Why the Markets are Unsurprisingly in the Red

European markets are ending the day deep in the red (DAX down 3.6%, CAC down 2.8%) on a plethora of different concerns, but mostly due to the political machinations occurring in France and the Netherlands. None of this should be surprising to TAE readers, since it has been repeatedly stressed that democracy, in whatever form it takes, is one of the biggest threats to maintaining stability in the European Monetary Union.

For example, this is what I wrote in Political Theater Will Kill the Status Quo:

And let’s be clear, it is the run-up to elections and the accompanying theatrical drama that will prove to be the most difficult for the status quo, rather than the actual outcomes of these elections. There is little doubt that almost all of the politicians will end up singing the exact same tune once they are actually in office. The real problem for the perennial can-kickers is that they simply do not have enough time to wait around for the elections to finish and the winners to take office.

 

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Secondly, there are elections in France and incumbent President Nicolas Sarkozy has been steadily dropping in the polls against Francois Hollande of the Socialist Party. As of early February 2012, Hollande is almost running at his all-time high of 60% against Sarkozy. If you thought Samaras was being a thorn in the side of the pan-European austerity hawks, then take a look at what Hollande has been saying [“mandatory austerity measures were too severe and would never produce the desired results because ‘everyone knows’ that ‘tehre is no rebound in growth in Europe and in Greece'”]

 

Right, Politics 101 – keep all your plans and policies for office vague and uncertain, but stay sharply critical of the current administration. Yet, that’s exactly what the markets can’t continue to handle right now – vagueness and uncertainty about the future of fiscal and monetary policy. The French sovereign bond market has so far remained relatively quiet throughout the whole crisis, except for a brief spike upwards in the 10-year yield late last year. If all of Sarkozy’s repeated promises of implementing domestic austerity come into question, though, France’s credit situation could change very fast, especially since it has already been downgraded from AAA by S&P and put on “negative outlook” by Moody’s.

After the first round of elections in France over the weekend, Hollande has gained even more momentum over Sarkozy for the run-off elections on May 6. Again, it is the uncertainty and subjective perceptions surrounding what a win by Hollande would mean for the Eurocratic plans in France that is spooking the markets right now. Democracy in action is anathema to preservation of the Union. Daniel Flynn reports for Reuters on expectations for the upcoming elections by the pollsters and investors alike:

Sarkozy woos far-right after Hollande wins round one

 

Polls show center-right leader Sarkozy on course to become the first French president to lose a bid for re-election in more than 30 years, trailing Socialist challenger Francois Hollande ahead of a May 6 run-off.

 

Hollande piped Sarkozy in Sunday’s 10-candidate first round by 28.6 percent to 27.2 percent, but National Front leader Marine Le Pen stole the show, surging to 17.9 percent, the biggest tally a far-right candidate has ever managed.

 

Her performance mirrored advances across the continent by anti-establishment Eurosceptical populists from Amsterdam and Vienna to Helsinki and Athens as the euro zone’s grinding debt crisis deepens anger over government spending cuts and unemployment.

 

“National Front voters must be respected,” Sarkozy told reporters as he left his campaign headquarters in Paris. “They voiced their view. It was a vote of suffering, a crisis vote. Why insult them? I have heard Mr. Hollande criticizing them.”

 

The unpopular Sarkozy, the first sitting president to be forced into second place in the first round of a re-election bid, now faces a difficult balancing act to attract both the far-right and centrist voters he needs to stay in office.

 

The weak showing by Sarkozy spooked investors already nervous about European governments’ ability to service their debts, helping to send French stocks and bonds lower.

 

Returning to the campaign trail on Monday, Sarkozy hammered home promises to toughen border controls, tighten security on the streets and keep industrial jobs in France – signature issues for Le Pen at a time of anger over immigration, violent crime and unemployment running at a 12-year high.

 

After five turbulent years leading the world’s fifth economy, Sarkozy could go the way of 10 other euro zone leaders swept from office since the start of the crisis in late 2009.

 

Hollande has vowed to change the direction of Europe by tempering austerity measures with higher taxes on the rich and more social spending. Polls published on Sunday predicted he would win the run-off with between 53 and 56 percent of votes.

 

But the strong showing of Le Pen, gravel-voiced 43-year-old daughter of National Front founder Jean-Marie Le Pen, offered Sarkozy a glimmer of hope by suggesting there are more votes up for grabs on the right than had been thought.

 

“Marine Le Pen’s breakthrough throws the second round wide open,” read the front page of right-leaning Le Figaro, while left-wing Liberation read: “Hollande leads. Le Pen the killjoy”./p>

The Dutch government also threw its support behind the latest round of “risk-off” sentiment over the weekend by completely failing to reach agreement on EU-sanctioned austerity measures, whch is now leading to the resignation of Prime Minister Mark Rutte and his cabinet. Perhaps the current rebels got a whiff of this comprehensive report that was highlighted in Their Assumptions are Getting Very Ugly, which clearly outlined how the costs to the Dutch people of staying in the Euro are much too high. Either way, what is happening over there is not at all good news for the status quo in Europe.

And, just for good measure, the so-called “mouthpiece” of the Fed, Jon Hilsenrath of the Wall Street Journal, has done a 180 degree reversal from his previous “telegraphing” of “sterilized QE” and is now saying that the Fed will not be launching any new QE programs in the near future. He starts his latest piece by casually stating that “financial markets seem to swerve daily on speculation about what the Federal Reserve is going to do next”. From wherever could this “speculation” possibly be coming from, Mr. Hilsenrath? More to the point, how can anyone still have confidence in the stability of markets which react so sharply to such expected statements and events?