Germany frets, markets falter over French and Greek election results

In Germany, the results of yesterday's elections are seen as a refusal to follow the austerity plan hammered out by European leaders in long, painful negotiations.

Elections in France and Greece yesterday did not just bring down the incumbent governments in these two countries. They also mean the return of insecurity to the eurozone.

In France, the election winner, socialist François Hollande, campaigned on the promise to put an end to the dictate of austerity, prescribed under Germany’s leadership as a cure to Europe’s sovereign debt crisis. In Greece, the two main parties, the socialist Pasok and the conservative New Democracy, will not be able to continue their governing coalition without the inclusion of smaller parties, who have announced their intentions to renegotiate the conditions for the bailout package which keeps Greece from defaulting on its public debts.

Observers in Germany see the election results in France and Greece as a refusal of the voters to follow the course of categorical austerity, hammered out in month-long, painful negotiations between eurozone leaders.

“There are hard times ahead for the euro and for European markets,” says Anastasios Papakostas, chief economist at K&P Invest, a Frankfurt-based consultancy firm. “We have just experienced a massive shift to the left in European politics, and that means re-negotiating the deals and agreements which were meant to solve the eurozone debt crisis.”

German Chancellor Angela Merkel, seen as the main driving force behind the eurozone’s austerity program, was quick to reject any suggestions for a change of course.

“The fiscal compact is not negotiable,” she said in a press conference this morning, referring to the treaty that was signed by most EU members in March and which obliges member states to have a balanced budget. The Chancellor conceded that growth in Europe was necessary, but added that it should not come at the cost of new debts.

Market indices slide

Financial markets reacted negatively to the prospect of renewed political upheaval in the eurozone. European and Asian shares sank Monday morning and US index futures dropped too. The MSCI All-Country World Index slid 0.9 percent. The Stoxx Europe 600 Index lost 0.5 percent and Standard & Poor’s 500 Index futures fell 0.9 percent. The euro dropped to a three-month low of $1.3006.

The main source of concern could be Greece, according to Mr. Papakostas. Pasok and New Democracy, the two parties which took turns governing the country over the past four decades, lost half of their votes. At almost 17 percent, a coalition of radical left parties, Syriza, became the second-strongest force in Greek politics, after New Democracy, which, after some initial resistance, backed the EU austerity plan for the country. 

“It could take weeks for a new government to be formed,” Mr. Papakostas says. “Syriza is strictly anti-bailout, so are most of the other potential coalition partners. The markets won’t take this uncertainty well.”

Greek stocks drop most

Investors have already reacted: Greek stocks fared much worse than other European shares, losing almost 8 percent this morning.

Greece depends on the goodwill of its European partners and the International Monetary Fund (IMF). In exchange for financial aid the country has had to adopt harsh austerity plans – five since 2010 – which have worn the patience of Greek voters thin. Up to a 150,000 public sector jobs will be scrapped by 2015, pensions are being cut, and the minimum wage has been reduced. The cuts in spending amount to €40 billion. The sale of public assets is expected to raise another €50 billion. 

The EU and IMF agreed to a first bailout package for Greece, worth €110 billion, in 2010. A second package of €130 billion was decided upon in 2011. In a statement last week, the IMF made clear that any deviations from the conditions linked to these packages would mean a halt of payments to Greece.

Even though France has not seen any of the sometimes violent protests against cuts in spending which took place in the streets of Athens and Madrid, the victory of leftist Mr. Hollande has a lot to do with his campaign against austerity. "In all the capitals ... there are people who, thanks to us, are hoping, are looking to us, and want to finish with austerity," he told supporters early today at Paris' Place de la Bastille. "You are a movement lifting up everywhere in Europe, and perhaps the world."

Berlin puts on brave face

In Berlin, they are putting on a brave face. “Europe is built on consensus, and that consensus has always been most of all a German-Franco affair,” says Ruprecht Polenz, chairman of the foreign affairs Committee in the German parliament, and member of Merkel’s Christian Democratic Union party. “If the strongest economy, Germany, speaks for the conservative forces and the second country, France, represents the leftist movements in the European Union, any agreement they can reach will be good enough for the whole of Europe.”

Hollande’s first foreign trip will be to Berlin on May 15, where he will be received “with open arms,” said Merkel, who publicly – and controversially – supported his opponent, President Nicolas Sarkozy, during his campaign. Until the leaders meet, global markets might treat France with patience.

The country is far from the financial woes of Greece, Portugal, or Spain, but its deficit has risen to 4.6 percent and unemployment is at a 10-year high. In recent months the country already lost its triple-A rating with agency Standard & Poor’s. If Hollande goes ahead with plans to create public sector jobs through increased spending, this kind of mistrust may spread.