It's Now the Bond Vigilantes Vs. the Voters
Austerity and political longevity are clearly not correlated, following the fall of another euro-zone government.
Just weeks after the collapse of Brian Cowen’s government in Ireland we have now witnessed the collapse of the Jose Socrates' minority Portuguese administration following a vote on even more stringent austerity measures aimed at balancing the books and appeasing the bond market vigilantes.
“This political crisis has very grave consequences for the confidence Portugal needs from institutions and the financial markets,” Socrates said, following the loss of last night’s confidence vote.
The euro fell as traders winced at the fact that pushing through austerity measures had, for the second time, led to the collapse of a government trying to impose unpopular measures deemed necessary by the ECB, the IMF and Germany.
Socrates' resignation will dominate attention at Thursday’s heads of state summit in Brussels, where the message will be read loud and clear by any political leader hoping to be re-elected.
Or, in other words, every political leader.
Austerity is very unpopular with the public. Sure, people understand that their government cannot go on spending other people’s money forever, but do MY taxes really need to go up? Surely you are not going to close MY local hospital? Maybe I should go for that other politician who opposes your austerity measures?
New Face, Same Problem
As the Irish are finding out after the election of Enda Kenny, a new leader does not really change that much. Sure, the person you blame for the financial crisis that has hit your take-home income is gone, but what can the new guy do any differently?
In the case of Portugal, the new Prime Minister will be able lower government borrowing costs a little by accepting help from the European Financial Stability Fund and blame it on Jose Socrates, as Barclays Capital pointed out before the loss of the confidence vote.
As we have seen from the examples of Ireland and Greece this may do little to appease the bond markets, who will still demand a very high spread to hold your debt as they bet that at some point, the new government or the one that follows will be forced to restructure or default on their obligations to domestic and international investors.
Timing is Everything
It appears the only hope for those politicians taking the knife to their budgets is time. Enough time to get the cuts through before they go to the polls in the hope that growth will return and voters will reward tough decisions made for the future of their country.
This is the hope of the UK coalition government, which was, at least, elected on a message of austerity.
On Wednesday, Chancellor George Osborne unveiled his second budget since winning power and there was very little good news for voters.
“Britain has a plan and we are sticking to it,” said Osborne, who has consistently told CNBC and others that this chancellor is not for turning on austerity.
The change in tone was on growth. While the plans he unveiled can hardly be expected to see Britain return to significant expansion of gross domestic product, they do lay down a marker and will form the basis of Osborne’s Conservative Party’s plan for re-election.
Get the cuts out of the way in the early years, hope that growth returns, finances improve and people begin to feel richer and thank you for it.
That is a lot of ifs and buts, but Osborne knows if borrowing costs for UK mortgage holders were forced higher by a run on the Gilt market, his administration might not even make it to the next election.
Expect President Obama or his Republican replacement to have a similar vision of next presidential cycle.