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Monday, June 18, 2012 3:18 AM


Greek Election Sideshow; Socialists Win Absolute Majority in France; How Long Will the Bond Market Celebrate Another Glorious Can-Kicking Exercise?


New Democracy won the Greek election. However, party leader Antonis Samaras still needs to form a coalition.

 If this seems like Déjà Vu, it's because it is. We were in the same place following the May election.

Does the Outcome Matter?

This go around, I expect Pasok will reluctantly cave in and form a coalition with New Democracy.  The price might be high, such as demanding the much despised Antonis Samaras to step aside.

Regardless, does the outcome matter?

The answer is "not really", except in the very short term, because of what I said in Europe Will Splinter Regardless of Greek Election Outcome; "France Has At Most Three Months Before Markets Make Their Mark" says German Official

All eyes are focused on the Greek election on Sunday.

However, a fundamentally far more important election (for the long term) will take place in France on Sunday.

If socialists take control of both houses in French parliament as expected, president François Hollande would have free rein to carry out his stated policies such as hire more public workers, raise taxes on the rich, and Wreck France With Economically Insane Proposal: "Make Layoffs So Expensive For Companies That It's Not Worth It"

Tensions Between France and Germany Mount

If Hollande is serious, and I think he is, France is going down the tubes fast. Moreover, the already strained relations between Hollande and German chancellor Angela Merkel mount as Merkel attacks French economy.

Major Differences

  • Hollande wants Eurobonds, Merkel says no
  • Merkel wants a tighter political union, Hollande says no
  • Hollande wants bank recapitalizations by the ECB and Merkel says no
  • Hollande wants more stimulus, more government workers, increased difficulty to fire workers and Merkel disagrees on all counts
  • Hollande is more willing than Merkel to make concessions to Greece
  • Hollande wants bigger "firewalls", Merkel does not.

Do they agree on anything other than the desire to keep the eurozone intact?
Socialists win absolute parliament majority in French election

The results are in: Hollande’s Socialists win absolute parliament majority in French election
French President François Hollande’s Socialists won an absolute parliamentary majority on Sunday, strengthening his hand as he presses Germany to support debt-laden euro zone states hit by austerity cuts and ailing banks.

The Socialist bloc secured between 296 and 321 seats in the parliamentary election runoff, according to reliable projections from a partial vote count, comfortably more than the 289 needed for a majority in the 577-seat National Assembly.

The left-wing triumph means Hollande, elected in May, won’t need to rely on the environmentalist Greens, projected to win 20 seats, or the Communist-dominated Left Front, set for just 10 deputies, to pass laws. The centre-left already controls the upper house of parliament, the Senate.
Greek Sideshow

Hollande now has free rein to do whatever he wants. I believe he will do just that, and if so the bond markets will not take too kindly to it, nor will Merkel, and nor will the average citizen in Germany, Finland, the Netherlands, or Austria.

An amazing amount of attention has been focused on the election in Greece when a far more important election was just held in France. The French election received scant media coverage.

Moreover, Spain has not been fully reckoned with, nor has Italy.

France Has At Most Three Months

If Hollande carries out his stated programs, it won't take three months before the bond market revolts, Germany revolts, or both revolt.

Step back for a moment and look at the enormous fundamental rift between France and Germany. Regardless of the outcome of the Greek election, that rift is not going away.

Hollande already threatened to renegotiate the so-called Merkozy treaty (which by the way France has not yet ratified).

Also note that last Thursday, the Bundesbank (Germany's central bank) came flat out and stated Policymakers Should Refrain From "Wild Goose Chase" of Higher Firewalls and Merkel Warned "Limited German Resources"

Assume France does ratify the treaty. Major revisions down the road are virtually impossible.

Dead Before Arrival

Thus, I was highly amused when a group of eurozone Nannycrats agreed to meet later this month to devise a master plan for a eurozone fiscal and banking union. (see Details of the Secret "Nannyplan" Emerge; Proposed Nannygroup Uniforms)

My response was "Dead Before Arrival": Bundesbank Shoots Down EU Banking-Union Proposal; Eight Lessons the EU Needs to Learn

Another Glorious Can-Kicking Event

For now the market is celebrating another glorious can-kicking event. The celebration will last until the bond market has had enough. I expect days at most, and perhaps hours.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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