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May 25 2012

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The Ides of June

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A Very Tough Month Ahead

Enjoy the Memorial Day break, everyone. You’re going to need the rest in advance of what will be a very consequential June.

The EU Sovereign Debt Crisis: the cauldron of political and economic problems that is the EU has disintegrated significantly in May. Further instability could be in the offing.

The EU will wake up on June 1st to see the results of Ireland’s referendum on the EU austerity treaty.  The Irish are currently undecided on the treaty, with more than a third of voters having yet to express a preference. A “yes” vote will strengthen Angela Merkel and the German preference for budget balancing and debt reduction. A “no” vote, bolsters voices across the EU for a new approach to the 2 1/2 year crisis that has created economic havoc across the region.

Next up are the French.

Francois Hollande won the presidency in a May 8th vote, but that win will be meaningless if he does not win a majority in France’s legislative elections, held in two rounds on June 10th and 17th.

Under the French presidential system, if the President’s party does not command a majority (289 out of 577 seats) in the lower house legislature, then the Prime Minister is chosen from the opposition, and effectively acts as the executive of the nation, with the President relegated to more ceremonial duties, in a very uneasy power-sharing arrangement.

Think John Boehner running the country with President Obama in office.

In the last election, the conservative UMP, the party of former President Nicholas Sarkozy, held 305 seats.

If UMP somehow maintains a majority, that will create political gridlock in France, with Hollande unable to implement his promised reforms. That in turn creates a challenge as to whether France can maintain its commitments to the EU, and as a co-partner with Germany in guiding the EU through this crisis.

If Hollande’s Socialists do win a legislative majority, there is skepticism that his program will allow the government to gain enough control of the French debt and deficits to prevent a credit downgrade (Moody’s is already hinting), which would have a cascade impact on sovereign debt across the continent.

And all of that is just an appetizer to the main event; the Greek elections on June 17th.

The most recent polling indicates that the radical leftist party, Syriza  – which is adamantly opposed to the terms of the EU austerity/bailout agreement with Greece – is leading the conservative New Democracy Party 30% to 26%. Attempts to reconcile Syriza with other Greek political parties collapsed after the May 8th election on Syriza’s firm commitment to abrogate the bailout agreement.

Syriza has only gained support since taking that position.

Based on the polls, the likeliest outcome is either a hung parliament, with no workable majority to continue implementing the bailout program (new cuts for bailout payments that are due in June), or, potentially, an outright Syriza victory, which would make a Greek exit from the EU not just likely, but certain.

The cascade impact of that departure, on Greece, on the EU member states,  on sovereign debt and global capital markets could lead to a cascade of slower growth globally, if not outright recession in countries outside the EU.

That the outcome of the French parliamentary elections will be the same day as the Greek elections will only heighten the impact of those voter decisions.

Egypt:  Egypt will hold its run-off presidential vote on June 16 or 17 between the top two vote getter’s from the first round elections being that have been held over the past two days. The Muslim Brotherhood, a formerly outlawed Islamic party ,has said that its candidate, Mohammed Morsi, was in the lead after the initial balloting, with Hosni Mubarak’s last prime minister in the second slot.

If correct, that will set up a contest between the Brotherhood and a candidate of the “old regime, likely a more secular official, but far from ideal for those who instigated the Egyptian revolution.

 The likely election campaign will be a proxy fight for ownership of the “legacy” of Egypt’s revolution that toppled Mubarak. That the student-led protests and rallies which ousted Mubarak, ended up creating a political vacuum filled  by Egypt’s highly organized religious parties hostile to the principles embodied by most of the original protests, is a sad commentary on the course of events in Egypt.

If Morsi and the Brotherhood win the presidency, it will have immediate implications for US policy with regard to Egypt, particularly on aid and concern over the landmark Egypt-Israeli peace treaty.

An Islamic victory will have heavy symbolism throughout the Arab world, and as the Brotherhood are Sunni, the sectarian divide in the Muslim world would become more complicated, particularly for Iran’s Shia leadership, and the majority Shia in Iraq.

