PARIS — The day after Francois Hollande rode to power in France on a slogan of “change now” the conversation in Europe is already different: Austerity has become a dirty word.
In Greece, political parties who reject the extreme belt-tightening required by international bailouts were the big winners in parliamentary elections. German voters in a northern state ousted the coalition led by Chancellor Angela Merkel’s conservative party, which has pressed the case for austerity.
And France, of course, elected Hollande, its first Socialist president in more than a decade and one who has promised more government spending to stimulate the economy.
“Austerity can no longer be inevitable!” he shouted in his first speech after Nicolas Sarkozy conceded Sunday night. The question remains whether Germany — which is Europe’s economic powerhouse driving the austerity agenda — will allow at least some countries in the eurozone to spend more freely in the face of a recession that is spreading.
Rising uncertainty over how Europe’s handling of the debt crisis may change in the weeks and months ahead has made investors nervous. Stock markets were volatile on Monday, falling sharply in the morning and recovering in some countries by the close.
The sharpest selloff was in Greece, where the main stock index plunged almost 7 per cent. The euro briefly spiraled to a three-month low against the dollar, hitting $1.2972.
More turmoil in the eurozone would affect the global market, particularly countries like the U.S. whose financial system is intertwined with that of Europe. As investors become nervous about the future they pull back on their investments, hurting economic activity, while drops in stock markets drain wealth from savers.
American exporters would suffer if sagging confidence in Europe shrinks the value of the euro against the dollar. Exports have been one of the U.S. economy’s few strengths since the recession ended three years ago.
The most nerve-wracking development occurred in Greece, where political parties that backed two bailouts lost their majority in Parliament. That opens up the possibility that Greece’s new leaders could renege on commitments made to secure the country’s massive rescue loans — or even decide to leave the euro.
But Greece isn’t the only problem. The 17 countries that use the euro — and 9 other European countries — agreed in March to a fiscal compact that seeks to make countries balance their budgets. But as Europe’s economy gets weaker, the public and politicians are growing weary of the budget-cutting that is required to make this fiscal compact work.
Eight of the 17 eurozone nations are already in recession and unemployment across the bloc rose to 10.9 per cent in March — its highest ever.