Nobody knows why spreads go up. Everyone has his/her opinion. Me too. At the risk of being proven wrong, as I have been before.

I think markets are asking to be paid for the added uncertainty of the soon to come elections and consultations: France, Greece, Ireland. And for the (uncertain) alliances and new policies that will arise.

So, not a deep thought, I am sure you are thinking. I agree with you. Where things become more interesting is what comes next after all these rounds of voting. Will spreads go down? Up?

We all agree it depends on who wins, right? Some are already ready to go short on France and the likes when Hollande, the French socialist leader, will be declared the winner and will announce taxes on the rich and more public spending. According to them, markets will collapse at that point. Others might say that if and when Hollande and/or the Irish referendum will reopen the space for national growth through fiscal expansions, local national markets are going to surge because debts will be deemed credibly reimbursable.

I personally think otherwise. I think markets’ strategy on what to reward will be based on a two-stage sequence.

First, they will gauge the extent to which this new political team that will lead Europe will be united or divided. Because markets know that disagreement and bickering will only make recovery more distant and unlikely. If Hollande, Monti and Merkel will fight among themselves, spreads will rise. If a country goes on its own, it will lose, whether it makes the right choice or not (it may have happened before, with Spain and Rajoy saying no to more austerity against EC wishes: he might have been right, but he played his cards  alone).

What if they agree, unite and show common intent? Spreads will go down, for sure. But how much? Not enough. Because unity is not enough, the right policies are also needed.

My hunch? If Merkel and Hollande (and Monti!) agree to shift to a pro-growth paradigm based on fiscal expansion meant to ensure credibly medium-term stability of public accounts, and they are in addition adamant in pursuing and communicating it, spreads will rapidly collapse to zero. At that point even Rajoy will be rewarded for the same policy for which he is punished today.

If Hollande will back down from his heroic stance of changing the Fiscal Pact and become rapidly a European “gray suit” run like a puppet by the European Commission, we might as well bet on austerity and at that point only luck (a pick-up in world growth?) will save the euro. At least for a bit, before the people will find a better tool than a unique cold currency to warm their hearts and enjoy a future full of hope for their European children.