European Election Results Leave Merkel Vulnerable

In rejecting their incumbent governments, voters in Greece and France have sent markets reeling. In France, Nicolas Sarkozy’s government fell to Francois Hollande to form France’s first socialist government in more than 20 years. Elections in Greece also led to the rejection of the current government and negotiations are underway to create a new coalition government.

German Chancellor Angela Merkel also suffered a setback managing only a single-point victory in a series of regional elections. These results can only be seen as a growing rejection of the austerity measures across the Eurozone calling into question the deals established over the past year to slash deficits in exchange for emergency funding. Hollande in particular has vowed to abandon Sarkozy’s planned spending cuts promising instead to increase taxes on businesses and the rich while simultaneously boosting social spending.

Given Merkel’s insistence on spending controls, there can be no doubt that the region’s two largest economies are headed in opposite directions. This will also mark a major change in euro leadership. Sarkozy and Merkel have, for the most part, presented a united front during the crisis and have been responsible for providing a sense of stability even during the most challenging times. With Hollande now calling the shots in France, markets now have far more questions than answers.

Greece to be First Test

With a decidedly different mood now taking over in Europe, the first big test will be Greece. The new coalition is expected to be headed by the New Democracy party which led all other parties winning 108 of the 300 parliamentary seats. While the new coalition’s makeup is still a question, it is clear that the fiscal policies of the current administration are about to be reversed.

During the campaign, the New Democracy party pledged to cancel spending cuts and abandon new taxes recently implemented. Keep in mind, these measures were required as part of the deal to access emergency funding and future payments are tied to meeting certain objectives.

If the new government does indeed mean the end of austerity efforts in Greece, it is a certainty that Merkel, fearing a backlash from German voters, will insist on holding Greece accountable. However, with Sarkozy now out of the picture, and voters making their voices heard across the region, Merkel could find her influence to be severally curtailed.

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