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French and Greek Elections Could Push Euro Zone Back to the Brink

Two major elections in the European Union are slated for May 6th – French presidential contenders Nicolas Sarkozy and François Hollande with face each other in a runoff while Greece will hold parliamentary elections to replace its caretaker government. The results of these elections could mark a turning point in the ongoing euro zone dilemma, the reverberations of which may be felt not just within the continent, but indeed in markets across the globe – including the United States.

It appears that German Chancellor Angela Merkel may be increasingly isolated in her campaign for austerity throughout the EU. French Socialist candidate Hollande – who is less in line with the German austerity push than current President Sarkozy – could win the runoff election, European officials are increasingly calling for measures that would entail more tax and spending policies rather than spending cuts, and the pro-austerity Dutch government has recently collapsed. But it was precisely these practices of high spending, overstretched government services and skyrocketing entitlement costs from Socialist governments that bankrupted the euro zone to begin with, especially in the PIGS countries (Portugal, Ireland, Greece and Spain). Just when the new wave of right wing governments finally took over power across the continent and started implementing long-overdue reforms and austerity measures, it could all reverse just as quickly, pushing the euro zone over the edge – possibly even before the 2012 U.S. election.

While Prime Minister Mark Rutte’s Dutch coalition government had been critical mediators throughout the crisis, Franco-German leadership has been the core of any coordinated European effort to navigate the region’s financial crisis. Any bailout efforts would have been inadequate without German financial support. However, the rest of Europe would have been quite uneasy with an apparently unrestrained Germany making all of the decisions and potentially leading the rest of Europe down an austerity path from which it would not recover economically. Close coordination with France creates a different perception – one in which leaders from the euro zone’s two largest economies and most politically influential states are working together to save Europe with collective solutions. France needs Germany’s financial strength, and Germany needs France’s political credibility.

A Hollande win could radically change that relationship, particularly in terms of economic vision for the EU. With the relationship between France and Germany likely to be strained over the next several months, Merkel is already looking for another potential ally to help her enact fiscal reforms. It seems she’s already testing out the head of the euro zone’s 3rd largest economy, Italian Prime Minister Mario Monti. Both Merkel and Monti are planning to have the German and Italian parliaments simultaneously ratify the European fiscal compact and European Stability Mechanism. With only one year left in former Italian Prime Minister Silvio Berlusconi’s term for Monti to serve out, as well as 16 months before the next German election, the potential partnership could serve as an adequate substitute for Merkel if Sarkozy loses the election Sunday.

Over the last two years, a wave of conservative leaders and coalitions have won elections across Europe, including Britain’s David Cameron, Ireland’s Enda Kenny, Spain’s Mariano Rajoy, Portugal’s Pedro Passos Coelho, and Poland’s Donald Tusk. The pattern could very well continue in Greece. Conservative candidate Antonis Samaras is leading the polls going into Sunday, and although his New Democracy party may not win enough votes for an outright majority, there is a path to a right wing coalition government in Greece.

A new rule in the Greek electoral system stipulates that the party that wins the most votes automatically gets a bonus of 50 parliamentary seats in addition to their proportional delegation. In practical terms, the party with the most votes needs to get between 36.4% and 42.7% of the popular vote to control an absolute majority in parliament on its own. While that’s not expected to happen, if the polls are accurate, a coalition of conservative parties New Democracy (ND), Independent Greeks (ANEL – a split-off from ND), and the Popular Orthodox Rally (LAOS) could pass the threshold needed to form a government.

Then again, it’s also possible that a slue of radical left wing, communist parties in Greece could win enough votes to push an election stalemate.

In any case, if Hollande does win in France and follows through on his campaign promises of tax and spending as well as create a rift with the leadership relationship with Germany, and/or Greece falls back on the same practices that bankrupted it in the first place, the uncertainty of such acts could rattle the European markets and perhaps even push its most vulnerable economies to finally default. The consequences of such an event are unpredictable, but if it ultimately causes the global economy to hit a double dip recession, it would derail the weak and fragile economic recovery in the U.S. as well.

Especially in an election year.

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