By Delusional Economics, who is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint. Cross posted from /“>MacroBusiness.
And so the black cygnets scuttle from the shadows again.
Over the weekend, Angela Merkel’s Christian Democrats suffered an 8.3% swing in North Rhine-Westphalia as the Social democrats (SDP) and the Greens garnered a majority. Although this is only a state election, called after the previous SDP led minority government was unable to get approval for its budget, North Rhine-Westphalia is the country’s most popular state and seen the bellwether for national government. Of note is the fact that the SDP-Greens coalition governed Germany under Chancellor Gerhard Schröder from 1998 to 2005. Although this is as much about state politics and personalities, especially the SDP leader Hannelore Kraft, the flow-on effects at a national level from such a large turn around are very obvious:
Appearing on stage in Düsseldorf on Sunday night, Röttgen said: “I led the CDU, I was its leading candidate. This is, above all, my own personal defeat — and it really hurts.” Röttgen stepped down from his post as head of the state chapter of the CDU on Sunday. Ultimately, the election had pitted the SPD’s Kraft, who is considered to be a down to earth politician who has no trouble connecting with the people of her state, with Röttgen, a national politician who proved to be too distant from state voters. And although Röttgen hails from the state, he failed to overcome the image that he was a carpetbagger from the capital. His many missteps during the campaign also made it difficult for him to win over the hearts of voters.
The worst came when Röttgen said he wanted to make the vote a state referendum in support of Chancellor Merkel’s policies for saving the euro. Merkel’s positions have been popular with German voters, but the chancellor wanted no part of Röttgen’s pending election defeat. Angry, CDU politicians at the national level distanced themselves from Röttgen, saying any loss in North Rhine-Westphalia would be his alone. It nevertheless represents a setback for Merkel and the CDU because the vote in the state, with its 13.2 million people, often influences the outcome of federal elections. And although there had been tensions in the run-up to the election, Röttgen is a political protégé of the chancellor and his defeat is ultimately hers as well. The loss threatens to further erode the chancellor’s clout — both at the national level and within her own party.
It is yet to be seen if the SDP can build on this win and engineer a campaign at a national level, many are doubtful, but this election loss for CDU isn’t the first, with Baden-Württemberg in March 2011 and Merkel’s home region of Mecklenburg-Western Pomerania in September. This continuing poor result may have some moderating effect on Angela Merkel as she meets Francios Hollande for the first time in his capacity as the President of France on Tuesday, and now that the politicking is over on both sides it will be very interesting to see what comes out of this first meeting.
The Franco-German relationship, however, is obviously not the major topic of concern at this point. That once again goes to Greece who over the last 24 hours have seriously ramped up the “risk off”.
As you may know, over the weekend PASOK’s leader, Evangelos Venizelos, failed in his party’s attempt to build a working coalition to govern Greece. Given his party was the last of three to be given such a mandate by the Greek President, Karolos Papoulias, the task of attempting to form a government fell back to the president. On Sunday the President held one-on-one talks with party leaders to no avail, and then on Monday morning the leaders of New Democracy, Syriza, PASOK and the Democratic Left were invited to the president’s office for final talks.
The outcome of the meeting became known before it even occurred as Syriza leader, Alexis Tsipras, refused to enter into new talks:
… Left Coalition (Syriza) bloc, which finished second in May 6 elections with 16.8 per cent, announced late on Sunday that it would refuse to join a coalition government.
“Syriza refuses to be a left-wing alibi for a government that will continue the policies the people rejected on May 6,” NET state television quoted Syriza leader Alexis Tsipras as saying.
Tsipras earlier said he would not join or support a pro-bailout coalition government, saying he could not agree to what he termed a mistake.
And once Syriza was out, then so was the Democratic Left:
The leader of Greece’s moderate Democratic Left party reaffirmed on Monday that he would not take part in a coalition government without the more radical leftist SYRIZA group, hours ahead of a final round of talks.
“A government that does not ensure the participation of the second party will not have the necessary popular and parliamentary support,” Fotis Kouvelis told Antenna TV, saying he wanted a broad-based “ecumenical” government.
It now appears, given the failure to build a working coalition, that the President is pushing to reform a technocratic cabinet, but it is unknown at this stage whether Lucas Papademos still wants the job, whether the political leaders would accept such a proposal or whether the citizens of Greece would be accepting of such an outcome. Negotiations are continuing but it looks almost inevitable that no agreement between the parties is going to be found.
The other black cygnet, Spain, also squawked overnight, with Spanish banks again adding to the dour news. Over the weekend, last week’s rumours of a new government plan to sort out the banking system became a reality. In the last 24 hours Moody’s has provided some opinion on the matter that may sound a little familiar:
Spanish banks will remain vulnerable to rising loan delinquencies even after they set aside €30 billion ($38.75 billion) in newly announced real-estate loss provisions, Moody’s Investors Service warned Monday, highlighting mounting concerns about the country’s ailing financial sector.
The Spanish government told banks Friday they must bolster their provisions to protect themselves against potential losses from loans to real-estate developers not currently considered to be at risk of default, a move that came just days after authorities bailed out troubled lender SA.
Moody’s said the added provisions will improve the capacity of banks to absorb losses but they remain vulnerable to the current recession and continuing real-estate crisis.
As a reminder, Spanish property prices have fallen nearly 30% from peak and accelerated that decline in April.
The Greek stock market fell another 4.5% overnight and is now down 56% for the year, while Spanish 10 year bonds jumped to a yield of of over 6.22%. Italian 10 years also leapt to 5.69%.
In other news, Eurozone industrial production “unexpectedly” fell in March, the Irish construction PMI also took a good whipping in April and , in case you missed it, the European Commission thinks Spain will miss its deficit targets this year and next and Portugal, that European model of successful austerity, is going to need some more because of a “more pronounced fall in private consumption and the substantial worsening of the labour market situation”. Finally, Moody’s downgraded 26 Italian banks.