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After French, Greek Votes, What Now For Austerity?

Besides a strong antiausterity showing in Greece's parliamentary vote, the election of Francois Hollande as French president has cast a shadow over Europe's austerity policies.
Besides a strong antiausterity showing in Greece's parliamentary vote, the election of Francois Hollande as French president has cast a shadow over Europe's austerity policies.
Proponents of economic austerity policies to contain Europe's debt crisis suffered a major setback on May 6 when French and Greek voters cast their ballots for staunch antiausterity advocates.

In France, Socialist Francois Hollande ousted center-right incumbent Nicolas Sarkozy, becoming the first Socialist to be elected to the post in more than 20 years.

Hollande has openly challenged the austerity-focused course espoused by outgoing President Nicolas Sarkozy and German Chancellor Angela Merkel, saying that growth, rather than deep cuts, can lift Europe out of recession.

Speaking to his supporters following his May 6 victory, Hollande said his mission was "to give the European project a dimension of growth, employment, prosperity -- in short, a future."

The same day, voters in Greece -- the country worst hit by the economic crisis -- punished their government for the belt-tightening imposed in recent years by giving antiausterity parties almost half their votes in legislative elections.

Jittery Markets

On May 7, the euro tumbled to a three-month low amid anxieties about the fate of the austerity policies designed to end the crisis.

BNP Paribas analyst Bertrand Lamielle said the slump was "essentially a reaction to what happened in Greece where antiausterity parties came back quite strongly in the election results." He added that "worries concerning Greece are clearly on the rise again."

In addition to stripping the pro-austerity coalition government of its majority, the Greek election gave a right-wing group its first seats in 40 years.

In France, Hollande has vowed to slow public-spending cuts imposed under his predecessor.

With a view to putting more emphasis on growth, he plans to introduce higher taxes for the wealthy and hopes to amend the EU fiscal pact, under which the 17 members of the eurozone agreed tough measures to curb their deficits.

Lamielle believes stock markets will be watching Hollande very closely in coming months as his economic policies take shape.

"The new President Francois Hollande has little room for maneuver," he said. "The objective has been set: it's the reduction of deficits to get on top of the debt crisis.

"His room for maneuver is about how he will do things. So we are waiting to see what will be the main measures announced in his first political speech."

Hollande will face tough resistance in his effort to revise the hard-won EU stability pact so that it focuses more on growth than cuts.

'Vicious Circle' Of Austerity

While Merkel invited Hollande to Berlin for talks, and her Foreign Minister Guido Westerwelle said the two countries "will work together on a growth pact," the German government has made it clear for weeks that it is reluctant to soften its austerity demands.

Although Sarkozy and the Greek leadership are the latest in a string of pro-austerity incumbents to be voted out of office recently, the European Central Bank, along with Merkel's allies, remains strongly opposed to any radical change of Europe's economic policy.

Its president, Mario Draghi, has spoken against the creation of common European bonds proposed by Hollande to finance future industrial and infrastructure projects.

Olivier Ferrand, the head of the left-leaning think tank Terra Nova, believes Hollande is conscious of the tightrope he needs to walk and will seek to complement, rather than rewrite, the stability pact, while staying true to French voters' wishes.

"The French left wing is entirely conscious of the need for budgetary austerity, of the need to cleanse public spending," he said. "But if all we do is cleanse public spending, we will enter a Spanish-style, or Greek-style vicious circle: austerity induces recession, recession creates deficits, deficits call for more austerity.

"To avoid this vicious circle, a growth initiative must be implemented along with the necessary austerity measures."

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