In the UK this has manifested itself in local elections, where the conservatives took major hits.   In Canada, the New Democratic Party has moved into a statistical tie with the conservatives.

In the United States it will be a hard sell in Mitt Romney's bid for the Presidency to reduce the deficit.  President Obama has been successful so far to sell what he  calls his more compassionate approach.   But those promises could be hard to keep or even fund.  

Both the left and right seem to agree that deficits and debt must be cut, but who has the real appetite to take a crack at entitlements remains to be seen.  Unfortunately if action is not taken, eventually unwanted cuts will happen on the back of the people as has been demonstrate in Greece. While stimulus seems like a good idea, it often is spend on the pet projects of politicians.

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