Global Implications Of French Presidential Election
Politics / Euro-Zone May 17, 2012 - 12:36 PM GMTBy: Dan_Amerman
Forget the anemic latest US jobs report - the world is in play, and the election of Francois Hollande as the President of France may do more to determine US unemployment rates (and global investment results) in the next year than anything that Ben Bernanke and US government policies will accomplish.
There is a near-term risk that a process has been set in motion that could plunge the entire globe into currency chaos and economic depression within the next year, with the failure to form a government in Greece acting as only one of a number of possible triggers.
This outcome is not preordained, however, and the world could also quickly move the other direction, which is ever greater government controls over markets and currencies accompanied by persistent inflation. While this alternative would avert immediate catastrophe, the pain for investors would not be avoided, but merely stretched out, with a steady erosion of wealth over potential decades of inflation and financial repression.
Regardless of which path the future takes, the bottom line is that the election of Francois Hollande has increased global economic volatility in 2012, while likely decreasing the remaining lifespan of the unsustainable veneer of normality in US and global financial markets.
In this analysis, we will examine twenty potentially world-changing economic and financial implications of this change in direction in France and Europe. These include the exacerbated near-term meltdown risk, the worsening of the long term outlook, the potential global political shift, the rapid redistribution of European wealth, and the impact on US unemployment, financial sector solvency and stock market returns, as well as US deficits and Federal Reserve monetization.
1. Putting The Pedal To The Metal
France, like the rest of Europe, the United States, and much of Asia, has a building demographic crisis. Simply stated, there won't be nearly enough young people to support the old people in the retirement style which they have promised themselves. This is the underlying reason why nations are talking about raising retirement ages around the world.
France has a particular problem because its European-style social safety net (i.e., transfer payments) is more institutionalized than in many other nations. As a result, only 56% of the French working age population is actually in the labor force (either employed or looking for work), as compared to 60% in Germany, 64% in the United States, and 67% in Canada (per the World Bank).
So the situation is that only a little more than half of France's working age population is working or seeking work, while there is a building demographic crisis with fewer young French workers to support each French retiree - and a new French president was just elected on a promise of lowering the retirement age from 62 down to 60 years old.
From an economics perspective, this is amazing stuff. For decades, politicians in Europe as well as in the US and other nations have been getting elected by making impossible promises about the future and retirement. The 1-2 combination of declining fertility rates and growing retirement promises created an oncoming cliff that has been in plain sight for decades now, for those who cared to look. However, as long as it was comfortably far off in the future, few people really worried about it, not while there was political advantage to be gained today by making promises that a different generation of politicians would have to eventually deal with.
A short-hand way of describing the current Eurozone crisis is that the cliff is no longer in the distance, it is no longer five years away, but it is in clear view here and now. There is more to the cliff than retirement ages, as expensive promises have been made in many ways, but the core of the Eurozone debt crisis is that nation after nation is finding out they've crossed the line in the here and now, and can't pay for the politically popular promises they made to themselves.
While austerity was effectively saying "let's slam on the brakes", the platform that Francois Hollande campaigned upon was "let's put the pedal to the metal instead" and accelerate towards the cliff. And he won the election.
2. Bringing Forward The Global Retirement Dilemma
There are some powerful global implications of the decision the voters of France made when they decided that lowering their collective retirement age sounded a whole lot better than this cutting benefits unpleasantness.
One implication is in the area of fundamental economics, and it is that when it comes to paying for retirement promises, the day of reckoning for the US and Europe has likely been moved forward. Before the election, France was counted in the "positive" column, in that France along with Germany could apply their economic power to help struggling Greece, Portugal, Spain and Italy.
Now this was always a bit marginal from a long term reality basis, as France has always had its own appointment with debt and demographic destiny coming up (as does Germany), even if it was considered far enough off in the future that it could be ignored, while interim solutions were being patched together for the crises of today.
However, through not just rejecting austerity for itself, but by voting to put the national "pedal to the metal" and bring forward the day when France flips into the "negative" column, France has also brought forward the day when either the rules must all change, or all of Europe goes sailing over the financial cliff together. Germany never could rescue Italy, not by itself. Germany most certainly can't rescue both Italy and France together. And now that France has officially decided to be, well, French, and relax and enjoy life in the here and now, instead of this sternly-determined Germanic rescuing the world business - none of the current Eurozone "solutions" work anymore. It is a just a matter of how much time it takes for that to be recognized and accepted.
