Eurozone Elections Spook Markets

Published in Investing on 8 May 2012

Election results in France and Greece, plus poor US jobs figures, send shares sliding again.

Thanks to the Early May Bank Holiday, Britain has just enjoyed a three-day weekend, while the rest of Europe fretted about election outcomes from France and Greece, plus weak job-creation figures from across the Atlantic.

Austérité? Non, merci!

In France, Nicholas Sarkozy lost the second round of voting in France's presidential election to his main rival, François Hollande, by 3.3% of the vote. As a result, the right-wing incumbent will step down on Monday, 15 May, to be replaced by his Socialist rival.

During his campaign, Mr Hollande declared his slogan to be "My enemy is the world of finance" -- and promised to boost France's spending on social welfare. While campaigning, he vowed to introduce a 75% tax rate on those earning over €1 million a year, hire 60,000 new teachers and abandon austerity measures in favour of maintaining France's social model.

Beware of Greeks bearing votes

Meanwhile, Greece -- birthplace of modern democracy -- also went to the polls on Sunday, this time in a general election. With the ruling PASOK-New Democracy coalition winning under a third (32%) of the vote, Greek voters failed to elect a majority government. With anti-austerity MPs winning the majority of votes, Greece faces more weeks of uncertainty as it attempts to form a government.

In another worrying development, Golden Dawn -- Greece's first far-right party for nearly four decades -- took around 7% of the vote. This anti-immigration, ultra-nationalist party promises to expel all legal and illegal immigrants. Its leading supporters wear black shirts and sport a Swastika-like symbol. Sound familiar at all?

These echoes of pre-war Nazi Germany, plus the uncertain election result, sparked a slide in the Greek stock market. On Monday, the ASE -- Greece's major stock-market index -- nose-dived by 6.6% as investors rushed to dump Greek stocks at any price.

Mr Market worries

Initially, this news from France and Greece caused a widespread slide in share prices across Europe, with stocks falling by up to 3% in major European markets. However, markets then recovered most of this ground to finish only slightly down on the day.

In Paris, the CAC 40 index actually rose by nearly 1.7% yesterday, having fallen to just above 3,100 at the opening. However, it is showing further weakness today and has slid 1.8% as I write. In Germany, the main Xetra Dax index rose fractionally on Monday, but has dipped nearly 1% as I write today.

German politicians have already started fretting about the French and Greek elections. In particular, they worry about Hollande's plan to tear up the eurozone 'fiscal compact' on budget discipline, in a spending spree aimed at winning over the French electorate.

Also on Monday, the euro dropped to a three-month low and the price of oil also dropped.

Meanwhile, across the Atlantic...

This week's jittery start followed steep falls in share prices last Friday, when the US Department of Labor revealed that America had added just 115,000 jobs in April, far fewer than expected.

Despite the US unemployment rate falling slightly to 8.1% -- from 8.2% in March -- world markets reacted badly to this news. Indeed, the blue-chip FTSE 100 index of elite British companies tumbled by nearly 2%, with US markets having their worst week this year.

The summer of slumps

Personally, all these echoes of the dark days of the Thirties are making me very nervous.

With Greece a total basket case, Spain deep in the dung and Germany fed up of bailing out its partners, I fear for the future of the single currency. Likewise, Portugal is a complete mess and needs a second bailout, as its 10-year bonds yield an unaffordable 11.3% a year.

As I warned in April, I suspect that the next few months will bring a summer of slumps, as investors finally grasp that Europe's solvency problems can't be cured with liquidity injections.

Indeed, history suggests that recessions accompanied by banking collapses take at least a decade to work out. Hence, we may not be even half-way through capitalism's current crisis!

Investing is by no means easy in today's uncertain economy. That's why we've published "Top Sectors Of 2012" -- our guide to three favourable industries. This free report will be dispatched immediately to your inbox.

Further investment opportunities:

> Cliff does not own any of the shares mentioned in this article.

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Comments

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AlysonThomson 08 May 2012 , 12:53pm

So how come the Euro exchange rate hadn't improved much by yesterday? Tesco's was just 1.18something. checking it again today.

Observer78 08 May 2012 , 1:15pm

Look, I don't want to nit-pick, but can you guys proofread your articles a little better before posting?

Firstly, Greece is not the birthplace of modern democracy; it's the birthplace of democracy, full-stop. The clue is in the word's linguistic roots. Many countries could lay claim to being the birthplace of specifically modern democracy - including France - but Greece isn't one of them.

Secondly, paragraph 7 seems to indicate that Germany has had an election recently. Unless MF has got a scoop on its hands, I'm fairly sure this isn't right.

CunningCliff 08 May 2012 , 1:32pm

Hi Observer78,

I will have "Initially, this news from France and Germany caused" changed to "Initially, this news from France and Greece caused"

Thanks!

Cliff

PS: When one writes 20,000 words a week, gremlins are bound to creep in. I apologise for not being perfect! ;0)

CunningCliff 08 May 2012 , 1:38pm

PS: "Look, I don't want to nit-pick, but" (northern) Germany did host a (state) election at the weekend, see:

http://www.guardian.co.uk/world/2012/may/06/germany-state-elections-merkel-test

Cliff

Observer78 08 May 2012 , 1:40pm

Ha! I stand corrected. Fair enough...

tru2me 08 May 2012 , 5:02pm

Very timely article Cliff.
I concur with most of it.

Although Spain in the dung maybe metaphorically true.
Can't help feeling the Spanish are getting tarred with the dung brush because of the size of that specific country within the Eurozone. If you like at Spanish debt to GDP. They have less debt to GDP than we do.

Mind you they don't have George Osbourne to smooth the brows of the credit agencies which is unfortunate.

diddyda 08 May 2012 , 7:07pm

Alyson Thomson: The reason that the exchange rate of good old Sterling hasn't improved against the Euro (and other global currencies) is that the Bank of England has been actively devaluing the Pound.

'Qualitative Easing' or as more commonly known (printing more money) means that the money in circulation is effectively 'watered down'. The assets behind the currency haven't changed, but more money in circulation means that each pound has less tangible assets behind it. Making each Pound worth less.

This is the ultimate 'stealth tax' and has been tried many times before. It is a sign of desperation on the part of governments. If you travel to Zimbabwe where the practice has reached its ultimate conclusion, one can 'buy' a ten trillion dollar note as a souvenir. It is worthless.

Call me naive, but too much credit, borrowing and living beyond our means caused all this trouble. Is encouraging more of the same, the solution to the Western economies problems?

apprenticeDRL 08 May 2012 , 8:29pm

about 70% of my companies products are exports so I am very happy to have a weak pound.

Our major worry is that sterling will rise too much against the euro and make us less competative.

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