Europe Economy

What to Look for Next in France and Greece

April 2012The political situation in Greece is far from certain. At the brink of defaulting on its debts, under Lucas Papademos, an unelected technocrat, most Greek legislators have backed further austerity measures in return for a new €130 billion ($184 billion) bail-out by the European Union. Expected to go to the polls in late April or early May, Antonis Samaras the leader of the most popular conservative New Democracy party has promised to honour the spending cuts demanded by the euro zone g
Photo: Louisa Gouliamaki | AFP | Getty Images

The outcome of Sunday’s elections in has raised fears that the euro zone debt crisis has entered a new phase, as leaders opposed to austerity threaten to wipe out crisis-fighting measures and unwind a bailout deal for Greece agreed after lengthy negotiations.

So far, the elections — which yielded a slim majority for socialist Francois Hollande in France but failed to produce a clear winner in Greece — have not led to the formation of a government in either country.

In Greece faces tough negotiations on the part of the three parties that topped the polls: Center-right “New Democracy” and socialist “PASOK” — which negotiated the second bailout deal for the country — and the anti-European Union/International Monetary Fund left-wing “SYRIZA.”

A first round of talks has already failed, and few observers believe that SYRIZA’s attempts to try and form an alliance of anti-bailout parties on Tuesday will be successful.

SYRIZA leader Alexis Tsipras fanned the flames on Tuesday with more anti-bailout talk.

"The popular verdict clearly renders the ,” Reuters cited him as saying.

Greek anti-bailout parties represented at least 49 percent of the vote on Sunday, but the votes were spread across myriad small parties ranging from the radical left KKE party seeking a euro exit to the neo-Nazi Golden Dawn party.

“This election clearly signals a large increase in the number of voters in favor of the more radical (left and right) parties,” analysts at Barclays wrote in a note to clients. “This outcome makes a renegotiation of some of the terms of the EU-IMF program more likely, including the fiscal consolidation measures.”

If the parties that emerged as winners on Sunday fail to form a coalition, the prospect of new elections and even greater uncertainty looms. Those would most likely take place on June 17.

“This could potentially delay the next program review (June 2012) as well as the disbursement of the next tranche,” Barclays said.

The brokerage continues to believe that the next government is likely to refrain from campaigning in favor of a Greek exit from the euro however as the population remains widely pro-euro according to polls.

In France, president-elect Hollande should be able to name a prime minister as soon as he is inaugurated on May 15. The prime minister will then present a list of ministers to be appointed by the president.

Hollande’s choice of prime minister will determine the focus of his presidency and several names are starting to emerge. Analysts will watch his first steps closely for any signs of a conciliatory tone towards German Chancellor Angela Merkel’s tough stance on debt and deficits.

But another crucial contest looms for the French lower house in June in which Hollande will want to keep the narrow socialist coalition majority in order to push through his policies.

“So we have to wait to see if M. Hollande will get a legislative mandate to implement the Socialist agenda,” Carl Weinberg, chief economist at High Frequency Economics, wrote in a note on Tuesday, in which he also wondered if Hollande would end up with a right-leaning lower house, “in which case nothing of any consequence will get done to change the status quo.”

New Faces at International Meetings

With former French president Nicolas Sarkozy out of the international picture, the “Merkozy” duo is no more. Merkel has little in common with the new French leader.

A strong supporter of fiscal discipline, Merkel had publicly expressed her support for her fellow center-right leader during his campaign against Hollande.

During Hollande’s very first visit to a foreign official as the French president, “very soon” after May 15 inauguration, the Franco-German duo will have to overcome those differences to remain the driving force within the euro zone as well as within the European Union.

Outside of Europe, U.S. President Barack Obama has also invited Hollande for bilateral talks ahead of the major international summits scheduled at the end of May.

“At the euro area level, the election of French President Hollande now provides the opportunity to revamp the current policy strategy to overcome the euro area sovereign debt crisis,” Barclays said.

German Finance Minister Wolfgang Schaeuble said on Tuesday that Hollande’s election would not impact the Franco-German partnership that lies at the heart of the EU and the euro currency.

However, “each country can make its own decisions about how it wants to manage its budget, whether it wants to raise taxes and spend more," Schaeuble told broadcaster ZDF, "but the fiscal policy framework, the deficit reduction has been agreed and France will stick to this just as Germany will."

Hollande meanwhile has said he wants to renegotiate the European fiscal treaty.

“The crucial question remains how much money Germany and other euro area member states with solid sovereign credit credentials are willing to commit for financing stimulus in Southern Europe,” Barclays said. “For example through investment projects co-financed by the European Investment Bank (EIB)”