With Hollande crushing Sarkozy in France and with a new chaotic parliament in Greece, two more destabilizing factors are added to the deeply troubled European Union. It is not clear how real were the promises of Hollande in France and if he will really turn the country left. It is possible a socialist government to be pressed to make austerity reforms, just as this happened with PASOK government of Papandreou in Greece. Anyway electing a left president that promises to re-negotiate the EU fiscal pact and dreams of ECB printing more money, is a choice that will at least frighten the markets. There will be also parliamentary elections in June. As France is a semi-presidential republic where Parliament can remove the government from power, this can create additional uncertainty. Up to now Sarkozy was strong because he has also a majority in Parliament.

In the south corner of Europe the Greeks elected a parliament much more unstable that the old one. In the new parliament the two old parties that support the austerity measures have together about half of the seats. The rest go to populist parties - including extremely communist and extremely fascist ones. In the old parliament the two old parties had together about 2/3 of the seats. It was a constitutional majority.

Now in best scenario they will have a very thick government majority (in fact it is possible even third party to be needed for involving) that could not be enough. Papandreou had his own majority but did not succeed in making reforms. Much MPs refused to vote as the party decided and this created risks in many votes on important laws.

Other very serious problem is the constitutional protection of government officers against firing. 1 million is the number of Greek bureaucrats that must be reduced at least twice. With no constitutional majority this is not possible. So Greece will be much more problematic after this election.

A crash in Greece can start a domino-effect in other countries like Portugal and Spain, and also create an up-impulse to all interest rates.

So obviously EU will have additional kick out of stability. So what will happen?

My prognosis is that first victims of new instability will be Spain and Italy. At the moment they are the main targets of market fears so any new problems will hit first them. It is not clear if Spain will survive a new rise in interest rates. The situation is extremely difficult even now.

Better, but only a little better, is Italy. It won a temporary stabilization under Berlusconi and Monti austerity programs. But Italy has a 120% of GDP debt and it is not needed much to destabilize it.

It is possible ECB to intervene on markets to stop the crash. But it is doubtful how effective can be such measures, as up to now uncontrollable money-print has brought only inflation.

Soon after Spain and Italy I expect the crisis to go to France. Under Sarkozy France has been in difficult balancing between being a rescuer (together with Germany) or becoming a victim. Now with additional instability it is possible France to become a pro-crisis factor.

If France is to go bankrupt this will crash the entire Euro project. So it is possible Germany unofficially to react helping it (for instance via Bundesbank discreet intervention). Something like this has already happened in Kohl-Mitterrand era. So it can happen again. It is not sure if such help will be successful. If not - soon after that the Euro-zone will collapse and the new Deutsche Mark will be born. If operation succeeds it will make Germany a hegemon of Europe and something like a Fourth Reich will become to be formed.

There is a joke about this. Now the EU leading tandem is called "Merkozy". If it is to become "Merkolande", than some jokers read it as "Merko-land". And if the name of the chancellor was other - for instance - Hitler, so it could became a Hitler-land. And What is the Hitler-land, if not a Reich... :)))
In fact the name of the chancellor does not mean much. "Merko-land" will also be a Reich where only Germany will be stable and much other countries will be dependent on it.

If all this happens it is possible to have a good chance to buy cheap Euro - while uncertainty devaluates it. It is even possible for Germany to inspire such an instability to use it to make France and other countries dependent on it. But this is only if Germany has the faith it can control the situation.

Generally it is not sure if Germany has enough power to save the Europe alone and with France becoming a problem. It is more probable the situation to become uncontrollable with cascade defaults of EU countries. Germany will have to focus on saving itself and implementing back the Deutsche Mark. Much money will be lost on markets - especially in government bonds, but also in much other assets that depend on general stability. I think it will be a great time for investors in gold and silver. It is also possible the Swiss Franc ceiling to be crushed if Euro is deeply devaluated. So holders of Francs will make profits. It is also possible much money to flee to United States that are much more stable now, although they also have debt problems. It is possible this money flow to help them.

So my advice is: "Stay away from Europe assets and invest in safe havens".

Dobri
May 6th 2012