Europe’s Voters Wisely Stick With Frugal Leaders

German Election

On the euro area, they said that the unemployment rate has been unchanged for five months and that this may have continued in August as the labor market appears to have stabilized. While most Southern European economies are struggling to provide work for the unemployed, the jobless rate in Germany , the regions largest economy, remained at 6.8 percent in September, according to 31 estimates in a separate Bloomberg survey . Thats close to a two-decade low of 6.7 percent. The Federal Labor Agency is due to publish these data tomorrow at 9:55 a.m. in Nuremberg. A robust job market and Germanys economic strength in the midst of the euro areas debt crisis helped Chancellor Angela Merkel s Christian Democrats take the largest share of the vote in Sept. 22 elections. Resurgent Economy Gross domestic product in the 17-nation euro economy grew 0.3 percent in the three months through June, the first quarterly expansion after six contractions. Signs of resurgence in the economy have helped boost equities, with the Stoxx Europe 600 Index up 5 percent since the start of the month. Economic confidence rose more than forecasts in September, with sentiment improving in the industrial sector as well as in services, retail and financial services. While the ECB expects the currency blocs economy to gain further strength in the second half of this year, Draghi said this month that risks are still on the downside, referring to a modest pace of the recovery. The Frankfurt-based central bank predicts the economy will shrink 0.4 percent this year before growing 1 percent in 2014. The ECB pledged to keep interest rates at current levels or lower for an extended period of time to fuel the recovery, a commitment it first made in July and repeated in August and September.

Congress must reach an agreement on the budget before October 1, next Tuesday, to prevent a government shutdown that could result in federal employees taking unpaid temporary leave and a delay in the payment of military personnel. Reuters reported on Wednesday that Senior Republican Jeff Sessions said there will be no shutdown or government default. House speaker John Boehner said a Republican proposal is coming that will tie federal government spending cuts to a U.S. debt limit increase. (Read More: Brawl in US Congressshould the world care? ) On the data front, the European Commission released figures on Friday showing that euro zone confidence picked up in September. An economic sentiment index, that gauges both businesses and consumers, rose to 96.9 in September from 95.3 in August, reaching its best level for two years. Nationwide released its house price index for the U.K. which showed a 5 percent (year-on-year) rise amid growing concerns that stimulus in the country is fueling a bubble in prices. House builder Persimmon led Britain’s FTSE lower on the prospect of less stimulus from the Bank of England and signs that politicians are fearful of a property bubble. Persimmon shed 4.3 percent by the day’s close. The FTSE 100 closed the day down 0.9 percent, ending the whole week lower by 1.31 percent.

By my count, 19 of the 28 EU governments have been thrown out by their voters in this period ( Austria s parliamentary elections occurred before and after the period in question), while eight have been re-elected, namely the governments of Estonia , Finland , Germany, Latvia, the Netherlands, Poland , Sweden and, indeed, Luxembourg. These eight countries have center-right governments and have pursued responsible fiscal policies. Before the crisis they had budget surpluses. In the depth of the crisis in 2009, their budget deficits averaged 4.0 percent of GDP, moving to 1.6 percent in 2012. By contrast, the other 19 EU countries whose governments were not re-elected had budget deficits during the boom, which deepened to 7.6 percent of GDP in 2009, firming to an average deficit of 4.8 percent in 2012. Both groups of countries carried out a fiscal tightening of almost the same size, but the re-elected governments started out with better fiscal balances before the crisis and could therefore better withstand it. Fiscal Space No single European country carried out any real fiscal stimulus — that is, increased their already enormous budget deficits of 2009. Nor could they have sensibly done so. Hardly any country had fiscal space, given that the average public debt in the EU had risen to 91 percent of GDP in 2012. In fall 2008, Latvia and Romania lost access to international financial markets although their public debt was less than 20 percent of GDP. Arguably, Sweden and Luxembourg had fiscal space, but that would have made no difference to the EU as a whole, and Sweden had growth of 6.6 percent in 2010, so it was close to overheating.