Guest post from friend of Alhambra, Brian Cronin:
The problem with entitlements is that once they are in place, they are extremely difficult to amend or even take away. Many seniors in the US for example, once intitially fearful of the Medicare Part D drug plan, have come to accept it and enjoy its economies of scale. It was put in place under President Bush in 2003 to deal with the astronomical costs of prescription drugs, not covered by Medicare in 1965, but it wasn’t paid for and added to the growing deficit.
The recent changes enacted by the 2009 Affordable Healthcare Act means also that the so-called “doughnut hole”, the gap between the initial coverage for drugs and the catastrophic coverage, will gradually diminish over time and for many seniors who still have to contend with the high cost of brand name drugs, that is a welcome feature. Reformers in Washington who want to repeal the law might well have a hard time with seniors of all political persuasions who like it and have grown used to it. Whatever they replace it and other entitlements with is going to have to be very carefully crafted.
That, essentially, is the problem that faced some European politicians this past week as they learned that the people don’t trust them. The reforms they had put in place or proposed to enact for their various systems to get their finances in order were met with solid resistance from electorates all over Europe. Austerity means different things to different people. It can mean cutting actual spending or just cutting the growth in spending. For many, the pain associated with such austerity was too much to bear and they made sure the politicians knew it.
President Nicolas Sarkozy was not able to engineer the change he promised in 2007. One telling example: he found that even trying to tamper with the retirement age by raising it to 62 was met with huge resistance, riots in the streets even. The French are able to retire almost on full salary after working for 41 years. If they left school early, then that could put them in their mid fifties at retirement. Better healthcare and perhaps the “red wine paradox” meant they were living longer and no reformer was going to mess with that! So he lost to challenger François Hollande whose election promises a seismic economic, social and political shift. He has vowed to bring the retirement age back down to 60 which should please a lot of French men and women.
His views on the integration of some of the positions of the eurozone’s governing bodies, the euro and the recent bailouts, and relaxation of the recent austerity measures could also bode ill for the Franco-German alliance and with Chancellor Angela Merkel personally, despite her immediate protestations of friendship. She is facing her own challenges with a federal election next year and recent regional contests too. She made it clear that she wanted to see M. Sarkozy win a second term but now has to contend with resurgent social democracy in France for the first time in 17 years. It could mean that Frau Merkel might be placed in an uncomfortable secondary position and jeopardise the whole bailout strategy. German voters are none too thrilled about having to rescue irresponsible partners and may want to send her a clear and unmistakable message of her own.
Even Britain’s Prime Minister David Cameron’s Conservative Party lost heavily in local elections. He is not directly affected by the euro crisis, but he has neverthless tried to bring reform to Britain. He took a beating and is facing the wrath of his backbenchers after leaning too far left to accommodate his Liberal Democrat coalition partners. Get back to basics, said the backbenchers, “bread and butter issues like jobs and mortgages”, otherwise he might suffer the fate of all leaders who do not deliver the goods and lose his position in a “palace coup” just as Margaret Thatcher did.
The reaction to austerity in Greece has been on view for all to see with riot police battling demonstrators armed with Molotov cocktails. There has been high drama in the parliament too. Reformers lost this past weekend and the two parties who gained ground were representatives of extreme left and right, former Communists and neo-Nazis. The fact that Greeks thought they might prove a better combination to get Greece out of its dilemma says more about the Greek mentality and their frustration, and less about these parties’ actual ability to effect change.
In the world of Greek politics, the extreme left and extreme right are not given a mandate to try and form a government. By turns, therefore, the other parties who gained seats in parliament got the chance to try. By the end of the week, all attempts had failed. If President Papoulias is not able to form a unity government as a last ditch effort this weekend then the stage looks set for new elections. The leader of the winning leftist party, Syriza, Alexis Tsipras, had more or less stated that austerity hadn’t worked and was basically null and void. This suggests that the spigot might well be turned back on jeopardizing Greece’s future inside the EU and/or the eurozone.
Little wonder then, that markets were jittery. The Athens stock market sank to levels not seen for 20 years though overseas markets fared somewhat better. But whereas the initial reaction was to shrug off the news of the French and Greek elections, by midweek, sentiment started to turn sour. By the end of the week, the market had recovered some of its poise. Still, concern that a financial fiasco in Europe could have knock-on consequences in the United States was hovering in the background. Our banks are exposed to Europe, it is our third largest export market and many companies are heavily invested overseas and rely for those markets on profitability. Once all that starts to erode, market operators will run for cover as the dominoes fall.