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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.

By Correspondent / May 7, 2012

A trader reacts at his desk in front of the DAX board at the Frankfurt stock exchange May 7. Eurozone blue chips turned positive by mid-session on Monday, bouncing back from oversold territory after a knee-jerk reaction to French and Greek election results sent the market to 4-1/2 month lows in early trade.

Alex Domanski/Reuters

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Berlin

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.

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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. 

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