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Saturday, June 16, 2012 1:34 AM

Europe Will Splinter Regardless of Greek Election Outcome; "France Has At Most Three Months Before Markets Make Their Mark" says German Official

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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.

Deepening splits between Angela Merkel and François Hollande erupted into the open on Friday as the German chancellor attacked Paris for allowing the French economy to stall.

Mrs Merkel warned the policies of the new Socialist president could destroy the eurozone by bringing the sovereign debt crisis to France itself.

Tensions are running so high that Jean-Marc Ayrault, the French prime minister, was forced to deny that Paris had broken off the Franco-German partnership, following Berlin anger at a Franco-Italian summit in Rome on Thursday.

There was a growing sense of crisis in European capitals after David Cameron, the Prime Minister, took part in a tense conference call with Mrs Merkel, Mr Hollande and Mario Monti, the Italian prime minister.

As tensions within the eurozone deepened on Friday, the German chancellor dismissed "quick fixes" and refused to consider any discussion on pooling debt for eurobonds or Germany underwriting bank deposits in other eurozone countries.

She hit out at Mr Hollande for blocking EU supervision of national spending and supporting eurobonds, which she warned would "mask" divergences between Germany and "mediocre" or declining eurozone economies, such as that of France.

"If you look at the development of unit labour costs between Germany and France, differences have now been growing a lot more strongly, a topic that must be discussed," Mrs Merkel said.
Merkel and former French President Nicolas Sarkozy did not see eye-to-eye on many important issues, but they did not openly feud like Hollande and Merkel. The differences between the latter pair are major in every way.

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?

Franco-Italian Pact Against Germany?

The Financial Times chimes in on the feud with its take:Merkel warns on French economy
Jean-Marc Ayrault, French prime minister, said on Friday that he saw the need for a public assurance that Mr Hollande’s visit to Rome the day before was “absolutely not” part of an attempt to form a Franco-Italian pact against German fiscal rigour. “That would be a serious political error which would not lead to any solution,” Mr Ayrault said.

Wolfgang Schäuble, German finance minister and a conservative like Ms Merkel, raised eyebrows in Paris when in an interview this week with Italian newspaper La Stampa he criticised Mr Hollande’s decision to restore the right of some workers to retire at 60 at a time when most European countries were extending the retirement age.

“France has at most three months before the markets make their mark,” said one German official.
France Has At Most Three Months

If Hollande carries out his stated programs, it won't take three months.

Step back for a moment and look at that 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

Greek Election Analysis

If Syriza party leader Alexis Tsipras wins the Greek election on Sunday, it may speed up the shattering of the eurozone, but it certainly will not cause it. Nor will a Syriza  win cause "contagion" as frequently cited by mainstream media (and nearly everywhere else too).

Alternatively, if New Democracy wins the election on Sunday, the market may throw a 3-day party (or not). However, there will be no lasting effect.

There are simply too many cultural and philosophical differences between countries in the eurozone to make the euro work. What can't last won't. The eurozone cannot last as we know it today.

Mike "Mish" Shedlock
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