Anarchy in the EU

Investors need not worry about who is or isn't in charge of eurozone governments, says Matthew Lynn. As far as the markets are concerned, it makes no difference.


Mariano Rajoy: resurrection not necessary

You might think political chaos would be bad for economies. You would be wrong. Within the eurozone, for example, it seems completely fine not to have a government any more. Spain hasn't had one all year. Ireland has managed without for a couple of months now. The reaction in the bond market? Zilcho. In financial terms, it is about as exciting as a rainy Tuesday afternoon in Eastbourne.

Spain held an election in December last year. The result was a roughly four way split in the vote between parties who agree on just one point that they all hate each other so much there is no way they will prop any of their rivals up in government. Prime minister Mariano Rajoy staggers on at the head of an interim administration while wrangling continues. It's similar in Ireland. An election was held at the end of February, and two months later there is still not much sign of a government.

As politics fractures and new populist parties from the fringes rise in popularity, we can expect to see this kind of thing more often. When Italian PM Matteo Renzi finally falls, it would hardly be a surprise if deadlock was the result. The same could be true of Portugal and the Netherlands. Even Germany, when Angela Merkel finally departs, may find it hard to form an administration without her centrist leadership of the Christian Democrats.

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But who cares? Not the markets. You might expect both countries to be circled by the bond vigilantes, with yields rising, and money running out as they grapple with political chaos. There is no sign of it. The markets could hardly be less interested. Ireland has just sold ten-year debt at a record low of 0.8%. Its bond yields have actually gone down since the election, and are nowhere near the kind of highs they reached at the height of the euro crisis.

Likewise, Spain. The ten-year yield has gone from 1.7% to 1.5%, and the government has had no shortage of buyers for its debt. For both countries, the spread with the eurozone's safest country, Germany, has not moved at all. And it is not as if these are intrinsically safe countries. Ireland went broke a few years ago, and Spain was only a whisker away from the same fate. Ireland has a debt to GDP ratio above 90%. For Spain it is just a fraction under 100%.

So what is going on? Of course, it might be that the markets are simply getting this wrong, and that both are disasters waiting to happen. Or it might be that the European Central Bank is propping up the market by buying so many government bonds itself and no one wants to fight it. There may be a more fundamental explanation. Within the single currency, national governments simply don't matter any more. Their power has been so curtailed by the rules of the eurozone, and they have so little freedom of movement left, that it doesn't make much difference who is in charge, if indeed anyone is.

They don't have the power to devalue the currency, or to print more money, or even to run bigger deficits, or do any of the things that make a real difference to the economy. Even if a radical government is elected, as it was in Greece last year, it will quickly be brought to heel by the EU, the ECB and if necessary the International Monetary Fund. There might be lots of rhetoric about change, but after a few weeks of in-fighting, it will get back to raising taxes and balancing the books.

The truth is that eurozone governments don't make any more difference to the financial markets than the election of a parish council in this country or a state governor in the US. That might be good or bad, according to taste. But it does mean the markets can stop worrying about who is in charge. There could well be fresh elections in Spain and Ireland soon, and later in the year elsewhere in Europe but investors can safely switch off, because they won't matter at all.

Matthew Lynn

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years. 

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.