German Chancellor Angela Merkel would be forgiven if she were found drunk under a bridge today after the weekend's votes in Europe. Not only did France opt for Socialist presidential candidate Francois Hollande and Greece choose anti-bailout parties in Sunday's votes, but Merkel's own Christian Democratic Union also posted its worst electoral result in more than half a century in the state of Schleswig-Holstein on the weekend.
The outlook for Europe's German-led austerity program is not good. French public spending will soar under Hollande and Greece has lost the will to get its fiscal house in order. Both countries will have to act fast to convince markets of alternative strategies to regain investor confidence.
German newspapers were mourning the death of the two-year-old austerity program even before the vote count was complete on Sunday. Under the headline "Europe Doesn't Believe in Saving Anymore," the Frankfurter Allgemeine Zeitung quoted local economists who saw the "change in paradigm" in Europe as highly damaging for the euro. Die Welt newspaper lamented that "the Germans are now standing alone with their fiscal compact."
The magic word "Ergaenzung" (meaning addendum or supplement) is making the rounds in Berlin these days to describe the growth program that is winning favor among the euro area's leaders. The implication is that any formal prescription to stimulate economic growth will simply complement the existing austerity plan forged by Merkel and Hollande's predecessor, Nicolas Sarkozy. The weekend's elections and the bravado displayed by anti-austerity leaders suggest that German hopes of preserving the current agreement on fiscal restraint are overly optimistic.
The onus is now on Hollande to come up with an affordable strategy to spur growth while containing public debt. If France fails to produce the economic results that he promises through increased government spending, the country may well find itself in a worse position than it is today, with unemployment hovering near 10 percent. And a French bailout is something the European Union doesn't want to even contemplate.
(David Henry is an editor for Bloomberg View.)