Has the Die Been Cast in Europe?

Even though Eurozone countries (EZU) are in an uptrend, Ireland (EIRL) and Greece (GREK) slid this year. The rest of the PIIGS: Spain (EWP) has held up as well as EZU, but Italy (EWI) and Portugal (PGAL) did break down in May.

The best explanation is that Greece and Ireland sold off along with momentum stocks because if you plot GREK and EIRL against the Nasdaq, Russell 2000 and biotechnology, a similar chart pattern is clear. Italy and Portugal are tougher to explain.

It looks like a surprise win by the euroskeptics is priced into stocks and the euro. Nevertheless, I've always maintained this is political crisis, not an economic one. The main issue was never the debt levels or the economic imbalances Michael Pettis' cites in his post liked below (though these are very real), but whether the nations of Europe will find a way to solve them together. Social mood is not working in favor of the EU: nations increasingly want to assert sovereignty, best exemplified by secession movements in Scotland, Catalonia, Belgium and Northern Italy, but now most clearly evidenced by political victories for parties such as UKIP.

Most alarmingly for the pro-EU politicians is that nationalistic parties have won in the absence of crisis, during a period of relative calm. In reality, the political crisis has grown during this period of calm as social mood remained negative. Since this is a political crisis driving the markets, another crisis is more likely following the victory of euroskeptic parties. Even if pro-EU politicians want to ignore them, the rise of parties such as UKIP is now an existential threat to the domestic political order because voters have a legitimate option to express their anger. What happens in Brussels no longer stays in Brussels: national elections may turn on votes that parties take in the European parliament.

The odds of another financial crisis are higher if these euroskeptic parties win in this weekend's election, and another crisis will serve to increase the popularity of euroskeptic parties because it will force the pro-euro and pro-EU parties into more unpopular votes. The euroskeptics aren't causing this though, behind them are the voters who in a period of negative social mood, want to express national sovereignty and want to protect their own nation. Ultimately, since social mood swings from positive to negative, is that the European Union and euro are positive social mood projects that do not account for periods of negative mood. The trend is for increased centralization of power, which increases the instability of the entire system heading into a period of negative mood.

This weekend's vote will cast the die for the dissolution of either the eurozone, the EU, or both, and stopping it will require an extraordinary effort by pro-EU politicians because they are now running uphill— even if they don't realize it yet.

Related: here is Michael Pettis thinking about possible implications from the EU elections: Some things to consider if Spain leaves the euro
The May 26 votes might end up reminding us that the euro crisis isn’t over. The longer unemployment and hopelessness drag on, the greater the erosion of support for the establishment and the stronger the support for the radicals who want to abandon the euro.

......How much longer is the rest of Europe willing to maintain high unemployment in order to support the German economy? On May 26 we will discover, I suspect, that at least some parts of the rest of Europe have little interest in continuing to maintain the euro if that simply means that they must suffer unemployment in order to protect Germany from its unwillingness to pay workers more.

No comments:

Post a Comment