El-Erian: European Elections Complicate Outlook
Sunday’s elections in Europe occurred in three countries with diverse economic circumstances (France, Germany, and Greece); and they were for different parts of government (presidential, regional, and parliamentary respectively). Yet the common message from the electorate is undeniable, reminiscent of a famous line in the 1976 movie Network: “I'm as mad as hell, and I'm not going to take this anymore!”
Much will be written about these elections, and rightly so as they could well mark a further evolution in Europe’s regional integration efforts. They unambiguously show that the electorate is angry and has lost confidence in the ability of traditional politicians to solve the region’s crisis. Indeed, many citizens are yearning for alternatives but, as yet, are not coalescing around a common view of what these should be. As a result, political realities will complicate even more what is an already delicate economic and financial outlook for Europe, the world’s largest economic area.
The first thing that Sunday’s elections scream out is anti-incumbency. French president Sarkozyjoined the growing list of leaders that have been thrown out of office by disgruntled citizens. In Greece, exit polls suggest that the combination of the two usually dominant parties failed to secure even 50% of the votes. And in Germany, the ruling coalition seems to have experienced another setback.
The elections also show that an unusually large number of Europeans are opting for fringe parties, some of which are yet to define their vision beyond the need to dismantle the past. In Germany, exit polls imply that the Pirate party may have secured 8 percent of the vote in Schleswig-Holstein, giving it a voice in a third regional parliament after similar success in Saarland and Berlin.
In Greece, both extreme left and extreme right parties are celebrating a surge in their popularity. And all this follows France’s extreme right wing presidential candidate getting almost 20 percent of the votes in the first round a couple of weeks ago.
Simply put, this translates into more fragmented European politics, at least in the short run. A politically more disparate Europe will find it even more challenging to reach common ground on a range of important issues.
Do not expect the sudden appearance of the type of decisive leadership that is needed at the national level to overcome long-standing impediments to growth, jobs and financial stability. And look for more fragmented regional interactions as cross-border coordination and collaboration become an even greater nightmare.
Markets will likely price in a larger risk premium following Sunday’s election outcomes – on account of political uncertainty and the related range of specific risk factors, including greater concerns about creditworthiness and eurozone exit. This speaks, first and foremost, to the spreads of certain European sovereigns, with negative spillover effects on equities and other risk assets.
Fortunately, there is a silver lining, though it will take some time. It comes in the form of a hope that the electorate’s message on Sunday will be interpreted by Europe’s leaders as a call for bold action.
According to PIMCO’s research, Europe needs to iterate simultaneously and on a timely basis to the following: a better policy mix at the national level that delivers both growth and solvency over the medium-term; stronger regional firewalls to act as circuit breakers to counter technical contagion; enhanced capital adequacy and asset quality for certain banks; and better institutional underpinnings.
And all this will only materialize properly in the context of a clearer vision of what Europe should look like in three years’ time.
Europe’s election results sound an alarm for European integration and, consequently, the wellbeing of both the region and the global economy. Let us hope that the inevitable short-term volatility is a precursor to a more decisive effort to deal with the continent’s festering problems.
Dr. Mohamed El-Erian is CEO and Co-CIO of PIMCO, the global investment manager.