subject: Austerity Backlash And Impact On Euro Zone [print this page] Here, Schroders' European Economist, Azad Zangana, comments on the recent elections in France and Greece, and the rising tide against austerity...
"A wave of austerity fatigue is sweeping across Europe. On 6 May, both France and Greece held important elections that have the potential to change the shape of the euro zone, and both returned a very clear message that voters are against austerity.
"The results of the French presidential elections were as expected. After leading the incumbent Nicolas Sarkozy in the first round, Socialist Party candidate Franois Hollande won the second round run-off by a small margin.
"This makes Hollande the first Socialist French President for over 20 years. For France, Hollande's proposed 75% income tax on earnings over a million euros is likely to cause an exodus of the talented and wealthy, and may even lead to a few large companies relocating too.
"Indeed, London wealth managers, lawyers and property agents are reporting a substantial rise in enquiries from across the Channel. Hollande's tax and spending policy could be damaging for France's long-term competitiveness.
"However, what is more concerning is the potential rift he could open up with Germany's Chancellor Angela Merkel over European austerity. Even during his presidential election campaigning, Hollande was exchanging public statements with Merkel about the need for a 'Growth Pact' in addition to the 'Fiscal Pact' already agreed.
"In his victory speech, he said: 'Europe is watching us. The moment that I was announced president, I am sure in many European countries there was a relief, hope at the idea that at last austerity is no longer inevitable, and my mission is to give to European construction the dream of growth. Europe is watching us, austerity can no longer be the only option'.
"Angela Merkel has already rejected Hollande's calls for a 'Growth Pact' and there is no doubt that the two will clash again on this issue in the future. France has not run a balanced budget since 1974 and has been one of the worst offenders against the existing Stability and Growth Pact.
"We doubt Hollande will have much success in changing the mind of Merkel, though we do expect financial markets and sovereign rating agencies to exert more pressure on Hollande to ensure he oversees a reduction in France's budget deficit. This could be a case of Hollande's bark being worse than his bite.
"In Greece, no party managed to win an overall majority as expected. New Democracy (previous main opposition) won a fifth of votes, making them leaders in this election. However, Antonis Samaras, leader of New Democracy, has given up trying to form a coalition government. He has now passed on the mandate to Alexis Tsipras, leader of the left-wing coalition Syriza, which after quadrupling their votes, finished second.
"Tsipras now has two more days in addition to today to form a majority coalition, before being forced to pass on the mandate to Evangelos Venizelos of Pasok (the previous government), which finished in a humiliating 3rd place. If both Tsipras and Venizelos fail to form a government, Greece will have to hold new elections next month to try once again to elect a government.
"Though the Greek election failed to find a party with a clear mandate, the votes that went to smaller parties provide a sign of the mood of the people. Approximately 70% of votes went to anti-austerity parties, while a significant proportion went to anti-euro zone parties.
"Meanwhile, with no government in place, Greece will now fall behind on the implementation of structural reforms that are required by the bailout agreement with the Troika (European Central Bank, European Union and the International Monetary Fund). As a result, the Troika is now likely to temporarily postpone the disbursement of bailout funds until the political situation is dealt with. The problem is that the next tranche is due in June, leaving little time to deal with the fall out of another poor election result. The greater danger is that another round of elections leads to a new government being formed with a majority that is anti-austerity.
"In our view, the results of the Greek election raise the probability of our central view that Greece's inability to elect a government that will adhere to the demands of Germany and the Troika will eventually lead to the existing bailout deal collapsing, and Greece being forced out of the euro."