Iran:  international negotiations between Iran and the P5 regarding Iran’s nuclear program wrapped up in Baghdad yesterday, with no discernible result but an agreement to have another meeting.

The Iranians want an immediate end to all economic sanctions that are crippling the Iranian economy in return for  what is- at best – token Iran compromises. The P5 stood firm, insisting that Iran make significant concessions on their nuclear program, and only after those steps had been taken would the most onerous sanctions be lifted.

Despite the Persian reputation to be among the world’s greatest negotiators, its hard not to see this string of talks as yet another fruitless exercise, providing Iran with additional time to work through their nuclear program. Yesterday, negotiators agreed to meet in Moscow in June for another set of discussions. If the Iranians stonewall again, the window on diplomacy will begin to close as other options become more likely.

While Here at Home: if that wasn’t enough to worry about, there are benchmark events happening at home as well in June.

The overwhelming force of June will be felt culturally and politically at home, in this most political year.

On June 5th, Wisconsin will hold its recall election for Governor Scott Walker.  With twelve days to go, Walker is holding steady with a five point lead over Democrat Tom Barrett.

Should Walker indeed win, it would be an unprecedented defeat for progessive politics, liberal lawmakers and unions, particularly public sector unions, who have pumped tens of millions of dollars into recall activity over the last eighteen months, while Walker’s reforms have boosted Wisconsin with none of the apocolyptic results predicted by the unions.

A Walker win would be defining proof that elected leaders can take on entrenched union interests and win, if they propose common sense reforms that benefit the broader citizenry of the state. Not only will Walker become the newest conservative icon, should he win, a GOP win would also put Wisconsin in play for Mitt Romney come November.

At the end of the month,  SCOTUS will end its term with landmark rulings on Obamacare and the Arizona immigration law.

If SCOTUS overturns Obamacare, or find signficant parts of the law unconstitutional, it would represent the single greatest setback in President Obama’s presidency, and the greatest defeat for progressive politics since the mid 1930s.. Having risked his congressional majority and ultimately his presidency on a partisan and unpopular health care miasma, Obama – if defeated – would leave Washington having no signature legacy.

The same is true to a lesser extent on the Arizona immigration law. Should SCOTUS find in favor of Arizona, and that the law is not an infringement on federal sovereignty, the entire structure of American immigration policy will have to change.

Both SCOTUS decisions will become fodder for the autumn campaign as each side seeks to roust its base, either in celebration or in desperation.  Right now, it looks as if Team Obama is going to get shelacked.

The SCOTUS decisions – at least on healthcare, will factor into the economy.

Unemployment figures for May will be released on June 1st. Experts don’t expect any change in BEA’s current 8.1% rate  A change in either direction will fuel a heated debate in this year’s political season.

This wil come as Wall Street is still digesting news of a general manufacturing slow down in the Euro Zone, the US and China, reported today in the Wall Street Journal.  That does not take into account the highly fluid, dynamic and unpredictable developments in the EU (outlined above) that have put pressure on financial markets. Since May 1st, the Dow has lost over 800 points – and the month is not over.

Also on the minds of financiers and businesses will be the coming “taxmageddon,” which comes at the end of the year when the Bush tax cuts and the payroll tax cut expire, and the sequestration of budget cuts agreed to last summer, kick in. CBO has just released an analysis of the impact of the cuts and tax hikes that shows the equivalent of a 4% drop in GDP if nothing is done.

Long time Washington hands would knowingly state that Congress would never allow this to happen, even if the solution was only to kick the can down the road. But businesses cannot plan based on best intentions, which will likely have a real and tangible impact on economic activity between now and the end of the year, and potentially on the country’s credit rating.

And, as an aside,  if you were wondering about Congress’s plan to deal with the coming “fiscal cliff,”  the Senate is scheduled to be in session for the month of June. But since no one can assemble 60 votes to do anything in that body, not much is going to happen. The less constrained House has scheduled just 13 business days; really 9 days when you consider that not much happens on Mondays and Fridays.

Not a confidence builder.

So, its a full plate.  And each action seems to have a greater and more unpredictable reaction.

So rest up everyone.  It looks like an “all hands on deck” beginning to summer.

 

 

 

 

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