By Mark Melin, at ValueWalk.
In the wake of a Greek populism movement that appears to have been squashed like a bug on a windshield by German Finance Minister Wolfgang Schauble, the key to watch will be if the desired outcome is achieved. Behind the scenes, the goal of Schauble’s tough talk has been to discourage rebellion from migrating in the region. Elections in Spain and Portugal will be interesting, but the powerful force to consider is in France.
France face “electoral hurdles,” and issue to be closely watched as the game of thrones plays out across Europe
A recent Morgan Stanley (NYSE:MS) economic analysis of the region notes that, in light of a “business-friendly government agenda” that “yielded some progress in structural reform” there are “external clouds” on growth. Those “external clouds” were not explicitly defined but the report pointed in several directions, one being the wave of populism sweeping through Greece having potential to ignite a democratic flame, the next sentence might provide clues to one primary concern. “Low government popularity, a fragile parliamentary majority and electoral hurdles also limit the scope for additional structural efforts,” the report, written by Carmen Nuzzo, concluded.
In other words, one conclusion a reader of the report titled “Ongoing Recovery with Clouds on the Horizon” might draw is that a populist electoral revolt in France could be a “cloud.” Morgan Stanley didn’t use such stark language, but such is the topic to watch.
Eyes no longer on Greece, for now: will a populist “contagion” grow or has it been squashed?
As the ECB appears to join the IMF in calling for a debt haircut in Greece – and an HSBC Holdings plc (ADR) (NYSE:HSBC) (LON:HSBA) report “One step closer to a deal,” analyzing the IMF concern with the Troika, failed to report the IMF a calling for a debt “reduction,” instead claiming the IMF was looking for “maturity extensions.” This is a critical issue as “debt reduction” such that was afforded Germany in the 1953 London Accord is an issue that could divide Europe against Germany. The concern is that in taking a hard line with Greece, what was a peaceful revolt could turn ugly. The Greek, French and Spanish people have seen this black boot of repression in a previous generation – the same generation that offered the London Accord to the Germans – and there is apparent growing discontent as the French could be the key linchpin towards wresting control of Europe from the current rulers.
What happens in France going forward might be most significant as the economy is gaining steam
The material issue going forward isn’t so much about what happens in Greece at this point – they are considered likely to default and leave the euro without some sort of meaningful debt reduction – the issue is watching France. If a populist government takes control, it could bolster efforts inside the Troika to take a different approach on debt in general, one that uses the black boot to help boost economic viability rather that suffocate it.
It is from this lens the Morgan Stanley research becomes relevant.
The report noted economic positives that typically do not translate the same way onto the street. The French economy is expanding “moderately,” with Morgan Stanley’s forecast looking for close to just over a 30 percent rise in GDP from its previous forecasts. In upping its growth forecasts to 1.1 percent and 1.7 percent from 0.7 percent and 1.4 percent, is a positive for the ruling party. Success on the economic front could translate into deficit reduction. However, “uncertainties about the pace of external demand and how the Greek crisis will evolve cloud the horizon though.”
In other words, if populism needs to be squashed again, structural reforms that encourage productivity growth and a public deficit shrinking, viewed as positives by economists but perhaps negatively by voters, could be derailed going into an election season. “The government faces several electoral tests ahead, which increase the hurdles to additional structural efforts, including on the public deficit-reduction front, as the ruling Socialists seek to regain popularity.”
"French Socialist" at one point was a term to send shock into the hearts of the economic establishment
It is interesting to note the use of the word “Socialist” in the context of the French election. This word used in the report context to describe electoral victory for business interests. At one point in history, such a result would have shaken the economic establishment to its core. However, in the new world a “Socialist” is good for business and likely supports the German approach to various degrees. That's good for business and "structural reform," which might not be good for those that enjoy month-long vacations in the summer.
As the French economy has finally returned closer to its previous luster and ECB stimulus is set to be sprinkled on the European landscape like fertilizer used to grow asset prices, there are “clouds” on the horizon, the report noted. This is correct. And watching the clouds through the lens of the French economy and electoral results will have much more impact than that which is felt in France. It could change the direction of European leadership to conform to an IMF, ECB approach to “debt relief” and “sustainability” in the region.
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