Global markets shuddered Monday after election results in France and Greece raised yet more questions and concerns about the future of the Eurozone. Major markets in Asia fell by more than 2% overnight, oil prices tumbled and equities in Europe and the U.S. headed south in the initial reaction to the voting, although declines were relatively modest in recent trading.
In France, Socialist candidate Francios Hollande defeated President Nicolas Sarkozy, the latest in a string of EU incumbents to be ousted amid voter anger and frustration. Hollande campaigned on a platform focused on reviving growth in the eurozone and against the austerity measures being promoted by Germany and the European Central Bank.
A breach between France and Germany would threaten the core of the European Union but Hollande's victory was predicted by the polls. At least for now, market participants seem much more concerned about election results in Greece where the two main parties -- who had agreed to the austerity measures imposed by the ECB and IMF -- suffered major losses.
"We are in for a prolonged period of political uncertainty in Greece" in the wake of the elections, says Jacob Funk Kirkegaard, a research fellow at Peterson Institute for International Economics. "The risk of Greece leaving the eurozone has certainly gone up."
Because the two major parties - New Democracy and Pasok -- failed to get a majority, they must now try to find coalition partners among the smaller, newer parties. But that's going to be very difficult because the anti-austerity Syriza party came in second place with 16% of the vote and radical parties on both the left and right wing received stronger-than-expected support from Greek voters.
In essence, "we are fundamental back in same situation before the formation of the previous unity government," Kirkegaard says. "We're going to have the same kind of brinkmanship as surrounding the G20 summit last year where Greece was famously threatened with expulsion from the eurozone."
It was just seven month ago when financial markets were on tinder hooks as the Greek parliament held a terse vote over whether to accept the EU's latest bailout and the accompanying tough austerity measures on which it was conditioned. Following Sunday's vote, Kirkegaard is now braced for "a game of chicken between the Greek political establishment and European leaders."
He is not, however, overly concerned about Hollande's victory leading to a fracturing of the Franco-German partnership.
"The rumors of an imminent split are vastly overblown," Kirkegaard says. "When Hollande makes a big statement about wanting to change the political direction of Europe on the issue of austerity, he's quite frankly bluffing. He's in no position to do so."
If true, that's going to disappoint a lot of French voters but Kirkegaard believes Hollande will be able to "initiate a new dialogue about growth" in the eurozone, which is a positive.
"Growth more broadly being on the agenda is beneficial," he says. "But I don't think it must come at the expense of continuing structural reforms as well as long-term budget consolidation in the euro area from which, frankly, there is no credible alternative."
The big caveat to that statement is Greece, where voters are clearly seeking an alternative direction -- credible or otherwise.