3. Near-Term Eurozone Meltdown Risks Sharply Higher
The Eurozone was already in deep danger. The rapidly evaporating "solution" for Greece doesn't work for the larger problems of Spain and Italy, and everyone knows it. Even when Germany and France were in alignment in insisting upon austerity as the solution - in practice, working out a series of interim solutions came right down to the wire and nearly failed, time and again during 2011. If Spain can't sell its bonds in the next few months, and Germany and France now have 180 degree different approaches to the appropriate solution - exactly what happens next, and how does the process work?
For a guide to the toxic intersection between dysfunctional politics and extraordinary deficits, one need look no further than the US government. Short-sighted, partisan bickering and power plays entirely unnecessarily placed the United States in danger of defaulting on its debt in 2011. These same dysfunctional politics created the looming "fiscal cliff" for the US government at the end of 2012 that could crash the economy, send taxes soaring - or even both.
There is no reason for this arbitrary "solve or self-destruct" deadline for the US, except that the political leadership agreed that because partisan differences between the two sides couldn't be solved even in the name of preventing national bankruptcy, the best "solution" was to defer - but force - a later solution through creating an artificial deadline with severe risks for the nation.
In some unfortunate ways - Europe just became the United States. That is, there is effectively a co-presidency between Germany and France when it comes to the debt crisis, and there is now a split government, with the co-presidents belonging to opposing parties.
In other words, an already dysfunctional process with extraordinary underlying problems just became much more likely to get derailed by political battles and brinksmanship. And given that the multi-government / single currency structure of the Eurozone is inherently much less stable than a single government / single currency structure, the dangers of an accidental - and completely unnecessary - breakdown are substantively higher than they were before.
This is not to say that the Eurozone is doomed. There are solutions, but they are political rather than economic. Given the extraordinary power of governments to control laws, banks, and the nature and value of money itself, and thereby rewrite the rules book, the Euro and the Eurozone can still be "fixed". However, when the solutions are political, and the political leadership just fractured, then the chances of finding a solution in the midst of crisis just diminished markedly.
Absent such a solution, then the next major crisis (or the one after that, or after that) could indeed bring about a Euro collapse scenario.
4. Latest Greek Election Compounds Danger
As of April, 2012, the German, French and Greek governments were in agreement on pursuing an austerity approach. All three corners of the triangle have now shifted with the recent elections.
Greece has moved towards breakdown with the failure to form a government, even while the German opposition, the Social Democrats, won a major regional election. With austerity parties losing by wide margins in Greece, and an "ally" winning in France, the chances that Greek voters will elect a party that will even attempt to pay the bills seems to be diminishingly small.
In other words, all deals are off, and this may very well force the issue within the next month to few months. In theory, Europe has been preparing for Greece defaulting and leaving the Euro for some time now, and absent major political blunders, the Eurozone should at least temporarily survive a Greek collapse.
But, as always, Greece isn't the point. For some time now, the world accepting the solvency of Spain and Italy hasn't been about the economics of money coming in versus money going out, but rather this acceptance has been based on a set of beliefs about how European governments will function together. If a spectacular failure occurs with Greece, then the belief system breaks, and it is then not just that a failure grows more likely with Spain or Italy, but the magnitude of the event needed to trigger such a failure may be both smaller and nearer in time.
5. Global Political Implications
Another immediate global implication is profoundly political. The political leaders in every nation around the world just watched one of the two most powerful political leaders in Europe lose his job, even while another took his place.
There were of course many issues driving the election results, and not everything was economic. But the ending bottom line was that the leader talking about making tough choices became personally unemployed himself, and the leader who told the people exactly what they wanted to hear is now in power. At the same time, politicians advocating fiscal responsibility were also voted out of office in Greece and Italy.
This was all carefully noted in Washington, D.C., Berlin, London, Canberra, Ottawa, and many other capitals.
Now, Hollande has no more ability to wave his hand and make the Eurozone debt crisis go away - or change the fundamentals of resources and the number of workers per retiree - than Sarkozy did. But, there is a choice for governments in how impossible promises get broken.
A government can tell the truth by saying belts must be tightened, and everyone's standard of living must fall - and then get promptly voted out of office.
Or a government can create inflation, use statistical manipulation to report official inflation rates that are beneath the true rate of inflation, keep interest rates and cost of living adjustments beneath that true rate of inflation, and steadily inflate away the value of outstanding government debts while breaking impossible promises in substance, but not in form. In other words, pay the retirees and other transfer payment beneficiaries in full every year, but do it with currency that is worth less every year.
If that situation sounds familiar for US readers - it is because that is the reality that is happening all around us. All any of us has to do is personally compare the cost of groceries between now and several years ago, or gasoline, or utilities, or health insurance, or college tuition for our children - and the truth is plain to see. Inflation is higher than what is officially reported, and neither cost of living adjustments nor interest rates reflect the true rate of inflation.
