It’s the European Economy, Stupid!

Here are a few excerpts from today’s released Roubini’s Q3 2010 Geostrategy Note:

“Something other than leaves will fall in Europe this autumn. American attention, no doubt, will focus on Barack Obama’s date with an angry electorate this November. Yet across the pond, governments of the right, left and center in Europe appear ready to crumble, their positions eroded by a wave of austerity and high unemployment and government debt, plus a smattering of nasty corruption scandals.

(…)

In Germany, one of the costs of bailing out the Greeks earlier this year appears to be the career of Chancellor Angela Merkel. It’s too early to write her off, but voters sharply rebuked her Christian Democrat-led coalition in local elections in July, depriving her government of control of the upper house of parliament. Since the election, Merkel’s own poll numbers have slipped, and trouble has emerged inside her coalition.

(…)

In Italy last week, Prime Minister Silvio Berlusconi lost his parliamentary majority due to the defection of a 30-strong faction from his People of Freedom party over a junior minister accused of corruption. Berlusconi, who has been in power since 2008 (after leading in 1994-95 and 2001-06), probably will face a vote of confidence in September. As of right now, new elections in Italy seem more likely than not.

(…)

In France, meanwhile, another mercurial continental leader, President Nicolas Sarkozy, finds himself embroiled in a campaign finance scandal that could threaten his job. (…)

In this Critical Issue, we address the potential implications for the implementation of Sarkozy's highly unpopular austerity package.

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In Spain, the European country staring most intently into the economic abyss, Prime Minister Jose Luis Rodriguez Zapatero’s coalition is dependent on two nationalist parties that know they have him in a spot. Ahead of the Catalan regional elections in October and November, both the Catalan Party and the Basque Nationalist Party want concessions on regional autonomy that the rank-and-file of Zapatero’s Socialist Party oppose. The Catalan nationalists also want to see more and deeper reforms of labor laws and social programs and could be tempted by a coalition with Zapatero’s rival, People’s Party leader Mariano Rajoy, who now trumps Zapatero in opinion polls.”

And even Britain’s recently elected government is threatened, since:

… “the election that ended 12 years of Labour rule in April brought to power not the Tories but rather a Tory-Liberal Democrat coalition, an uncomfortable and somewhat unprecedented situation for the British. The deals each side cut have a one-year shelf life—basically, until the referendum on electoral reforms that the Lib Dems insisted on can be held next May. After that, watch how quickly the coalition unravels.”

Previous evidence regarding the determining impact of economic conditions on the political market is vindicated, again. Accordingly, politicians of all stripe would be well advised to carefully weigh what their next economic policy move will be.