Monday, May 7, 2012

Greek-French elections: Beginning of the end of the EU?

Quite the busy Sunday as the election results in France and Greece throws doubt and uncertainty on the viability of austerity and bailouts!

The Greece election results, besides throwing the financial bailout of the country into doubt, included an alarmingly strong performance by a party that goes by the name Golden Dawn. This anti-immigration and anti-austerity political movement was projected to have taken 7% of the vote. This compares to .29% of the vote this radical party won in 2009.

Said the leader of Golden Dawn,"The day of national revolution by the Greeks has begun against those who are selling us out and looting the sweat of the Greek people." Golden Dawn members typically wear black, display an emblem similar to the Nazi insignia and are are extremely anti-immigrant. Television ads run by the group during the campaign referred to immigrants saying, "let's rid the country of this stench."

This strong performance by Golden Dawn is a fairly clear indication of some of the troubles ahead for Greece and its people.

In France the impact of Nicolas Sarkozy losing to the Socialist Francois Hollande could be swift and severe as, like Greece, the new French government will most likely move against the austerity measures being pushed by Germany.

On the other hand Hollande may work in a more pragmatic way that will preserve the standing of France in the financial markets.

In other words uncertainty and uncertainty, particularly in the financial markets, is never a good thing!

If there is a move by Hollande to bring an end to the idea of austerity and instead look to economic growth through government spending it would most likely put a fatal wedge into the France-Germany alliance that had existed between Sarkozy and Merkel.

At the same time this would make it much more difficult for some of the other struggling governments like Italy and Spain to keep to the moves they must make towards austerity going forward.

This would cause the angst that the EU has been dealing to rise to a level that was unimaginable a short time ago.

To monitor the situation in Europe in order to try and determine just how serious things are going to get there and by extension in the U.S., I would suggest watching 10-year sovereign bond yields and the price of Credit Default Swaps or CDS.

These two indicators may be your best guide to what the "smart money" thinks the endgame in the EU is likely going to be.

Below is where the bonds were trading last week. Where will bonds from Germany, Spain, Italy, France and Greece be trading today?

10-year Sovereign Bond Yields, Spread to German 10-year and Spread to US Treasury 10-year



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