European Market Insight
The Dutch voted for a pro-European Union (EU) Parliament, and the German Constitutional Court decided in favor of EU legislation. Both events are positive for preserving the euro, but come with significant caveats.
To understand European financial markets, an understanding of European politics is necessary. This is why last week’s decisions by Dutch voters and the German Supreme Court are important.
This is in spite of the fact that markets went up mostly because the Federal Reserve launched a new round of quantitative easing (QE3), which led to a stock rally across the world and also propelled the euro. The euro went up just over 1 percent on Friday to close at $1.31, extending a powerful weeklong rally—up 2.5 percent. The EURO STOXX Index went up 2.2 percent last week, with Spain and banks again outperforming, rising 3.4 percent and 4.4 percent, respectively.
Dutch Vote For a Broad EU Majority
Last Tuesday, the Dutch electorate chose to vote pro-EU and gave the center right VVD party with Prime Minister Mark Rutte and the center left PdvA party a broad majority in the Lower House of Parliament. Both parties are moderates when it comes to EU matters and support the current structure of helping peripheral countries such as Greece.
Nonetheless, astute observers note that both the VVD and PdvA might have gained seats because they toughened their language on future bailouts and the European Commission. Rutte for example opposes another Greek bailout and also supported the U.K. freezing the European Commission’s budget for the next round spanning 2014–2020 in real terms.
PdvA leader Diederik Samsom ruled out eurobonds and further European integration involving common debt issuance as well as a joint finance minister and Parliament. Both parties have therefore catered to growing discontent among the Dutch populace over austerity at home and profligacy abroad.
The bottom line is that Europe avoided the unlikely scenario of a Dutch euro exit if Wilders had won. Nonetheless, further bailouts and integration will probably be met by staunch opposition from the Netherlands, delaying or thwarting negotiation in the future and causing further volatility.
German Constitutional Court Allows Bailout Fund
Last Wednesday, the German Constitutional Court in the city of Karlsruhe denied a request to grant a temporary injunction against the launch of the European Stability Mechanism (ESM). Several lawsuits have been filed by concerned German taxpayers on the grounds that the ESM violates the German Parliament’s sovereignty over its own budget.
The ESM is supposed to be launched at the Oct. 8 Eurogroup meeting and will have a 500 billion euro ($656 billion) lending capacity once its capital is paid in full. It will most likely be used if Spain requests a bailout.
The concerns of the German taxpayers were warranted, however, as the initial ESM treaty was meant to completely bypass national approval processes once ratified. This is why it is important to consider that the German court imposed several severe restrictions on the fund, which will limit German contributions and increase the German Parliament’s supervision.
Since this was just a ruling against a temporary injunction, a full ruling is expected sometime in 2013, but it will likely be very similar, if not the same. For now, the ruling keeps the euro safe even in the case of a Spanish bailout, but will likely be an obstacle if the situation deteriorates further and Italy needs financial support.
Europe: The Week Ahead
German Chancellor Angela Merkel will host an annual press conference Sept. 17, which might shed some light on where the German leadership stands in regard to further EU integration and bailouts.
Sept. 20 will also see a slew of Purchasing Manager Index releases, a good gauge to see where the economy is heading, which in Europe’s case, is likely to point downward.
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