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The US Election vs. EU Talk of Reform Posted: 04 Nov 2008 06:11 AM PST What effect do the elections in the United States have on the market compared to the impact of the decisions being made in Europe about covering the financial crisis and implementing reform across the European financial system? The answer: confidence, stability, and transparency. The last 2 years have seen one of the most intense, and historically important, presidential elections which the US has witnessed in some time. Not only is it a much needed relief from the 8 years of George W. Bush’s presidency, but it also comes at a time when financial institutions are crashing, the wars in Iraq and Afghanistan are absent from the news, and the general populations of the world are in a panic about their economic future. The conclusion of this race, regardless of the winner, will likely provide a much needed respite for over-stressed investors. At the same time, across the Atlantic, financial leaders throughout the European Union have been meeting to discuss financial reform. Throughout this financial crisis, the EU has been made painfully aware that its financial system is subject to systemic weakness during times of market slowdowns. The European Monetary Union (EMU) faces difficulty when trying to enforce monetary and fiscal policies throughout its member states. Take these two events and compare them side-by-side. Three things are made apparent. The first is that confidence in the American system will be strengthened upon the conclusions of the Presidential Election. When the world finally learns which candidate it is dealing with, it will make decisions with more confidence based on what it expects. For Europe, the meetings taking place, along with the terminology being used, do not instill confidence in the European system. Claiming that reform is needed automatically assumes that something is terribly wrong. The process of reform never goes smoothly and investors will price that factor into their valuation of the economy and the EMU currency: the Euro. The second factor has to do with stability. The economy of the United States operates in clear, typical patterns. The bailout packages and lowered interest rates are no doubt outside the norm for the US economy, but they are being explained to the world as a simple downturn in the economy standing alongside a standard 4-year presidential election. Upon concluding the election, again, investors will feel safer about where the economy may go, and have more time to invest in watching the market as opposed to the information which floods the news during the run-up to such an important election. Stability has much to do with confidence, so many reading this will see little difference between the two. However, the difference is made more apparent when compared to the European financial system. While both are suffering from financial crises, the American financial system remains more or less in tact. The EU is the one discussing systemic reform and an increased role for the IMF, as well as a call for higher regulation in the banking industry, as well as a deterrent for risky investments. While it appears that the EU is taking necessary steps to rebuild the strength in its markets, what is happening under the surface is a competition between individual countries, the EMU, the EU financial chiefs, who are not necessarily part of the EMU, as well as the average investor. This creates friction which will no doubt slow down the pace of reform, if not impede it altogether. This means that the European financial system is not just witnessing an economic downturn; it is also seeing the destabilization of its very existence. The third important factor to note is transparency. The success of the American experiment is largely due to two contributing factors: a driven business mentality which rewards innovation, and a transparent political and legal system which allows for predictability and ease of access. In a nutshell, America succeeds because it offers political, legal, and economic transparency which is good for investors who want to know what exactly they are buying in to and how to use it. The conclusion of this election indicates a continuation of the predictable political and legal system in the US, whose system will go largely unchanged after it’s all said and done. The European system is not necessarily any less transparent in the legal or economic sense. However, there are political factors which create difficulties. The fact that each country maintains its own sovereign rights and laws means that a company wanting to invest in Germany and Spain, for example, must make itself familiar with each legal system, despite the fact that both are in the European Union. The challenge becomes further complicated when the laws are also written in two different languages. Again, this does not mean the European system is less transparent, but it does mean that the ease of access is less than it is in the United States. On top of this initial difficulty, the talk of reform now has investors worried that the period of transition will generate less transparency as the system becomes clouded with restructured legal codes. In conclusion, those analysts predicting economic turmoil directly after the US Presidential Election are overly presumptuous, for starters. The new president will not actually take office until January 20, 2009, so his policies on the economy won’t even be discussed until early next year. This means that the conclusion of the election will in fact ease the market as investors will turn their attention to the economy instead of the election campaigns. Politicians will have renewed confidence in their jobs and begin focusing on their districts’ economic woes. Overall, the US economy will start to heal, not suffer, once this marathon campaign is over. It is not so simple for the European economy. Talk of reform means upcoming structural change, a process which has proven to be long and painful historically. There will likely be a devaluation of the European currencies in light of interest rate cuts and loss of confidence which arrives as a result of lowered stability and clouded transparency. The American economy will live on; the European economy’s future appears bleak. Will the EU survive the upcoming recession? For more articles from ForexYard analyst Greg Holden, click here.

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