The euro took a hammering yesterday, as its value against the dollar and the sterling dropped sharply in response to the election results in France and Greece.
France’s new President, Francois Hollande, has put the cat amongst the pigeons by announcing that he will steer his country towards growth – fuelled by public spending. He has also upset the apple cart in Germany, by saying that he seeks to re-negotiate austerity agreements which were put into place following eurozone crisis summits last year.
Meanwhile, poor performances by pro-bailout parties in Greece have also caused market jitters, with Germany’s Dax trading 1.2% lower. By late morning, the Cac 40 in Paris was trading down 0.9%. Athens shares were trading down by 8.3%.
Asian markets also fell, with the Nikkei in Tokyo dropping 2.8%, South Korea’s Kospi shed 1.8% and Hong Kong’s Hang Seng dropped 2.4%.
In Greece, the socialist Pasok party saw an unexpectedly poor result, while Syriza, which has opposed austerity measures, had a strong performance – in line with ‘New’ France, but diametrically opposed to the eurozone’s common position.
Experts fear that the hard work that had gone into getting the second bailout package for Greece may start to unravel. Pro-austerity parties were hammered across the board and one must not wait and see what kind of coalition may be put together.
Experts also predict fresh doubts as to whether Greece can remain in the euro. The new political reality in Europe is that voters appear no longer willing to accept spending cuts, low growth and unemployment – something which is also beginning to reflect here in Malta, though our employment and growth figures are quite healthy.
Another issue which will be under scrutiny is the relationship that Mr Hollande will have with Germany and its Chancellor, Angela Merkel. For all their tiffs, Merkel and Sarkozy always presented a unified front within Europe and their alliance often led to the brokering of agreements when everything previously seemed deadlocked.
Ratings agency Standard and Poor’s, which downgraded France from its triple-A rating in January, said the election result would have no immediate impact on its credit status. However, that could all change once Mr Hollande’s policies become more clear. Of course, there is also the issue of updating the books and making sure that the power of incumbency did not lead to glossing over of figures. In fact, a spokesman for S&P told the BBC that: “We will analyse the policy choices of France’s president-elect and the new government, taking into account the outcome of the parliamentary elections in June.”
Of course, the rhetoric of an election campaign is never followed up with much fervour – as happened in the UK when the Tories ousted Labour. The grim reality is that the current economic climate does not allow one to do as he pleases. David Cameron found this out, to his poll ratings’ expense.
Credit ratings agencies are understood to have set a date for June to “see how it goes” with France’s new policies. One only hopes that Mr Hollande will learn from the mistakes made by Gordon Brown in his ill-fated “spend your way out of recession” strategy. We have said all along that the key to it all is growth and employment levels, but in order to do that, you have to first balance the books – failure to do so will just result in more double-dip recessions across the eurozone.