Europe saga continues

The situation that is playing out in Europe reminds me of that great line from Michael Corleone in The Godfather III, the mobster who just can’t get out of the mob: “Just when I thought I was out… they pull me back in.”

A few months ago, it looked like things were sorting themselves out in Europe. Greece had finally bowed to the continent’s bankers – led by Germany – and agreed to put in place massive austerity measures in order to secure a bailout.

Things were still grim in Ireland, Italy, and Spain and, to a lesser extent, France, but there seemed to be light at the end of the tunnel. Global markets were more settled and, overseas at least, heading in the right direction.

And then it all fell apart again.

The Australian sharemarket fell 2% yesterday in what was seen as a direct response to the results of elections in France and Greece.

In France, the presidential vote was won by Socialist candidate François Hollande, who campaigned strongly against incumbent Nicolas Sarkozy’s austerity measures and what Hollande said was Sarkozy’s protection for the rich.

Hollande has plans to reverse that. During a campaign in which he called finance the “real enemy”, Hollande announced plans to increase tax rates for those earning more than $1.2 million to 75% and impose a rate of 45% on those on incomes above $192,000.

Austerity measures will also be under the microscope. What Hollande favours is “growth spending” to stimulate the economy.

Austerity measures in Greece received a similar verdict from the electorate, with a radical Left party led by 37-year-old politician Alexis Tsipras surging to a surprise second place in weekend elections. He’s put real question marks over whether the spending cuts and higher taxes required to secure the Greek bailout will continue.

“The people of Europe can no longer be reconciled with the bailouts of barbarism,” Tsipras said yesterday. “European leaders, and especially Angela Merkel, should realise that her policies have undergone a crushing defeat.”

Whether Hollande or Tsipras will eventually have to put pragmatism before principle when they come to actually exercise some power remains to be seen, but you can understand why markets have been spooked.

Without austerity cuts, the threat of a European country collapsing – and Greece of course remains the most likely candidate – becomes real once again.

And with the threat of a bailout comes the threat of contagion. Could a Greek collapse cause financial markets to seize up? Will credit get squeezed again? Will an already weak global economy be smashed again?

What does this mean for Australian entrepreneurs on the other side of the world?

Well, it’s a reminder.

A reminder that the mess that Europe (and the United States and to a lesser extent Australia) got into by borrowing too much cannot be sorted out quickly. The process of de-leveraging, of paying the bill for the pre-GFC free-for-all, still has some way to go and it will not be easy.

It’s a reminder that millions of Europeans (and others around the world) won’t necessarily appreciate the idea that they have to suffer higher taxes and spending cuts to help pay the bill their governments ran up nationalising banks and other financial institutions.

Most of all, it’s a reminder that the worrying headlines from overseas will keep coming, at least for a while yet. That will have some impact on consumer and business confidence, which could continue this general slowdown in spending across many areas of the economy.

Smart entrepreneurs won’t panic, but they will watch the situation carefully and think long and hard about the impact on customers, suppliers, financiers and other stakeholders.

Stay close to the news and your market. We’ll be doing our level best to help you with both.