What Will Europe’s Political Change Mean for Euro?

by ETFguide | May 8, 2012 12:42 pm

What Will Europe’s Political Change Mean for Euro?

Political change has swept Europe, and while the characters have changed, Europe’s financial problems remain.

Socialist Francois Hollande was elected as France’s new president, German Chancellor Angela Merkel’s political party suffered setbacks in northern Germany, and Vladimir Putin returned to power in Russia.

Over in Greece, the two largest political parties failed to keep their majority status, which puts into question its ability to meet economic milestones. Greece needs spending cuts of 5.5% of its GDP in 2013 and 2014 to satisfy its bailout conditions.

The reaction for the euro currency, European stocks(NYSE:VGK[1]), and Russian stocks (NYSE:RSX[2]) to the changing political winds has thus far been quiet, but will it stay that way?

Conflicts Arising

France’s exiting president, Nicolas Sarkozy, played the part of cooperating with Germany’s strict austerity diet of spending cuts and deficit reductions. Unfortunately for him, that strategy didn’t sit too well with French voters and so they gave him the boot. (Sarkozy was so shaken by the loss, he vowed to quit politics altogether.)

If Nicolas Sarkozy was the equivalent of Dr. Jekyll, than his successor, Hollande is definitely Mr. Hyde.

As France’s new president, Hollande, is calling for economic plans that are opposite of Sarkozy and in direct conflict with Germany’s plan for economic reform.

Interestingly, Merkel did not Tweet or Facebook congratulations to Hollande, but telephoned that honor and also invited him to visit Berlin ASAP.

Will the calm relationship between France (NYSE:EWQ[3]) and Germany (NYSE:EWG[4]) - two of Europe’s key economic cornerstones – remain?

Hope and more Hope

A change in political power is often followed by great enthusiasm and hope from the general public, regardless of whether that hope is realistically justified. As history has shown over and over again, the election promises made often go unfulfilled.

Speaking of campaign promises, Vladimir Putin really put himself in the firing line.

Putin wants the Russian government to increase capital investment to no less than 25% of GDP by 2015 and to create an additional 25 million jobs by 2020. He also wants a 50% increase in labor productivity by 2018.

Now that his presidential term runs for the next six years, Putin will be given plenty of time to make his dreams come true.

Slow Moving Crisis

Since the onset of Europe’s financial crisis, the euro currency has remained resilient and stubbornly inflated. Today’s trading level of around 1.29 versus the U.S. dollar is virtually unchanged over the past two years. It’s not the sort of calm trading conditions many bearish traders expected, but a debt crisis of this magnitude doesn’t always have an immediate impact.

The ETF Profit Strategy newsletter keenly observed this by saying, “Europe’s sovereign debt crisis has been a slow moving crisis. Sometimes a region, a country or a market doesn’t instantly collapse – but ever so slowly dips until a bottom is reached.”

Other Important Developments

Rivaling the importance of political change is the persistent economic deterioration in the eurozone’s fundamentals.

The ETF Profit Strategy newsletter noted, “The velocity of credit downgrades for eurozone governments has been increasing.” More importantly, the downgrades which were originally limited to fringe countries like Greece and Portugal, have now moved to more significant economic partners like Italy, Spain, and France.

Europe’s own bailout vehicle – the European Financial Stability Facility or “EFSF” itself has experienced credit downgrades because of the weakening financial strength of the partnered countries backing it.

Even without the threat of sovereign debt defaults, the stock market cratered more than 50% in value from its 2007 highs.

The past is not prologue and that’s why the ETF Profit Strategy newsletter has defined key trading levels for the euro, recognizing that no significant moves can occur without a break above or below key support/resistance levels. While politicians can and do lie, the technicals don’t.

Endnotes:
  1. VGK: http://studio-5.financialcontent.com/investplace/quote?Symbol=VGK
  2. RSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=RSX
  3. EWQ: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWQ
  4. EWG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EWG

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