The bottom line with inflation in an environment of financial repression is in many ways the same as "austerity". Retirees, public workers and other transfer payment beneficiaries are all gradually impoverished as their payments and salaries will buy less every year. At the same time, savers and investors also see the after-inflation and after-tax value of their net worth steadily eroding away and buying a little less each year, instead of compounding for retirement and buying a little more each year (the way all the financial planning models show it).
One could say that this is a terrible deception by politicians and governments. One could also say that if bitter medicine is what is required, that this is the way the voters themselves will demand it be served. Many tens of millions of voters around the world share deeply held beliefs that they are absolutely entitled to a certain standard of living, with certain basic prerogatives that come from living in a civilized society including retirement at a comfortable age. Technicalities like real goods and services and workers per beneficiary are of little interest to the very substantial portion of the population with this mindset, when it comes to their fundamental rights as human beings.
One could even say that the citizens in France and elsewhere will get exactly what they demand from those they vote into office: glowing promises on the surface - which are impossible to keep in substance over the long term - which then require deep levels of deception beneath the surface that steadily break the impossible promises in a manner that is sufficiently complex that the average voter will never really understand what is going on.
I've been studying this area of economic reality versus retirement promises and the impact on public and private retirement investments for about twenty years now. In anticipating this time of a seemingly impossible conundrum, it has long been clear that it was the political considerations which would define the most likely path: one of governments inflating away obligations while manipulating the inflation indexes, which would destroy the value of savings even while impoverishing investors who followed conventional retirement investment approaches.
In my opinion, the election of Francois Hollande as President of France means that the French have effectively committed to follow the United States down a path of inflating away debt and promises, so that the political requirement to meet popular but impossible promises will be kept in form - but not in substance. Economists refer to this process as "Financial Repression", and three tutorials can be found at the link below:
Financial Repression Tutorials
6. Resolving The European Leadership Conflict
In looking at the leadership conflict from a broad, global context, the next step looks obvious: it must be Merkel and Germany who give, and follow France's lead, the secondary strength of France's economic muscle notwithstanding. Hollande was just elected after all, so it would be quite difficult for him to completely renege on his campaign promises in a highly public manner. Other European elections seem to be confirming the mood of France's electorate, and the media coverage of the swing away from austerity has been generally positive as well. If Hollande does get most of Europe behind him, then either the Germans give way - or the Eurozone implodes.
However, logic doesn't necessarily rule here, and there are ample opportunities for any number of political leaders to do something that might make sense to them at the time, but will quickly turn out to be a remarkably bad idea. Angela Merkel is the head of the most powerful nation in Europe, she retains enormous power, and she has her domestic political interests to consider. All it takes is a bit of gamesmanship for political advantage gone awry when the Eurozone is on the brink - and there could be an accidental breakdown that quickly spirals out of control.
If and when Europe unites behind a "printing" and inflation-driven approach to solving its problems (even while every nation uniformly and steadfastly denies any such plan), then the crises may pass, and Europe could get down to a reasonably stable process of defrauding its creditors and domestic population through a combination of inflation, inflation-index manipulation and financial repression. Thus, there is no certainty that either the Euro or the Eurozone will collapse.
However, so long as the political leadership remains divided, then all it takes is the combination of one flash point, combined with one remarkably bad political decision, and the Eurozone could go down at any time. Which would then be highly likely to lead to a soaring US dollar, which could devastate US employment and the US economy. This in turn could create a double-crested tidal wave slamming into Canada, Australia and other nations which trade heavily with both Europe and the United States.
The remaining 14 implications include the rapid redistribution of wealth within Europe, and the impact on currencies, unemployment, energy prices, US banks, derivatives, deficits, Fed policy and stock market wealth.
Daniel R. Amerman, CFA
Website: http://danielamerman.com/
E-mail: mail@the-great-retirement-experiment.com
Daniel R. Amerman, Chartered Financial Analyst with MBA and BSBA degrees in finance, is a former investment banker who developed sophisticated new financial products for institutional investors (in the 1980s), and was the author of McGraw-Hill's lead reference book on mortgage derivatives in the mid-1990s. An outspoken critic of the conventional wisdom about long-term investing and retirement planning, Mr. Amerman has spent more than a decade creating a radically different set of individual investor solutions designed to prosper in an environment of economic turmoil, broken government promises, repressive government taxation and collapsing conventional retirement portfolios
© 2012 Copyright Dan Amerman - All Rights Reserved
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