The headlines from Europe continue to be dire. In the weekend's elections in France and Greece, the architects of failing austerity policies were thrown out of office. Sunday night, global markets were reacting negatively to the defeat of French President Nicolas Sarkozy by Socialist Francois Hollande, and a Greek election that promised more chaos. (Did you know that "chaos" comes from the Greek word "khaos," which means "gaping void," or "refusal to pay bondholders?") Here we go again with the European problems.
And yet by noon, the U.S. markets had stabilized and were flat or positive for the day. Why? Well, at some level the results weren't at all surprising. It turns out that enacting austerity at a time of low economic growth or contraction is an extremely ineffective political strategy. (It's also a very poor economic strategy.) Across Europe, virtually every chance they've had, citizens have thrown out the politicians who responded to slack economic times by raising taxes, slashing spending, and hoping that bond markets would bestow upon them low interest rates and growth.
But for the markets, and perhaps even for the European economy — and hence for the U.S. — the electoral results weren't unambiguously bad. It could be that France trumps Greece.
Here's what I mean. The Greek election results are unambiguously bad — for the Greek people (these days, everything is bad for the Greek people), for its financial system, for the European Central Bank (which owns or backs a fair amount of Greek debt), for the European banks who are sufficiently incompetent as to still own Greek debt, and, really, for humanity. It has been clear since that the onset of the crisis that, as a matter of sheer mathematics, Greece would not be able to stay current on its debt. With the economy continuing to shrink for a fifth straight year, the likelihood of Greece living up to its reduced financial commitments seemed rather low. But now the voters have substantially reduced the power of the two centrist parties that signed off on the bailout deal, and empowered parties from the left and right fringes who are hostile to the whole idea. The neo-Nazi Golden Dawn will now have a significant number of seats in the Greek Parliament. So, yes, look for Greece to wreak more chaos onto the world's financial system. That's the bad news. (On the plus side, my Delta faretracker alert tells me the cost of an airplane ticket to Athens this summer has fallen sharply in the past week)
Strangely enough, the good news for the financial markets is that an avowed Socialist is now running the world's fifth-largest economy. The last time a Socialist was elected president of France, it was pretty bad news for the bourses. Francois Mitterand nationalized industries and individual companies. Now, Francois Hollande, the president-elect, has spoken of his antipathy toward the bankers (join the club!) and of his desire to jack up taxes on high earners. So he's not going to be any great friend to the globe's capitalist elite.
But here's the thing. Hollande ran against the folly of continued austerity in the face of recession. French voters had a choice between an incumbent who insisted on cutting deficits and reducing spending as a primary growth strategy and a challenger who accurately called out the fallacy of such a strategy. They chose the latter. The great irony is that if you want to hear someone speaking about the importance of stimulating growth in Europe, you have to go talk to someone on the political left. Sarkozy eagerly collaborated with German Chancellor on a joint project to impose austerity across the Eurozone. (So similar was the outlook of the two leaders, critics and admirers alike dubbed them "Merkozy.") Hollande, who has an image of a political softy, has indicated that he would oppose further efforts. In fact, he's more likely to be an advocate for measures that have a chance of boosting growth. As the Wall Street Journal headline notes "Hollande to Discuss Growth With Merkel." And, yes, that may involve levels of deficits and inflation that make Germany uncomfortable.
The only known solution to big deficits and massive unemployment is growth. The private sector has a vital role to play. But fiscal and monetary policy can also help. Unfortunately, for the last few years, Germany, through its influence over the European Central Bank, the Eurozone economy, and the government of a (theoretically) united Europe, has acted as a force against expansionary fiscal and monetary policies. So long as its own economy was growing, Germany didn't much care that unemployment in Spain topped 20 percent. With the election of Hollande, there's finally a counterweight to austerity at the heart of Europe. And the result might have the effect of getting right-leaning austerians elsewhere in Europe (I'm talking to you, David Cameron of the U.K.) to think better of their misfiring strategies.