"EUROPE is watching us," declared François Hollande (video here, in French) after being confirmed as winner of the French presidential election. “At the moment when the result was proclaimed, I am sure that in many countries of Europe there was relief and hope: finally austerity is no longer destiny.” But the celebration may not last long. The euro dropped in Asian trading as markets tried to digest not only the long-expected rise of the first Socialist president in France in 17 years (see our briefing), but also the electoral earthquake that took place in Greece on the same night. Enraged voters punished Greece's once-dominant parties, the socialist Pasok and the conservative New Democracy, which had formed a unity government and accepted the unpopular terms of the second EU-IMF bail-out. With the count still taking place, the two parties secured less than 35% of the vote, which means they will struggle to form a majority. Anti-austerity Greek parties, of the left and the right, have done well. Syriza, a radical left-wing party, pushed Pasok far into third place. The far-Right Golden Dawn was poised to enter parliament for the first time. Antonis Samaras, leader of New Democracy, which won the biggest number of voters, said he was prepared to forge a government of national unity based on two points: that Greece remains within the euro, and that the bail-out terms are renegotiated. (See here for background on forming the government.)



The fragmentation in Greece will inevitably raise the question of whether the country will leave, or be pushed out of, the euro zone. Until now European officials have been adamant that any breach of Greece's second austerity and reform plan would lead to the halting of its rescue funds.

But the election of Mr Hollande may yet change political calculations, and European leaders may try to muddle along until Greece holds fresh elections that deliver a clearer result.

Even before Mr Hollande's victory, the public discourse across Europe had started to change: less talk of relentless deficit-cutting and structural reforms, and more talk about growth (see my column). The EU bureaucracy long favoured Nicolas Sarkozy in the belief that, despite his flaws, the continuation of the “Merkozy” partnership (Mr Sarkozy and Angela Merkel, the German chancellor) would ensure greater stability. But in recent weeks the corridors of Brussels have resonated to the sound of shuffling feet, as the bureaucracy re-positioned itself in preparation for the arrival of Mr Hollande.

The change of heart was not mere opportunism, important as France may be in European affairs. It was also driven by dislike of Mr Sarkozy's lurch to the far right as he chased the votes of Marine Le Pen. Moreover, Eurocrats started to see in Mr Hollande a champion for several of the European Commission's proposals that have been languishing for months. These include its call to recapitalise the European Investment Bank and issue new EU “project bonds” to finance big infrastructure schemes.

So as long as Mr Hollande does not unpick the text of the fiscal compact, a new German-inspired treaty that imposes balance-budget rules, such policies could make up the core of a related but separate “growth compact”. But as he prepares to meet Mrs Merkel in the coming days, it is not clear whether these modest gestures will be enough for the new French president to claim he succeeded in changing Germany's mind. Mr Hollande has also called for a change to the rules of the European Central Bank so that it can lend directly to sovereigns, a move that would be anathema to Germany.

The Franco-German relationship is complicated by other political factors. Though Mr Hollande has won the presidential race, his Socialist party will still be campaigning for the election to the National Assembly in June. Moreover, Mrs Merkel's Christian Democrats (CDU) look like losing power in yesterday's state election in Schleswig-Holstein. Popular resentment against having to finance repeated euro-zone bail-outs may push Mrs Merkel to adopt a hard line. That said, Mrs Merkel needs the support of Germany's Social Democrats (SPD) to ensure ratification of the fiscal compact, and their demands may be influenced by Mr Hollande's price.

Mr Hollande knows that he will also be negotiating with the markets, which may be less forgiving than Mrs Merkel. Even as he called for Europe to “re-orient” its policy towards growth tonight, he was careful to say he was committed to reducing the deficit to “tame the debt”. The IMF is predicting that France's deficit will reach 3.9% of GDP next year, above the 3% target agreed with EU partners. If the European Commission's forecasts later this week confirm the overshoot, Mr Hollande will face an early test of his budgetary policies.

All this uncertainty must raise questions about whether Irish voters will support the fiscal compact in their referendum at the end of the month. All of a sudden, the euro zone looks like it is sailing into another storm.

(Photo credit: AFP)

