The outcomes of the political elections in France and Greece on Sunday are sending a shock wave across financial markets at the opening in Asian trading. The SP500 futures indicate a 14 point lower opening and the Euro is falling against the dollar, now trading below the 1.30 mark at 1.2972.
Financial markets are terrified with the outcome as Francois Hollande becomes the first Socialist president of France in three decades. Many financial participants are worried about the socialist program which includes a 75% income tax for incomes over 1 million Euro, increased public spending and a lowering of the retirement age to 60 years.
Other economists believe Hollande will behave responsibly to avoid renewed turmoil in Europe's financial markets after last December's episode. Financial markets found some comfort in the good relationship between "Merkozy" in which France and Germany had seen a historical strong relationship during the financial turmoil. Markets are afraid a clash between Merkel and Hollande could occur ahead of their first official meeting later this week. Hollande tried to comfort financial markets in his victory speech on Sunday night, saying that the reduction in the budget deficit and control public debt is on top of his list.
Growth vs. Austerity
As more people in Europe recognize the need for economic growth, the debate concentrates on how to achieve this. While Merkel focuses on austerity measures combined with structural labor market and social welfare reforms, Hollande has proposed the idea of European project bonds in order to finance infrastructure investments. Economists note that key in formulating these economic growth projects is that they tackle structural issues without adding to the debt.
Hollande has committed to stick to the 3% budget deficit rule, although the pace at which France will achieve this is up for debate with Chancellor Merkel and the wider European union later. Germany's foreign minister Westerwelle said Germany would work together with France in a new relationship. The minister said "we would now work together on a growth pact for Europe, that delivers more growth through more competitiveness". An open clash between the two leaders in the ax of Europe could spark a great deal of unrest on financial markets.
At the meantime in Greece the mainstream parties got hammered in the parliamentary election. The parliament in Greece no longer has a majority for the IMF/EU bailout package. The outcome of the elections casts doubt about the future of Greece within the Eurozone. The two parties that want to change the terms of the international bailout, or even reject the deal, have seen the biggest gains in the elections. If the new leaders, which still have to form a new government, fail to support the bailout agreement or cannot negotiate a new deal with international lenders, the International Monetary Fund may pull the funds for the country. This might trigger a domino reaction on European financial markets.
Nothing has yet been decided about the fate of the Euro but the weekend has made the prospects of a fairly quiet summer a bit more unlikely. Markets will continue to put pressure on politicians in order to make structural reforms which promote economic growth and at the same time continue to adopt austerity measures to keep public deficits and debt levels somehow in check.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.