New Democracy victory sees Merkel ease up on Greece

It could take up to a week to form the new Greek government, but the impact of the French elections will be felt immediately in the EU.

With French president François Hollande poised to win his Socialist majority in the upper and lower houses, he will be pushing full steam ahead with his plans to soften the austerity on eurozone countries.

The win in Athens by New Democracy offers a good chance that the bailout terms will not be torn up, and already Germany has indicated that they are willing to see what can be done to help the country that is on its knees.

The markets are unlikely to let up battering the euro, with Spain still in its sights as the country mulls over asking the EU for €100bn finance ministers have already approved for them.

But there are big fears that, once it does ask, it’s borrowing costs that crossed the all important 7% barrier last week will rise further, pushing Madrid to look for an overall sovereign bailout.

Then Italy is in the cross hairs and needing to raise €30 billion a month just to keep going, many fear the euro’s end could be nigh.

However, Hollande has been forging a front with Italian technocrat prime minister Mario Monti and the centre right prime minister of Spain, Mariano Rajoy, to balance the power of Berlin and chancellor Angela Merkel.

The possibility of forming a government in Athens that does want to stay in the euro and is willing just to seek adjustments to the memorandum of understanding rather than tear it up strengthens the Hollande wing. They will have their first meeting today with Merkel at Los Cabos in Mexico at the G20 leaders meeting where the dangers the euro is posing for the global economy will be top of the agenda.

Hollande opened the rupture with Germany during his election battle with Nicolas Sarkozy when he insisted there was too much emphasis on austerity, and a growth pact was required.

His colleague socialists, the SPU, in Berlin took up the battle cry and Ms Merkel duly produced a growth pact in exchange for the opposition PSU agreeing to vote for the fiscal treaty and the new bailout fund, the ESM, on June 29.

Her growth proposals coincide substantially with the French proposals sent to EU leaders last week in which Hollande put a figure of €120bn on it. The emphasis is on money coming from the EU’s budget and from the European Investment Bank, but nobody believes this effort at a growth stimulus will suddenly stem the fear of a euro break-up that is haunting the EU at the moment.

Instead, Merkel will find herself under massive pressure both from European, American and Asian leaders to throw the might of the German economy behind all eurozone states and use it to guarantee borrowings. Berlin has been on a campaign over the past few weeks explaining it cannot do this, for reasons of its own constitution and that of the EU Treaties that they say ban such mutualisation of debt. Merkel also warned the world from the Bundestag last week that Germany’s shoulders were not that broad, that the country has its own issues and its modest growth forecast of just 0.7% is now depending on domestic spending with exports having dropped off.

Her fall-back position appears to be that Greece will be allowed to change the MoU, not the reforms of the country’s chaotic public sector structures and tax collection, but in the time given to repay the €230bn bailout, and perhaps given extra time to cut it’s budget deficit to 3% of GDP.

While this is probably far from what the voters who gave Syriza 28% of the poll want, it could be the start of a general move to allow countries more time to reach that magic 3% deficit.

Greece is already behind in meeting the targets under its second programme and there is talk of a third bailout. But much will depend on the public reaction in Greece. Alexis Tsipras leader of Syriza was last night ramping up the rhetoric, complaining his party had been subjected to a campaign of psychological terror but vowing to be an opposition to be reckoned with.

With the fascist party, Golden Dawn, being the third most popular party among voters under 34 years of age, nobody can bet on the streets emptying of protestors and people returning home to pay their taxes and get on with austerity. If law and order breaks down, if the current jog turns into a fully-fledged run on the banks if the parties take too long to form a government and, if the government looks too unstable, there will be no let up in the euro crisis.

Cyprus will be quickly be followed by Spain which will have a major impact on Portugal, and then the colossus that is Italy could bring down the whole euro edifice — with Ireland in its wake.