• With Hollande's ouster of Sarkozy, Merkel has lost an important ally in her austerity drive (Photo: Francois Hollande)

Europe's left-wing turn worries markets

07.05.12 @ 09:26

  1. By Valentina Pop
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BRUSSELS - With a Socialist president in France and a strong popular mandate in Greece for re-negotiating the terms of its bail-out, the German-driven focus on budget discipline in Europe may have to soften.

The euro traded at its lowest in three months on Asian markets Monday morning (7 May), down to $1.29 from $1.3 on Friday. It also fell against the Japanese yen from 104.5 on Friday to 103.4.

An investor note from the National Australia Bank spelled out the worries: "The Hollande win in France is not necessarily a surprise. However it brings home the reality that incumbents following the prescribed austerity measures are going to find it difficult to remain elected."

"What happens to these austerity measures now are what are weighing on (the euro)," the bank said.

Budget discipline and austerity were one of the main topics in the French election campaign, with Hollande leading calls to re-focus on growth-spurring measures instead of deepening the recession with budget cuts.

In Greece, pro-bail-out parties that had signed up to the austerity programme were punished by voters, with a radical-left coalition coming in second. The leader of New Democracy, the party which scored most but not enough to rule alone or with its former ally, said he is willing to form a broad coalition provided Greece stays in the euro and the terms of the bail-out are re-negotiated.

Back in Berlin, Chancellor Angela Merkel took her time in congratulating Francois Hollande, some three hours after the exit polls were announced. Her spokesman Steffen Seibert tweeted that they "both aspire to collaborate closely" and that she invited Hollande to Berlin soon after his inauguration.

Merkel - from the same centre-right political family as Nicolas Sakozy - had refused to meet the Socialist candidate before the vote and publicly supported Sarkozy. This came after Hollande repeatedly stated he will re-open the recently signed treaty enshrining a balanced budget rule in national law, a German condition for further bail-outs.

German papers on Monday morning read the Greek and French election results as an "anti-German" vote, making her increasingly isolated on EU stage when it comes to fiscal discipline. In addition, regional elections in the northern part of Germany have weakened her party and bolstered the junior coalition partner, the liberal Free Democrats.

In Brussels, EU officials were keen to show themselves in tune with the underlying message of the two votes

EU commission chief Jose Manuel Barroso congratulated Hollande on his win noting that he met the French politician last November and they clearly have a "common objective": "To relaunch the European economy so as to generate sustainable growth on a solid base and creating new jobs."

The litmus test for the commission's commitment to the strengthened fiscal discipline rules will be on 30 May, when it is supposed to assess for the first time the budgets and plans of member states to reduce their deficits.

Out of the EU's 27 members, only Estonia, Finland, Luxembourg and Sweden are in line with the rules, all other countries are under the so-called excessive deficit procedure which can lead to fines or, in the case of non-euro countries, to having their EU funds suspended.

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