Every once in a while, an election or series of elections take place which can have a particularly profound impact on the financial structure of both national and international societies.  It appears to us at TMR that the elections which took place over the past weekend in Greece and France were indeed "game-changers".

First, French voters decided to turf outgoing President Nicolas Sarkozy and replace him with Socialist Francois Hollande by a margin of 52 to 48%, making Hollande the first Socialist President of the French Republic elected to office since Francois Mitterand thirty years ago.  This change of direction appears to be one with particularly ominous implications, given the fact that France is already facing a deteriorating economic situation with high unemployment, renewed deflationary data and a mammoth existing national debt.

The differences between Sarkozy and Hollande are striking, given their statements during the recent campaign.  Sarkozy expressed his desire to continue to work with Germany to impose austerity conditions in France and encourage austerity in other nations as well in order to finally get a grip on Europe's astonishing levels of debt.  Hollande, on the other hand, advocated an entirely different direction, one more in keeping with Socialist and Keynesian thought.  He made no bones about his desire to take a new direction, as noted in a Reuters' article this morning which quoted him as follows:  "...In every capital, beyond the heads of government, there are people who have found hope thanks to us, who are looking to us and want to put an end to austerity."  Other socialists supported Hollande by their calling for, as Reuters put things, "...denouncing capitalism and demanding an end to Europe's austerity policies."  (our emphasis)

Hollande added a few other words, stating, "...I am sure that in many other countries, it (the election result) was met with relief and hope...Austerity is not inevitable.  That is now my mission:  to provide a European vision of growth, employment, prosperity - in a word, our future."

Among the specific acts he has recommended are:

The imposition of a special, new tax on financial transactions

Renegotiate the Euro bailout pact to allow higher levels of government spending

To increase levels of government debt in order to 'spur' economic growth

From our point of view, excessive government growth combined with enlarged levels of debt plus massive taxation impositions against commerce are precisely those factors which created the monumental crises now sweeping across Europe in the first place.  It is as if the prescription to cure the disease is to spread additional quantities of the illness.

Apparently that message is taking hold as the results of the elections in Greece were similar to those of France.  The political party which advocated austerity was trounced in the voting booths and the radical Left made strong gains. 

The two ruling parties which had combined to form a Greek coalition granting approved to the austerity measures demanded by the European Economic Community in order to gain a second 'bailout' were both hammered in the voting and it was the more radical parties - all of them calling for an abolition of austerity measures - which posted strong gains. 

When the final vote tally came in, those forces which opposed austerity, favoured default on debt and even recommended exiting the European community had gained more than 50 percent of the vote.  Those parties included the Greek Communist Party, the radical far left coalition known as 'Syriza' and the radical far right 'Golden Dawn' which recommends re-instating the Drachma to the exclusion of the Euro.

Our observation is that while the voting indeed reflected a high level of unhappiness with the current philosophy of austerity as a means of restoring economic order, those advocating 'change' toward stimulation utterly failed to present a credible case for restoring sound prosperity.  In fact, their squabbling sounded to us like a bunch of brats throwing a temper tantrum calling out "I want, I want" without having the slightest idea where Mommy and Daddy were going to get the money.

It will be most interesting indeed to see how markets sort out the various prospects over the coming days and weeks.

However, one look at the chart of the Euro shows renewed weakness, which can hardly be interpreted as a vote of confidence.  The Euro has once again traded under the $1.30 mark and now threatens to challenge important support near $1.26.

While Europe is still sorting out its period of political discontent, there is, in my opinion, a major battle brewing in both Canada and the United states which threatens to become an all-out class war.  I am referring to the new struggle between the "haves" who work for government and are the beneficiaries of a staggering array of special benefits and the "have-nots", those who do not work for government but whose taxes support the "haves."  Simply put, the "have-nots" are becoming tired of the prospect of working until they are 65 or older; not receiving pensions comparable to government bureaucrats, not receiving vacation and sick leave benefits comparable to government workers and who are also coming to the realization that they are being paid less than comparable government workers employed in the same fields as themselves.

One simple comparison might include those cafeteria workers at the BC Ferries system who earn better than C$20 per hours to clean tables or sweep floors in addition to earning a host of special benefits while their non-governmental brothers and sisters earn less than half that amount and who receive virtually no similar 'goodies\.

The Canadian Federation of Independent Business recently commissioned a study which concluded, "...wages and benefits in the federal public sector are 40% more than equivalent jobs in the private sector."  A column in the Vancouver Province authored by financial writer Laura Jones concluded, "...In reality, we have a two-tier compensation system.  Do the same job in the public sector and you can earn more, take more time off, and retire earlier with a bigger pension...this is a problem which calls for discipline now before we feel the pain of regret when we start looking like Greece."  (our emphasis)

We can see the battle is also heating up in America, where states like Wisconsin and Ohio are trying to rein in excessive public service labour costs while the public service unions are fighting them tooth and nail.  It could easily become a prime factor in the US Presidential election this coming November.

We believe that in the long run, unsettling financial and social problems could work to the benefit of the precious metals.

As of 10:00 AM PDT, reaction in financial markets to the European elections have been relatively muted as financial indexes have recovered from early moderate selling and are now closer to unchanged while precious metals have followed a similar pattern with gold and silver remaining close to unchanged at about $1,640 and $30.15 respectively.  Base metals are also little changed and mining share indexes have recovered to show only slight losses on balance.

In other markets, crude oil is now trading near $97 per barrel, the US Dollar is stronger in currency markets and long-term interest rates are continuing their recent declines with the 10-year bonds now yielding less than 1.9%.

All quotes US$ unless otherwise indicated.

Next "Melman Minute" is now scheduled for Wednesday, May 9, 2012