May 7th, 2012
04:12 PM GMT
London (CNN) – So far, the markets have taken the elections in Greece and France in stride. And why not? What has changed?
France helped broker the so-called Fiscal Compact, which is at the heart of closer integration in Europe. Does France now want to pull away from the eurozone and allow Germany to take all the decisions? Of course President-elect Francois Hollande would not want that.
Sure, there may be some tinkering at the edges and fancy words out of Brussels about growth, but to open up all the talks again would surely be painful, and frankly, dangerous to Europe’s economy.
Last year, I sat for many, many (many) hours in Brussels waiting for word on bailouts and budget deficits and fiscal rectitude. I don’t think European leaders have the stomach to go through another painful 12 months again. The markets would not like it, even if many voters would. Austerity is a dirty word, but what is the alternative?
Remember not all eurozone countries have to sign up to the fiscal compact for it to go forward: only 12 are needed to bring it into force on January 1, 2013, although not having Europe’s second biggest country in there would be embarrassing and give it fewer teeth.
As for Greece, let’s wait and see what kind of coalition is cobbled together in Athens. One has to be formed, even if takes weeks –or another election in June. But one will be formed and two of the parties in that future coalition have already agreed to the austerity package. PASOK and New Democracy are one or two seats short of a majority.
Again, what choice do they have? Greece cannot pay its bills and signed up to the tough measures to get that second bailout. They get the next tranche of that money in June, when Athens has to lay out future cuts, based on cold, hard facts and figures. A third bailout is probably not far behind, as long as Athens continues to take steps to cut spending.
Can Greece get some breathing room from Berlin and the IMF? Sure. Will the bond markets be happy about it? Sure. Markets moved beyond Greece months ago and may leave Greece to work out some wiggle room to get a new government. Anyway, there are bigger fish to worry about – Spain for one.
For Greece to become front and center again in the minds of the markets would, in my mind, be a dangerous step. But remember, Greece wants to stay in the European Union and still use the euro. All the parties, even the fringe elements, have stuck to that line.
Greece could eventually fall out of the euro. Even though there is no mechanism to do it, analysts from Citibank now give that scenario a 50-75% chance of happening in the next 12 to 18 months. No one thinks it will happen next week or next month.
Could the markets have a tough summer? You bet. Could Greece become the spark for another euro crisis? Let us really, really hope not. In the past year, the Greeks have missed austerity deadlines and there have been long nights of negotiations and fears of bankruptcy.
But let’s give the Greek people some credit and time to sort out their mess and form a new government.
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