Tags: EU | election | US | euro

With European Parliament Election Done, EU Faces Serious Challenges

By    |   Tuesday, 27 May 2014 01:38 PM EDT

The European Parliament elections that took place in the 28 member states are finally over. I don't think it's an overstatement to say the European Union faces, once again, serious challenges.

While the anti-austerity and the anti-EU votes — in France with the "Front National" and the United Kingdom with the "U.K. Independence Party (the first time in a century that neither the Conservatives nor Labor won a U.K. national vote contest!) — weren't completely a surprise, their amplitude took not only those involved at national as well as at the EU level, but also most observers, completely by surprise.

Another surprise was that the widely expected political instability in Italy didn't materialize and instead we got completely the opposite — a stunning victory of acting Italian Prime Minister Matteo Renzi's center-left Democratic Party (Partito Democratico), which is part of the European Socialists Party.

Yes, Renzi, who stands for an end to the EU-imposed austerity programs, turned out as being the big winner, with 41 percent of the Italian votes.

It would not be surprising if he receives direct support from French President Francois Hollande and his socialist government. Already, a French official said his Hollande would back Renzi's call for more pro-growth policies and tell European leaders, who are due to meet over dinner Monday in Brussels, to discuss the fallout of the European parliament elections that Europe had reached "the alarm level." Of course, a serious question that immediately arises is "What will happen to the still absolutely needed structural reforms the European Union has still to put in place?"

If a deep policy change would please the EU-core/North and more especially Germany is another question. If you ask me, that wouldn't bode well for a strong coherent future of the euro area.

As a long-term investor it's practically impossible to negate what's happened and will probably happen in the European Union and in the euro area, now that the "weakened" bloc will be restrained, for purely nationalistic reasons, to move full steam further ahead as was hoped for until now.

To put it simply: The euro area will face, without any doubt, huge difficulties for further constructing 1) a solid banking union, 2) a fiscal union and 3) a political union, which all have now become nearly impossible, at least during the near term.

That situation will have negative consequences, but such a development hasn't been priced in the markets yet, because of the extreme complexity of the whole turn of events. Nevertheless, long-term investors would do well not to underestimate the situation.

Keep in mind that European voters have reacted negatively to the political momentum that has been orchestrated by the political elite in Brussels and to a lesser extend in Berlin.

It's a fact the pro-EU parties have lost a couple of millions of votes. The pro-EU parties have nevertheless kept as a bloc a majority in the parliament, which of course doesn't assure this will turn out to be a "workable" majority and it is nothing more than common sense not to expect profound changes to happen overnight.

In the European Union "land of the blind," the pro-EU parties continue to negate that the EU house was originally built on a "historical plot," but without adequate foundations ready to withstand serious events, and now we get a couple of earthquakes and that EU-house doesn't seem to be as solid as once was thought.

Without exception, national politicians will now have to address this rising Euroskeptic wave. It will be interesting to see what they are going to do about it.
That said, it could also be interesting to know that of the 751 deputies of the EU parliament, 80 deputies will belong to the EU-skeptics' bloc and 48 to the far-right stream, of which three will be neo-Nazi deputies coming from Greece and one neo-Nazi deputy coming from Germany.

Anyway, I expect lower interest rates to continue for an extended period of time in the core of the euro area, and I still have faith in German bunds and the other core sovereigns. I'm not a speculator and, therefore, I wouldn't take on risk in the peripheral sovereigns.

As a direct market consequence of this election, complacence about the whole EU situation is a dangerous attitude that could bear a heavy price in the future.

As for the euro, please keep in mind that on Monday European Central Bank (ECB) President Mario Draghi said at the ECB Forum on Central Banking in Sintra, Portugal: "In the context of a certain disconnect between economic performance and inflation, the monetary policy response has to be carefully considered and precisely designed. We are not resigned to allowing inflation to remain too low for too long. . . . There is a risk that disinflationary expectations take hold."

We'll have to wait for the ECB staff projections that will be available beginning next week, which will give as a hint what the ECB could probably do about its key interest rates.

Long-term investors should keep in mind that euro area risk will not occur because of the unexpected shock caused by the results of the European Parliament elections, but because of the evolution of investors' sentiment outside the euro area as these investors have been a major source of capital inflows into the euro area, and political confusion could easily deter that.

In the United States, we have the first revision of GDP growth rate during the first quarter of this year, which should give us more clarity if GDP growth really came to a standstill in the first quarter. Going forward, I think growth should be a lot better, but I don't know if it will be on average above trend.

The big question in the United States remains: "Where do we go from here?"

I'd like to say: "Ask the bond market. If the bond market snaps, the equity markets will snap."

For the moment, I can't see a safer place than the United States and the U.S. dollar, together with a couple of countries like Switzerland and the Swiss franc and Norway and the Norwegian kroner (but certainly not in Norwegian real estate because that is in a bubble), and also a few other places.

Yes, above all I'd keep it simple and highly liquid.

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The European Parliament elections that took place in the 28 member states are finally over. I don't think it's an overstatement to say the European Union faces, once again, serious challenges.
EU, election, US, euro
Tuesday, 27 May 2014 01:38 PM
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