Can Europe Ever Get Its Act Together?

by: John M. Mason


The value of the euro has dropped below $1.32 in the market on the news that French President Hollande dissolved his government.

The prevailing question in Europe concerns the ability of eurozone countries to be able to work together to develop coherent and consistent economic plans.

With Hollande's move, the further question concerns whether or not eurozone countries can form governments capable of developing coherent and consistent economic plans.

The euro dropped below $1.32. It was headed that way. Mario Draghi, the President of the European Central Bank, wanted the value of the euro to drop. Others in Europe wanted the value of the euro to drop.

A decline in the value of the euro seems to be a necessary part of the plan to get the economy of the eurozone growing again. All the recent data… data on EDP growth… data on inflation… point to more economic problems for the European continent.

The cascade of recent "bad news" has resulted in more and more pressure being put on Mr. Draghi and the ECB to begin some sort of quantitative easing. Indications given by Mr. Draghi indicated that the ECB would not begin any quantitative easing until at least the start of next year… if at all.

In recent days, Mr. Draghi was heard saying that the governments in the eurozone must also do something to assist the central bank… must engage in the economic reforms necessary for the continent to become competitive again.

And, this last point seems to be the sticky one. Can the countries of Europe ever pull their act together so as to be on the same page when it comes to making the eurozone competitive with the rest of the world?

But, the question can be extended to ask… can the governments of the countries get their own acts together sufficiently to craft a unified approach to the problems of the confederation as a whole?

This spring and summer we have seen the difficulties of European countries even gaining some kind of internal approach to reform. This drama surrounded the election and governing troubles of Matteo Renzi, the Prime Minister of Italy.

Now, we see the French government falling apart, as President François Hollande dissolved his Socialist government and asked the current prime minister Manuel Valls to form a new government. Seems there was quite vocal dissent within the French cabinet.

Mr. Hollande had been elected on a platform to re-build the French economy along more socialist lines.

However, the economic conditions did not allow that. And, as Mr. Hollande's poll numbers tanked, the president moved to earlier this year to espouse a new economic program based upon reducing the heavy tax burden faced by the French, to reduce the heavy regulatory burden on French business, and to cut the huge public spending budget of the French government.

Of course, in doing so, Mr. Hollande lost the support of the strong left-wing component of his base. A particularly vocal member of this latter group was Arnaud Montegourg, the economics minister, who let his displeasure of the government moving in this direction be heard around the country.

The government could not function with this internal split. So, Mr. Hollande moved… much faster than his past, cautious actions, would have led us to expect.

Will Mr. Valls be able to craft together a government that will allow France to get back into the game?

Maybe Mr. Hollande needs to review the presidency of François Mitterrand, another Socialist President of France, who came into power proposing to nationalize a lot of French business only having to reverse himself and create a much more business-friendly environment and get the government's budget until control. The "bond" markets forced him into this reversal and Mr. Mitterrand became a real "fiscal" conservative… and was quite successful in doing it.

The question, going forward, is whether or not Mr. Hollande will be able to bring about such a reversal and bring it about successfully. And, furthermore, will France then restore a leadership position within the eurozone.

Right now, with the further drop in the value of the euro, it looks as if investors are that confident that Mr. Hollande… and Mr. Valls… will be able to accomplish this turnaround… either component of it.

According to Hugh Carnegy of the Financial Times, "the results will be slow in appearing. Meanwhile, Mr. Hollande and Mr. Valls will continue to plead with Brussels and Berlin for a further delay in meeting deficit targets and for more pro-growth policies in the eurozone."

In other words, the eurozone is a ways off from acting in a uniform way. And, if economic growth does not pick up, the countries in Europe will have even more discontent at home and therefore more problems in knitting together some form of coherent and consistent approach to maintaining the monetary union.

It seems as if investors are building this kind of scenario into the currency market. The forecast… even more decline in the value of the euro.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.