Economically, What Happens in Europe Doesn't Stay in Europe
With the winning parties in both countries having staked their campaigns on pushing back against the harsh deficit- and debt-slashing regimes being imposed by the European Union, the future of the eurozone is again in doubt.
And as goes Europe, so goes the U.S. Here's a look at why the bond markets in particular care so much about this past weekend's goings on -- and why you should, too.
When Bond Markets Attack
The eurozone has been in various stages of economic turmoil since late 2009, when -- in the time of another political transition -- the world found out that Greece's deficit was significantly higher than previously thought. By EU rules, the maximum deficit any member country is allowed to run is 3%; Greece's was closer to 14%.
This revelation drove the cost of its sovereign debt, determined by the bond markets, higher and higher, pushing it to the brink of bankruptcy and starting a chain reaction throughout the eurozone that began forcing debt costs for countries such as Portugal, Italy, Spain, and even France higher as well.
Just like with people or companies, debt payments can get so high even a country can default. To keep Greece from defaulting, the EU organized one bailout and then another -- this second one contingent on the country following strict deficit- and debt-reduction guidelines.
Other EU members, not yet on the verge of default like Greece, have also been forced to adopt draconian economic measures in order to reduce their deficits -- and not just for fear of Brussels, but for fear of the bond markets, as well.
Playing Against Team Merkel
Just when everyone thinks that Europe has reached some sort of economic stability, there's an unwelcome surprise, like these elections.
Under the center-right leadership of Nicolas Sarkozy, France has worked side by side with Angela Merkel of Germany for four years now to try to stabilize the eurozone. France and Germany are the EU's two biggest members and, as such, together have wielded the necessary political and financial firepower to corral smaller EU members such as Greece, Ireland, and Portugal when they step out of economic line.
Austerity has been driven hardest by the Germans, to whom it comes quite naturally. But how will France's new president-elect behave?
Will Hollande join Team Merkel and continue to push hard for austerity when, frankly, it's something that doesn't come naturally to most socialists -- especially one who had run precisely against Sarkozy's record in order to get elected?
And then there's Greece. There, voters failed to give any single party a clear majority in parliament. And since no party has yet been able to form a new coalition, Greek voters will likely be returning to the polls next month to try again. But the party that came closest to winning, and therefore the party with the best chance of forming a coalition government after the next election -- the far-left Syriza party -- has taken to calling the EU rescue package invalid.
Here's Where the Trouble Crosses the Water
If it ends up that the new Greek government refuses austerity, its next round of bailout money will almost certainly be withheld. If this happens, Greece will have no choice but to default. It may then be forced out of the euro, which there's already talk of.
There's only so much money in the world for bailouts.
Europe can likely absorb a Greek default, but not the series of sovereign defaults that might follow. The EU is sick. Spain and the U.K. have officially slipped back into recession. It won't take much to make Europe get much worse very quickly, and that would almost certainly spread to the U.S.
In a nutshell, further and deeper recession in Europe could send the teetering American economy back into recession itself.
The U.S. is currently experiencing some growth, and unemployment is edging down. We want to keep everything headed in that general direction. Everyone is getting tired of Europe's little parade of surprises, undoubtedly including Europe. So cross your fingers, and hope for pragmatism on the part of Hollande and a return to sensibility among Greek voters -- for everyone's sake.