Ahead: 2 weeks of political turmoil in EU

Europe is heading new weeks of instability after the Dutch government lost its parliamentary majority and new elections are ahead. This happens at the same time in France a presidential election is hold with very high probability of being won by the candidate of socialists who promises to undermine the EU stability measures. By an irony, in Netherlands the reason of political instability is the same - the spending cuts needed to reduce the budget deficit.

EU debt crisis has already moved some governments out of power. Ireland, Spain, Italy and Greece have new prime ministers. Much analysts are now asking if Sarkosy is next. And the surprising add-on of Netherlands with no government and elections soon lead Europe to self developing and uncontrollable crash.

France - together with Germany, are considered the kernel of EU stability. Netherlands - together with Austria, Finland and Luxembourg are considered the smaller, but stable supporters of the kernel. So if at one and the same moment we have destabilized both France and Netherlands, the situation goes bad.

The main culprit for instability in Netherlands is the populist anti-immigrant "Freedom party" of Geert Wilders. It was one of supporters of the government and now rejected the spending-cuts plans. Wilders is pleading for elections as soon as possible and this means that may be he is expecting a better result and more deputies in next Parliament. So if such an opponent of the needed reforms is to increase his positions in politics, this does not mean good times for reforms.

In next 2 weeks markets will be destabilized by uncertainty of French vote whose second round is on May 6th. At this time in Netherlands will be a political bargaining time of negotiating some budget cuts with opposition in exchange for preliminary elections. On May the 6th elections will be hold in Greece, where is expected the 2 old major parties not to have a majority together. Instead - much smaller and radical parties will be in Parliament, elected with promises against the EU stability pact and against spending cuts.

Greece is small country, but is the test-milestone of all EU salvation programs. Due to this Greece received almost 200 billion Euros in different rescue operations, along with an enormous 75% decrease of the debt, held by private lenders. If in Greece is to come anti-EU government, the entire salvation operation will crash imposing tens of billions of losses for other EU members and IMF, that financed the salvation programs. If that happens the aptitude of foreign taxpayers to support the rescue programs will entirely disappear. And this will bring to default the next problematic countries like Spain and Italy, that now are hardly balancing on the edge of the abyss.

One of the main weapons against crisis now is the expectation that strong EU members will help the weaker in need. If this possibility disappears due to heavy losses for the rescuers, then the crash is inevitable.

So EU is entering a period of serious instability. Adding Netherlands (considered as a "rescuer" and an important member of the "club of stability") to the problems is a bad surprise. In fact no surprises must happen, as in this mess everything must be expected. But the hope that some bad things will not happen is an important part of EU rescue strategy.

Now the best scenario for EU is Sarkosy to be re-elected, Netherlands to avoid a deep political crisis and in Greece the 2 old major parties to have a majority in the new Parliament. If all this happens, EU will be at the same situation as was before current political complications. If something of this does not happen, we will have change for the worse. And if we have together a socialist president in France, a new election situation in Netherlands and fanatics dominated parliament in Greece, then we will have the worst possible scenario.

But next 2 weeks we will have something may be worse than this - an uncertainty when no one knows what lies ahead. And sometimes the uncertainty can induce even stronger market fluctuations than the real worst news.

April 22nd 2012

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