With voters in Greece, France and Italy using elections to reject austerity, Channel 4 News looks at what happens next and whether a break-up of the eurozone is now on the cards.
The vote against public spending cuts took place in France, Greece and Italy – with implications for the whole of Europe.
France threw out President Nicolas Sarkozy, who had agreed the so-called “fiscal compact” with Germany’s Angela Merkel, and elected Socialist Francois Hollande, who wants the pact modified to include a commitment to economic growth.
In a general election, Greek voters rejected the centre-right/centre-left coalition that was committed to big spending cuts in return for bailout money from the European Union (EU) and the International Monetary Fund (IMF).
The radical left Syriza party, which is pro-euro but anti-austerity, benefited most. It is now attempting to form a government, but Raoul Ruparel, head of economic research at the pro-market think tank openeurope, believes it will be hard for a stable administration to emerge from the crisis.
“It doesn’t look as though they’ll be able to form a stable government,” he told Channel 4 News. “There’s a real possibility of an election cycle where they continue to have elections, but don’t form a stable government.”
In Italian local elections, anti-austerity left-wing and protest parties gained at the expense of the centre-right party of former prime minister Silvio Berlusconi.
The biggest worry is Greece, which cannot afford to borrow on the money markets to run its public services and is being kept afloat by EU and IMF loans.
There’s a real possibility of an election cycle where they continue to have elections, but don’t form a stable government. Raoul Ruparel, openeurope
These loans could dry up if Athens attempts to rewrite the agreement it has struck with its creditors, with default and exit from the euro now back on the agenda following the elections.
The country may be forced to hold another election in June, but after the revolt against austerity this time, there is no reason to believe the result would be dramatically different next month. The Greek voters have spoken and the message is that there is only so much pain they can take.
The EU and IMF have been trying to keep Greece in the euro, but the time may come when this proves to be impossible if the Greek people are unwilling to accept the austerity that is the price of the loans their country is receiving.
Mr Ruparel does not expect an “imminent” exit, but he is not optimistic about the Greeks’ chances of remaining in the euro. “I don’t see how they can stay in the euro in the long term,” he said. “With this, the possibility of leaving has definitely increased.”
In December 2011, President Sarkozy and Chancellor Merkel agreed the “fiscal compact”, which is designed to stop eurozone countries from borrowing too much, with automatic sanctions for those that build up big budget deficits.
Francois Hollande campaigned for the compact to be amended, Chancellor Merkel has said the agreement is “not up for grabs” and a centre-right ally of hers, Peter Altmaier, said on Tuesday that the French economy and public finances “remain in a precarious position” and “there simply isn’t any wiggle room”.
But it would not be beyond the wit and wisdom of both countries to agree a fudge that suits them both and does not spook the markets.
Mr Ruparel said: “They’ll tack on some sort of growth pact. It’s unlikely the current treaty will change, just pieces added on in places.” Chancellor Merkel could accept a renewed emphasis on growth. “There’s scope there to meet somewhere in the middle.”
Beyond the political and economic crisis in Greece, Spain is also under the spotlight because of the loans some of its banks have made.
Despite his previous reluctance, Prime Minister Mariano Rajoy has said public funds could be made available to support the banking sector, “but it would only be as a last resort”. In his sights is Spain’s fourth biggest bank, Bankia, whose chief executive stepped down on Monday.
Austerity is also being pursued in Spain, where 25 per cent of people of working age are jobless, and critics of this use of public money question why billions of eurors are being spent on a bank rescue rather than schools and hospitals.
Spain is a more important member of the single currency than Greece because it is a bigger economy, and Mr Ruparel thinks there is a danger that Madrid may not be able to afford to prop up its banking sector and could have to turn to the EU for help.