There are a range of issues coming out of the French and Greek elections over last weekend.
One thing it shows is that while most people in Europe realise there is no “quick fix”, voters are still prepared to toss out Governments in an effort to minimise the pain they will have to go through personally. After all it is hard to take a “big picture” view when you are unemployed or struggling financially.
Related to this is the gap between rich and poor, which does seem to be getting greater in Europe and the UK (as it did in the great depression). This could be the basis of real social problems – particularly for the young and unemployed. It can also lead to voting for extreme political parties as was seen in Greece.
The results also reinforce how widespread distrust and general disinterest in financial markets is in continental Europe, with the French election having NO truly pro-market candidates. This is a real contrast with the US and even the UK where the politicians are more concerned about financial market impacts from their policies. This means unlike the US, European politicians are more likely to do “dumb” things from a financial market perspective. This, in turn, makes markets nervous given political decisions can have such an impact on the future of the EU.
Of course the big debate in Europe currently is austerity (ie the Germans) vs growth (almost everyone else). The French and Greek elections show which way the population wants to go on this choice. This is not necessarily a bad thing as the strict austerity measures seem to be leading to a vicious cycle of lower economic growth or even recession, leading to worsening fiscal positions.
The best case for Europe is if the austerity and pro-growth factions can work out an accommodation. The worst case is it leads to a huge split in Europe and a messy end to the Euro and EU.
My view is that the downside risks for markets through 2012 come more out of Europe than the US. While the US still has major debt and economic issues to work through, it has tried to strike a balance between growth and austerity. The more flexible labour and currency markets in the US will also better help them make the adjustments required, although it will still take many years for this to occur.