Prime Minister Zapatero?s Socialist Party Routed in Spanish Elections; Antinuclear Greens Surpass Merkel's Party in Local German Vote

The Euro is down nearly 2 cents vs. the dollar as incumbent parties in Spain and Germany were trounced in weekend elections.

• In Spain, Prime Minister Zapatero?s Socialist Party suffered a massive defeat over his austerity programs.
  


• The Spanish elections cast still more doubt about Zapatero's ability to stick with unpopular programs in the midst of 21% unemployment.
  


• In Germany, Chancellor Angela Merkel?s Christian Democratic party slumped to third place in a state election, trailing the Greens in a wave of antinuclear sentiment.
  


• Polls show Merkel would be soundly defeated if national elections were held today.
  

Bloomberg reports Merkel?s Party Slumps to Third in Bremen

German Chancellor Angela Merkel?s party slumped to third place in a state election in Bremen and blamed the result on having to shoulder Europe?s debt crisis, as the main opposition Social Democrats were re-elected.

The Social Democratic Party took 38.3 percent in Bremen, a city-state that includes the car-exporting port of Bremerhaven, to cement their 64-year hold on Germany?s smallest state, ARD television projections showed yesterday. The Greens won 22.8 percent to take second place and continue their coalition with the SPD of the past four years. Merkel?s Christian Democratic Union slid to 20.2 percent, its worst result since 1959.

While the CDU dropped about 5 percentage points from the last election in 2007, Merkel?s Free Democratic Party coalition partner in the federal government slumped to 2.7 percent, below the 5 percent threshold needed to win seats, projections as of 7:55 p.m. showed. That?s the third state in which the party lost all its parliamentary seats this year after elections in Rhineland-Palatinate and Saxony-Anhalt. The Left Party took 5.9 percent in Bremen.

Nationally, Merkel?s coalition trails the opposition SPD and Greens by as many as 13 percentage points in polls as euro- area bailouts sap voter faith and erode confidence in the euro.

German pressure on debt-strapped euro countries to cut spending and boost revenue is growing as the crisis returns to Greece, one year after a Europe-led bailout staved off its default. Merkel last week called on Greeks, Spaniards and Portuguese to stop retiring earlier and taking more vacation time than Germans.

Greens Overtake CDU

Please consider Merkel's CDU Overtaken By Greens

Germany's Social Democrats and Green Party--in opposition nationwide--won elections in the city-state of Bremen Sunday, according to preliminary results broadcast by ARD television, handing another painful defeat to the parties in German Chancellor Angela Merkel's governing coalition.

According to the preliminary results, the Greens for the first time in any state in Germany won more votes than Merkel's Christian Democrats, or CDU, as an antinuclear electorate doubted the veracity of Merkel's turnaround in nuclear policy after the disaster at nuclear plants in Japan.

Were Merkel's government to decide to abandon nuclear power "then we would have achieved our goal," Green Party leader Claudia Roth said on ARD television. "The fight [against nuclear power] for more than 30 years would have been worth it."

After the disaster at the Fukushima Daiichi plant in March, Merkel ordered a three-month safety review of Germany's 17 nuclear-power stations. She suspended an earlier decision by her government to grant nuclear plants a lifespan extension. She then also ordered the seven oldest nuclear-power stations to be shut down temporarily while nuclear safety in Germany is being reviewed.

The government has made clear that the question is no longer whether Germany will relinquish nuclear power, but only at what price and when. Opinion polls have shown that voters trust the Green party far more than the government on nuclear issues.

A growing unease about more aid for troubled countries in the euro zone, such as Greece and Portugal, further harmed the CDU and Merkel's coalition partner in the national government, the Free Democrats, or FDP.

Polls Show Merkel Would be "Soundly Defeated" in 2013

Merkel's CDU party has already lost control in the upper house of parliament known as the Bundesrat. Each defeat makes it much more difficult for the CDU to pass legislation.

In Greens Surpass Merkel Party in Local German Vote, the New York Times quips

If the trend for the Greens continues in future regional elections in coming months, they are in a strong position as a potential kingmaker for the federal elections due in 2013. Opinion polls show that if elections were held right away, Mrs. Merkel?s center-right coalition would be soundly defeated by a coalition of Social Democrats and Greens.

What is not clear is whether Mrs. Merkel, whose party is expected to remain the largest party after the 2013 federal elections, would consider a coalition with the Greens.

Zapatero?s Socialists Routed in Austerity Backlash

Bloomberg reports Zapatero?s Socialists Routed in Austerity Backlash

Prime Minister Jose Luis Rodriguez Zapatero led his Socialist party to its worst defeat in more than 30 years in local elections, prompting a transfer of power in Spain?s regions that risks reviving concerns over the country?s public finances.

The opposition People?s Party won 38 percent of the vote in municipal elections yesterday, compared with 28 percent for the ruling Socialists, with 99 percent of votes counted, the Interior Ministry said. The Socialists lost control of Barcelona, the country?s second-biggest city, for the first time since 1979, and also ceded Seville. The region of Castilla-La Mancha, Socialist for three decades, fell to the PP, as did Extremadura, another Socialist stronghold.

?I know that many Spaniards suffer grave difficulties and they have expressed their discontent,? Zapatero said at a press conference in Madrid, where he pledged to press ahead with legislative overhauls. He said he won?t call early elections. ?The Socialist party has clearly lost the elections.?

The transfer of power in the regions threatens to revive concerns over Spain?s budget deficit as newly elected officials may reveal weaker finances than their predecessors reported. The defeat, capping a week of street protests, may further weaken Zapatero as he seeks to convince investors he can tame the euro- region?s third-largest budget shortfall and avoid following Greece, Portugal and Ireland in accepting a bailout.

?They?re going to arrive and realize there?s no money,? said Ismael Crespo, a political scientist at the Ortega-Maranon Foundation in Madrid. ?Many of the regions have problems not only to meet the deficit target but to meet basic services, which until now have been hidden because of the elections.?

Spain?s 8,000 municipal governments, which are also suffering from a revenue slump caused by the collapse of property prices, owe 33 billion euros in unpaid bills, according to the Platform Against Late Payment, a pressure group.

I doubt they can keep a lid on Spanish government bond yields much longer.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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